Manhattan office landlords scramble to keep tenants as demand falters

Manhattan office landlords are facing falling rents and heightened competition, spurring unprecedented spending to accommodate tenants.

Effective rents, the amount paid after concessions, slid 7 per cent in the fourth quarter from the previous three months to an average of US$57.18 a square foot, according to brokerage Savills Studley. Leasing has slumped and tenants are putting more excess space on the market for subletting -- often a sign of weakness to come.

With brand-new skyscrapers opening and companies seeking to pack more workers into less space, New York landlords are having to work harder to lure and keep tenants. Building owners are spending aggressively to make traditional partitioned offices more collaborative while adding amenities such as food areas and open-air terraces.

“The market has demanded more in concessions from landlords, particularly for building out space,” said Scott Rechler, chief executive officer of RXR Realty, the biggest buyer of Manhattan offices in 2016.

Tenant-improvement allowances -- agreements in a lease to cover the cost of converting raw space into finished offices -- soared 12 per cent last year to almost $76 a square foot, according to Savills Studley. While owners and tenants usually agree to share the expense, the portion paid by landlords reached a record in the fourth quarter.