Smaller Footprints and Smaller Firms Drive Tech’s Renewed NYC Leasing

As recently as a year ago, any search for signs of optimism regarding the relationship between technology firms and the New York City office market would’ve turned up a “404: Not Found” message.

Facebook and Instagram parent meta, which held leases for over 2 million square feet of office space in the city, laid off 1,700 workers as it shrunk its New York office portfolio by over 700,000 square feet. yelp, Spotify (SPOT), Twitter, Uber and Microsoft (MSFT) also jettisoned significant space in the last few years.

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But, over the past year, it has begun to look like the tech sector’s office play might be rebooting. Palantir and Stripe both signed leases in Manhattan this year of at least 140,000 square feet. Fintech companies Ramp and Pinwheel both agreed to sizable Manhattan leases in the past few weeks — in Ramp’s case, a 66,000-square-foot expansion to 132,000 feet — and artificial intelligence juggernaut OpenAI inked a 90,000-square-foot lease in early October for its first New York office. In Brooklyn as well, open source electronics manufacturer Adafruit Industries took 42,000 square feet at Industry City.

Gabe Marans, a vice chairman at Savills, is just one commercial real estate exec who believes we’re seeing the beginning of a tech office revival.

“It’s not just that tech leasing seems to be back. It’s that the tech leasing that’s coming back is happening at a grassroots level, meaning it’s not being driven by big tech. It’s happening organically,” said Marans.

He added a key caveat, too: The resurgence might say more about the current state of tech than the office sector itself in that it’s being fueled by a tier of technology companies that aren’t industry behemoths. They’re still significant and established enough, however, to make tech office appear healthy without additional activity from household names like Facebook or Spotify.

“For the very first time in New York’s tech history, we have a well-set-up playing field,” said Marans. “This is the first time New York has established, experienced founders, operators and investors across the board.”

Marans mentioned the prominence of Cornell Tech, which he notes has “anchored the city’s commitment to higher education as it relates to tech.” Cornell Tech’s campus occupies 12.4 acres on Roosevelt Island, and serves as just one example of how the tech industry is approaching its leasing commitments from a position of strength.

“The downturn in leasing was the result of a hyper focus on profitability in the face of rising interest rates,” Marans said of the wave of tech downsizing. “You’re seeing these companies that are starting to take space be responsibly run, and spending in financially responsible ways. It’s not just that tech leasing is coming back. It’s also that the financial health of these tech companies is superior to any other point in similar New York cycles.”

Benjamin Bass, executive managing director of brokerage for JLL (JLL), also notes how firms outside of the behemoth class are driving significant activity.

“We’re certainly encouraged by what feels to be a very strong rebound in the leasing market generally,” said Bass. “We’ve seen an emergence of AI companies making significant commitments to New York on the side of smaller and midsize technology companies. The average size of technology companies currently in the market is somewhere between 15,000 and 30,000 square feet.”

But Bass also said that many larger tech firms as well are re-evaluating their space needs.

“Larger companies have been active this year,” he said. “Bloomberg made a very large commitment. So has Palantir, and Google renewed for 300,000 feet. So I think we’re seeing some pretty strong momentum across the board amid signals from big, medium and small technology companies.” (News of Google’s 300,000-square-foot renewal at 85 10th Avenue for eight years came just last week, in fact.)

New York’s continued importance in the eyes of venture capital firms has driven some of this revival. Bass pointed out that New York has seen a major uptick in VC funding, and that JLL data shows the city has been fourth in the world — behind San Francisco, Silicon Valley and Beijing — in VC funding for AI companies since 2018.

Another factor in the tech office revival is the growing backlash against work-from-home policies, such as Amazon’s recent announcement that most full-time employees must be in the office five days a week.

Michael Morris, a vice chairman at Newmark (NMRK), sees this as a significant driver for companies reclaiming or expanding their office lease commitments.

“It took a fair amount of time to reconcile productivity for employees working remotely, as well as for those employees to understand the trajectory of their careers in a work-from-home environment,” said Morris. “You have a combination of management being frustrated with their lack of productivity, and employees being frustrated that the career trajectories of their peers are improving at a better pace because they’re not in tangible locations to senior management.”

For some, it’s not a complete elimination of work-from-home making the difference, but rather a stricter definition of what the parameters of office work should be after a more flexible period of adaptation to a new working environment.

“There are definitely more expansions, and I think that’s because of companies forcing change management,” said Justin Myers, a principal and executive managing director at Lee & Associates NYC. “Companies are implementing two-, three-, four-, five-day-a-week schedules as opposed to more of a laissez-faire, come-when-you-want attitude. Now, there are more rules, which allows for companies to dictate how much space they actually need.”

Myers recently had two separate tech clients — an AI company and a proptech firm — expand their leases from 3,000 square feet to 6,000 in the Flatiron District and SoHo, respectively.

Bass, too, noted how stricter conditions are building as employers lose patience with empty offices.

“Not only are employees in the office more, but we’ve started to see technology companies revert back toward closer to a one-to-one desk-sharing ratio,” said Bass. “Before, maybe you were sharing a desk with one or two other people. Now, people are getting their own desks back, which is generating serious leasing demand.”

Given the depth of the retrenchment in recent years, the tech office comeback is still in its early stages. But signs of momentum are growing steadily, including a shrinking supply for some of the most desirable office layouts.

“If you take a microscope to certain portions of this city, you’ll see that in some instances [leasing demand] is more intense than it was in 2019,” said Marans. “For example, let’s say you’re looking for a 100- to 200-seat office in Flatiron. There are very few free and clear options, and the nice spaces have multiple proposals trading on them. Bidding wars are happening with spaces in that category. Pick any 20,000-square-foot shorter-term space in the general vicinity of Union Square, and I guarantee you’ll have two or more proposals in on that space.”

This drives home a larger point about one factor that has not changed in the past year or so: the widespread flight to quality, as the desire for newer Class A offices still towers over demand for Class B stock and below.

“The top of the market — the beautiful AAA, glass and steel, newer-construction buildings — are setting record-breaking rents and have close to 100 percent occupancy,” said Morris. “Firms are still focused on higher-quality access to transportation and amenities, and [Class A office] has absolutely become king. The B and C stock, unless it’s in extremely convenient locations and has undergone significant capital improvements, is still extremely challenged.”

As technology companies’ demand for office continues to grow, Morris does see Class B and C office potentially becoming more desirable for smaller firms in the sector.

“I think it is fair to speculate that as more and more groups continue to return to the office, you’ll start to see organizations being more amenable to a slightly lower caliber of product,” said Morris.

This being New York City, some of the causes of the current upswing are the same reliable factors that have always made New York a world-class office market. JLL’s Bass said that a full 10 percent of 2023 college graduates in the U.S. wound up working in New York City this year, as did 14 percent of relocating employees in the technology sector.

“We get an influx of new, highly paid, highly skilled technology workers in New York City every year,” said Bass.

Still, a return to the days of full office glory, tech or otherwise, is more likely to build gradually in the coming years than to snap back suddenly at any point to pre-pandemic conditions.

“There is a general sense that companies will want more space, but committing to space is going to take time. Deals just don’t happen overnight,” said Lee & Associates’ Myers. “Companies usually start looking at space six to 12 months in advance. So we are feeling very positive, and I would guess you’re going to see more velocity next year.”