Developers Remain Cautiously Confident that New Office Construction Will Attract Tenant Demand

Amid numerous press releases casting a dark cloud over the future of the office market, some developers remain confident in the asset class, particularly when speaking about high-quality new developments and existing Class A or trophy properties built since 2015 that are within walking distance of transit hubs — which accounted for a majority of recent leasing. Cited in example of companies showing a willingness to commit to long-term deals in new offices is the lease by consulting firm KPMG, which despite representing a significant downsizing of its Manhattan footprint, signed a 20-year lease to consolidate space in three older offices at the under construction 2 Manhattan West.

According to construction industry advocate the New York Building Congress, construction square feet of non-residential development in New York City (office, hotel, retail, and other commercial space) is off pace by more than one-third of pre-pandemic 2019 volume. However, despite uncertainty about the possibility of it “taking another two years or so for the future of office work to become clear,” along with rising interest rates and construction costs providing “strong disincentives for initiating an office project,” some developers are forging ahead — particularly in the Hudson Yards and transit-rich Midtown East areas. Banking on demand from tenants willing to pay a premium for newly constructed buildings offering a wide range of amenities, projects are still being pursued such as the planned redevelopment of the Grand Hyatt hotel into a 1,575-foot-tall office building and scaled-down hotel at 175 Park Avenue, as well as recent filings at 343 Madison Avenue and 514 West 36th Street, but it has been pointed out that some developers going through the process are moving at a slower pace, hoping the market settles down a bit.