For office developers to double down on new projects, they’ll need to command approximately double the rent they do today.
Significantly elevated rents are the only way to justify projects as developers cope with rising construction, material and borrowing costs, Boston Properties president Douglas Linde said at an investor conference this week, Crain’s reported.
“We’re at a point now…that will require rents well in excess of $200 a square foot for anybody who wants to build anything,” Linde said.
That’s a lot to ask of an office leasing market contending with vacancies left stubbornly high as tenants adjust their needs post-pandemic. Manhattan’s average asking rent last month was $75.70 per square foot, according to Colliers. That was seen as a positive, as it represented the fifth consecutive month of rising rents.
The city’s Class A space only averages around half of what Linde says is necessary for new office development. There are exceptions for the cream of the crop, but commanding $200 rents on even the most premier floors of a building — not to mention the rest of the property — won’t get easier anytime soon.
The volume of triple-digit leases rose in each of the last two years in Manhattan. There were 164 such deals in 2021 and 190 last year, according to JLL, as tenants who remained interested in office space fled to high-quality buildings.
Around the $200 per square foot mark, however, the number of leases last year dropped to 15. Those deals represented 280,000 square feet.
A silver lining to reduced office construction is the possibility of supply and demand growing more aligned, which could bring down the vacancy rate across the market.
Boston Properties last month sold a 45 percent stake in 343 Madison Avenue, a planned 49-story tower in Midtown Manhattan. The firm filed plans last year for a 900,000-square-foot office building with ground floor retail at the former site of the Metropolitan Transportation Authority.
An executive said prospective tenants have inquired about the property, which is yet to be designed. No anchor tenant has officially emerged, however, and there’s still a possibility the tower doesn’t get built, which would revert the 99-year ground lease back to the MTA and set Boston Properties up for a refund.
— Holden Walter-Warner