Prepared by Richard Plehn, Lisa Ann Pollakowski and Vanessa Ollarves.
Please click on the slideshow below for the full report. Alternatively, you can also follow the link on the button to read it on PDF.
SUMMARY OF THE COMMERCIAL OFFICE MARKET MIDTOWN – Q1 2025
NEW YORK CITY ECONOMY
New York City’s economy showed positive growth with the civilian labor force expanding to 4.3 million in March 2025 from 4.2 million in March 2024. There were 20,800 jobs added to the market over the year. Sectors like healthcare and tech led gains, and transit and tourism improved, including a 16% rise in Broadway attendance. There was a 70-basis point increase in hotel occupancy rate.
Today, the government is decreasing federal fundings to non-profits, defense contractors, etc. This could have a negative effect on the commercial real estate market; however, the federal government may reverse the funding back to these organizations. Tenants are concerned about the federal trade policies representing a factor that could either positively or negatively influence the national economy and, by extension, the commercial real estate market.
ASKING RENT VS AVAILABILITY
Average asking rents in midtown have decreased from $50.95 in Q4 2024 to $50.92 in Q1 2025. The current asking rent is lower than the pre-COVID average of $59.71.
The availability rate has also decreased from 15.5% in Q4 2024 to 14.9% in Q1 2025. The current availability rate is higher than the pre-COVID average of 8.1%
THE ACTUAL AVAILABILITY IS LIKELY 3% TO 5% BELOW THE STATED RATE
In Midtown, a tenant cannot lease space in certain office buildings because the landlord is renegotiating the debt. There is approximately 6.4 million square feet in this situation. Another group of office buildings is being converted to residential. There is approximately 5 million square feet being converted to residential. The Lessee of the net-leased office building is giving the building back to the Lessor. The lessor does not know what to do with the building. There is approximately 3.5 million square feet where the lessee is giving the building back to the lessor.
MIDTOWN AVERAGE LEASE SIZES ARE UP FROM PRE-COVID.
The average lease size pre-COVID was 9,635 square feet. In the last 4 quarters, Midtown has exceeded the average lease size pre-COVID, increasing to 10,492 square feet.
LEASING ACTIVITY IS UP FROM PRE-COVID AVERAGES
In each of four out of the last four quarters, leasing activity has been above pre-COVID levels of 6,399,825 square feet, in Q1 2025 it was 6.7 million. Before COVID, yearly leasing activity was 25,599,301 square feet. If you aggregate, the leasing activity of the last 4 quarters was above the annual leasing activity before COVID.
CLASS A BUILDINGS DOMINATE, ACCOUNTING FOR 72.6%
Leasing activity continues to be dominated by Class A buildings, representing 72.6% of leasing. In five out of the six last quarters, the Class A buildings leasing activity has exceeded the pre-COVID levels (4.8 million square feet).
LANDLORDS IN CLASS A OFFICE BUILDINGS CANNOT ACCOMMODATE TENANTS’ REQUIREMENTS
Davis Polk & Wardwell, located at 450 Lexington Avenue, could not find additional space there. As a result, they leased 61,000 square feet nearby at 237 Park Avenue. Kirkland and Ellis could not find additional space at Citicorp Building (aka 601 Lexington Avenue), so they lease 131,000 square feet at 900 Third Avenue.
USERS CONTINUE TO BUY OFFICE BUILDINGS IN MIDTOWN
Haddad Brands, a children’s clothing manufacturer, purchased the 28-story office building at 2 Park Avenue, 1,029,985 square feet, from Morgan Stanley for approximately $360 million or $360 per square foot. B&H Photo purchased Brookfield’s 333 West 34th Street, which is 287,000 square feet, for $150 million, or $523 per square foot.
5 LARGEST DEALS COMPLETED
Five out of the five largest deals were direct, four out of the five deals were renewals, four out of the five deals were expansions, three out of the five deals were done in Class A buildings, and two out of the five largest deals were done in the Grand Central submarket.
STARTING RENTS AND CONCESSION PACKAGE
Average starting rents show an increase in Q1 2025 to $79.4 from $76.3 in Q1 2024. In the first quarter of 2025, the concession package decreased to $208.80 from $211.8 in Q1 2024. However, it represents an increase from Q1 2023 with $206. The typical tenant receives 10.2 months of free rent and a $141.6 cash contribution.
SUMMARY
If the USA does not fall into recession, asking rents will increase, and concession packages will decrease. Currently, leasing activity is stronger than last quarter and pre-COVID averages, with Class A continuing to dominate leasing activity. Tenants will continue to have difficulty finding premier spaces in Class A office building.
