The wave of construction that reshaped the Manhattan skyline? It's over.


Manhattan's office construction boom is over.

There are only three large office towers, over 500,000 square feet, under construction in all of New York City, with two of them expected to open in 2024 or 2025 and nothing else planned for years. Typically, a handful of sites that size would be in various stages of construction, with at least one opening each year since 2018, according to JLL, a real estate services company.

Nearly 20 large office buildings that developers have proposed, including the final tower near ground zero, have yet to begin construction. Many are on indefinite hold as developers face numerous challenges.

Rising construction costs and interest rates have significantly raised the price of construction. Banks are increasingly reluctant to finance such construction while Manhattan has a record number of vacant offices. And there are few large tenants, who are required by lenders to be lined up before a new office can be built, and who are actively looking to move.

As a result, Manhattan is entering its most significant office construction drought since the savings and loan crisis of the late 1980s and early 1990s. Developers now admit that the next wave of large office towers may not open until early 2030s, if not later.

“It's hard to justify putting a shovel in the ground when supply and demand fundamentals are out of whack,” said James Millon, president of CBRE, a real estate services firm that helps developers raise capital.

In a city normally filled with cranes, the current lull in new office projects signals the end of a quarter-century construction wave that resulted in glass and steel towers that reshaped the Manhattan skyline and filled with growing companies, especially in the technology sector.

The pause contrasts with other metropolises, including London, where demand for new office space remains relatively strong. Ten buildings were recently approved for construction in London's financial district, including what would be the tallest in the area.

However, in New York City, officer developers are still reeling from the double whammy. The initial impact of the pandemic disrupted corporate work culture, leading many companies to reduce their footprint due to remote work. Then came the aftershock of skyrocketing interest rates: kryptonite for a debt-based industry.

Most importantly, the pause could be a drag on the city's budget during a time of financial austerity. Office buildings have an enormous influence on the city: they greatly increase the value of the land on which they sit and account for one-fifth of all property taxes collected annually by New York City, which relies heavily on property taxes to finance basic services.

The cost to build the largest office buildings can easily exceed $3 billion and take years to complete, creating thousands of jobs along the way. In the years before the pandemic, construction spending in New York City on nonresidential projects, including offices, averaged about $21 billion a year, according to the New York Building Congress, a trade group for construction and construction companies. real estate.

At a ceremony last month to celebrate the final installation of the steel beam on the new JPMorgan Chase building, Mayor Eric Adams compared this period to the opening of the Empire State Building during the Great Depression. That building was one of the last major offices to open before a hiatus that lasted two decades.

Since 2000, more than 52 million square feet of offices have opened in Manhattan, according to CBRE. An entire neighborhood rose above the railroad yards on the west side; the tallest building in the Western Hemisphere, One World Trade Center, rose in the center; and skyscrapers rose near Grand Central Terminal.

But today the story is very different. As of late November, nearly 18 percent of all office space in Manhattan was available for lease, the highest rate since Colliers, a real estate brokerage firm, began tracking it in 2000. On its own, the Available space could fill 27 One World shopping centers.

Brokers say a swath of that space is concentrated in older office buildings, built just before and after World War II, that most companies consider obsolete.

“One of the biggest problems we've had in the city, and it's like it's never been noticed, is the age of the office stock,” said Mary Ann Tighe, a prominent broker who is executive director of New Tri-State Region of York from CBRE.

Tighe said elected officials, who have become increasingly hostile toward the real estate industry, should encourage office development. “We have to continue reinvesting and we have to make it easy for people,” he said.

But state Sen. Liz Krueger, D-Manhattan, said the most pressing question about Manhattan offices is not when the next one will be built but what will happen to all the empty space, including how to get more workers back to their desks. “The opposite discussion takes the lead,” she said. “How do we transition surplus office to residential?”

Despite the headwinds, many office developers are still eager to build the next supertall tower. They believe that the pandemic has accelerated the so-called flight towards quality: companies are upgrading to the best and most modern offices.

They point to the new JPMorgan Chase building on Park Avenue and One Vanderbilt, the 1,401-foot-tall tower next to Grand Central Terminal that opened in 2020. One Vanderbilt is more than 99 percent leased, with some tenants paying $150 a foot square and more.

“When JPMorgan builds this new headquarters, JPMorgan's competitors will also want to be in that type of space,” said Scott Rechler, chief executive of RXR, a real estate company.

RXR has proposed one of the largest office buildings yet to break ground, at 175 Park Avenue, on the site of a Grand Hyatt hotel in Midtown Manhattan. Rechler hopes to begin construction next year, but the tower needs an anchor tenant, a large company that could commit to leasing about a quarter of it, which would be about 500,000 square feet.

Another developer, Silverstein Properties, has been searching for an anchor tenant for 2 World Trade Center in Lower Manhattan for about 15 years. Also waiting is BXP, the real estate investment trust formerly known as Boston Properties, which plans to build a roughly 900,000-square-foot tower on Madison Avenue.

A handful of significantly smaller office buildings in Manhattan, most of which are between 15 and 25 stories tall, are being built without tenants already lined up. Real estate analysts say such buildings carry much less risk for lenders and don't face the same hurdles as large developments.

When the construction drought ends, the highest rents and revenues any office developer has ever collected in New York City will follow, according to analysts and brokers.

As of late November, the average asking rent for office space in Manhattan was $75 per square foot. With higher interest rates and higher construction costs, developers would have to charge between $200 and $300 per square foot for a future office skyscraper to make financial sense, they said.

“There are a handful of trophy buildings in New York that can command those types of rents,” said CBRE's Millon. “But space is limited: you'll have to knock something down to get back up.”

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