New York’s Midtown Ties Hong Kong’s Central District as Office Market With World’s Highest Occupancy Cost

‘Flight to Quality’ Sends Well-Heeled Tenants Seeking Top-Tier Offices

Manhattan's Midtown now ties with Hong Kong's Central district as the world's most expensive office market, according to a JLL study. (Andria Cheng/CoStar)Manhattan’s Midtown now ties with Hong Kong’s Central district as the world’s most expensive office market, according to a JLL study. (Andria Cheng/CoStar)

New York’s office market may still be struggling to stem record-high vacancies and declining rents, but the so-called flight to quality has driven the occupancy cost in the Midtown area up so high the neighborhood now ties with Hong Kong’s Central district as the world’s most expensive.

The occupancy cost for top-tier Midtown office space — which includes net effective rent, service charges and government taxes on rent — has risen to $261 per square foot, the same as in Hong Kong’s Central district, according to real estate brokerage giant JLL’s “Premium Office Rent Tracker” released Wednesday.

It’s the first time Midtown made it to the top of the list since JLL began the study in 2016, a spokesperson told CoStar News.

The cost beyond rent for top-tier properties in Midtown is even higher than before the pandemic, as New York’s overall office market has been battered by the fallout of the remote working trend during the health crisis. In the fourth quarter of 2019, before the pandemic, Midtown’s office occupancy cost was $212, JLL’s report from the time showed.

This year, Beijing’s Finance Street and London’s West End follow New York City’s Midtown and Hong Kong’s Central district on JLL’s list of areas with the highest occupancy costs across 112 cities around the world, the most recent study found.

CoStar data shows New York’s vacancies have reached a new high of 11.9% in the fourth quarter, with declining annual rent. The JLL study speaks to the divide between top-tier buildings that attract well-resourced tenants willing to pay top dollar and other properties that often have to resort to rent reduction and other tenant incentives.

In the Plaza District in Midtown, the average rent, which is different from occupancy cost, has declined to nearly $88 per square foot in the fourth quarter from a record high of nearly $93 in the third quarter of 2019, pre-pandemic, according to data collected by CoStar.

Many real estate brokers and property owners from SL Green, Manhattan’s largest office landlord, to Vornado Realty Trust have spoken of the “flight to quality,” in which well-heeled employers increasingly seek in-demand properties with desirable amenities such as access to outdoor space and fitness centers to lure their workers back to the office.

For instance, SL Green’s trophy new tower One Vanderbilt next to Grand Central Terminal is expected to top its leasing goal and has commanded some of the highest rents in New York this year. Its third-quarter leases excluding One Vanderbilt, on the other hand, saw higher third-quarter tenant concessions.

The JLL report also shows a widening rental gap between primary and what it described as “secondary or decentralized” markets in gateway cities from New York to Tokyo. For instance, the occupancy cost of $261 per square foot in Midtown is more than double downtown Manhattan’s $106 per square foot, according to the JLL study.

Globally, on average, there is a discount of about 40% to 50% between the primary office locations and secondary or decentralized business districts across the 10 major cities covered in the report.

“While urban cores struggled to remain relevant during the depths of the pandemic, due to lockdowns and a shift to remote work, many amenity-rich central business districts are now rebounding with new energy and purpose,” Jeremy Kelly, lead director of global cities research at JLL, said in a statement. “The resilience of rents in premium buildings demonstrate the fortitude and importance of urban core locations to companies.”

Not surprisingly, just as the likes of Google, Facebook and Amazon have expanded their Manhattan footprint, the JLL study found tech firms have continued to play a key role in driving up premium office occupancy costs globally. The tech sector is now second only to banking and financial services in top-tier office demand in high-end markets around the world.

With the increased adoption of hybrid work models, in which staff work some days at the office and other days at home, the uncertainty surrounding the future of office real estate is also leading to increased demand for flexible space that may come with shorter lease terms and other more accommodating terms.

The study found 43% of the premium office buildings examined include at least some component of flexible space, such as coworking space or serviced offices. It’s “an indication that flexible working spaces are becoming an increasingly important and common amenity for users of office space,” the report says.

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