NEW YORK • 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 (S$81.30) per sq ft (psf), 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 draw 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 Mr Scott Rechler, chief executive officer of RXR Realty, the biggest buyer of Manhattan offices last year.
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 US$76 psf, 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.
Rising construction costs contributed to the increase, but the gain also indicates that office owners are competing to keep tenants, especially with new skyscrapers rising in the Hudson Yards district, as well as in Midtown and in lower Manhattan's World Trade Center, said Mr Keith DeCoster, Savills Studley's director of US real estate analytics.
Keeping tenants in place has become critical for landlords at a time when many companies are being cautious and trying to make offices more dense, Mr DeCoster said.
"If it takes refreshing their space or 'restacking' their building or renegotiating the lease, not all landlords, but more landlords, are doing that," he said. "If they want to be able to compete in this market, they really have to bite the bullet."
Subletting, or tenants putting space on the market, increased by 2 million sq ft from July to December to 10.4 million sq ft, Savills Studley reported.
Mr Tristan Ashby, director of New York research for JLL, said leasing may improve in the first quarter, based on deals he has heard are in the works.
With the presidential election over, tenants may have more confidence to make moves, and there is hope that financial services firms will become more active if Mr Donald Trump's administration eases regulations, he said.
Banks have played a relatively small part in the New York office market's rebound from the financial crisis, with leasing instead driven by technology and media companies.
"If we had some growth, any growth, from the banks, that would be a positive for the market," Mr Ashby said. "It's clearly too early to really tell, but that's the model we're looking at."
Landlords may have a while before they regain the upper hand. Effective rents peaked some time last year, said Mr DeCoster.
"A year from now, landlords might look back wistfully on 2016," he said.