What has long been a known fact for New York City flat-hunters is now reaching Manhattan's corporate sector: bidding wars for office space. After several quarters of intense demand and scarce new supply, the availability of high-quality, fitted-out office space in sought-after submarkets is rapidly shrinking. The tech boom in Manhattan, fuelled by artificial intelligence (AI), is further intensifying this development.
Even second-generation office space in a twelve-storey building can lead to competition these days. The Rosen family recently received a deluge of offers for a 17,610 square foot space on the top floor of their building at 151 West 26th Street in Chelsea, as Max Koeppel, Leasing Director at Koeppel Rosen, reported. The field of interested parties narrowed down to three candidates, including two AI companies. All three applicants countered Koeppel Rosen's counter-proposal, with the space, originally offered at $56 per square foot, eventually receiving bids between $60 and $70 per square foot.
AI Boom as a Demand Driver
While the wave of return-to-office mandates and office-to-residential conversions steadily reduces the urban office supply, both landlord representatives and tenant brokers attribute the current surge primarily to the AI boom. These companies, equipped with investor capital, are growing too quickly to wait for comprehensive fit-outs by landlords. Some AI firms are doubling or tripling their size within a year. Koeppel describes that “AI companies today take 15,000 square feet, then need 30,000 in a year, and 60,000 the year after.”
Given historic lows in sublease space, companies must compete for sought-after turnkey office spaces in tech-savvy neighbourhoods. Benjamin Bass, Vice Chairman in JLL’s brokerage division, confirms that “it’s predominantly AI companies that are embroiled in these bidding wars in Midtown South.” He adds it’s “as close to a circus or a frenzy as I’ve ever seen.” Craig Deitelzweig, President and CEO at Marx Realty, reports he hasn’t seen such leasing speed in two or three decades.
Market Recovery and Fast Transactions
Although the New York office market has not fully recovered from post-pandemic losses, it shows impressive progress. Manhattan's total available office supply fell to 65.4 million square feet in August, according to Colliers data, its lowest level since September 2020. Sublease availability is at 2019 levels, and office spaces continue to be taken off the market for residential conversions. Midtown, in particular, saw its lowest availability since March 2020, and the average asking rent of $84.68 per square foot is only slightly below pre-pandemic levels. Midtown South accounted for 47 percent of office demand in August.
High demand for high-quality office space significantly accelerates the transaction process. Koeppel compares the current situation to the boom years before the pandemic, when WeWork and Nu Hotel expanded so rapidly that tenants had little time to review offers or negotiate. Today, as the market regains momentum, options for tenants with specific requirements are more limited, and this affects more than just one or two companies. Ford Models, for example, signed a lease for 11,986 square feet at the Rosen family's 36 East 31st Street. From viewing to contract signing, only two weeks passed – a “ridiculously fast” turnaround in commercial real estate, as Koeppel notes.
Brokers emphasise that there is no general shortage of office space, but rather a lack of the spaces tenants desire. Furnished, high-quality spaces, in particular, are scarce. This preference represents a reversal of the situation before COVID-19, when Class B spaces were the scarce commodity, according to David Falk, New York Tri-State Region President at Newmark. Bidding wars are occurring more frequently in his properties this year, Deitelzweig says. He stated it was “probably the first time in my career that I’ve gotten proposals before the tenant has even viewed the space.”
