We are pleased to share with you our new report entitled The long road to equilibrium: office conversions and “functional obsolescence.” Focusing on Manhattan’s commercial real estate market, the report answers the question of what the “true availability rate” would be if we excluded buildings from our existing office inventory that are either conversion candidates or currently obsolete and have had little to no leasing activity since the start of the pandemic.

Key Takeaways:

• Nowadays, concerns of oversupply in the Manhattan office market have less to do with the development of new buildings, and more so with existing ones that are obsolete with chronically high availability, and are also affected by post-pandemic impacts where the hybrid workplace is now the “new normal.”
• As such, we dissect the peak Q1 2024 overall office availability rate of 20.1% for Manhattan and examine the buildings that make up the 94.0 million square feet (msf) of current available space, based on the 467.8 msf of such office space tracked by Savills.
• After identifying eight buildings with chronically high availability and little to no leasing activity – which we characterize as “functionally obsolete”, as well as considering 21 office space conversion candidates, we were able to remove a total of 6.5 msf of combined available office space.  In doing so, the “true availability rate” for the Manhattan office market decreased from 20.1% to 19.2% for a 90-basis point decline.
• Finally, removing the associated buildings from existing inventory would cause the Manhattan office space per office-using worker utilization metric to decrease from 310.2 to 303.1, which is still considered oversupplied where national metrics are currently 212.3, compared to global metrics of 10 square meters per worker or 107.6.
• The city currently has programs in place to help move the needle more meaningfully.  Such programs include the NYC Office Conversion Accelerator program, the Midtown South Mixed-Use Plan (MSMX), and the Manhattan Commercial Revitalization Program (M-CORE).
• Even with local government programs to support the conversion of “functionally obsolete” office buildings or to make existing ones more sustainable and attractive, it will take some time to significantly move the needle.  Hence, the road to equilibrium is long, if it even can be reached at all.