Big Tech Pullback Could Drive NYC Office Market Shift

Henry Kravis of KKR, Stephen Ross of Related Companies and Mark Zuckerberg of Meta with 30 Hudson Yards (Getty, Rhododendrites CC BY-SA 4.0 via Wikimedia Commons)

When KKR took up Hudson Yards space vacated by Meta Platforms this month, it may have signaled a trend in Manhattan’s office market: financial firms and other tenants are filling a void left by Big Tech.

Tech companies have been busy leasing, encouraging office landlords shaken by the pandemic. Then the persistence of remote working and investor pressure even forced some high-net-worth tech companies to change course.

“The financial companies are happily growing and benefiting from the capital expenditures and the time and energy that many of these technology companies put into their space,” said JLL’s Steve Rotter, who brokered the deal for KKR at 30 Hudson Yards.

With fears of a recession and increasing office availability, the private equity giant and others stepped in, said Adam Henick of Current Real Estate Advisors.

“I think general periods of economic volatility and uncertainty create opportunities, and it’s inevitable that companies with strong balance sheets that are well-positioned can take advantage of that and use that as an opportunity,” Henick said.

Finance, insurance and real estate firms, also known as FIRE tenants, have been — along with law firms — the traditional backbone of the Manhattan office market. But technology, advertising, media and information tenants — or TAMI — have expanded their presence in New York City over the past decade, led by Amazon, Google, Meta and Twitter.

Now notable tech companies are shrinking their footprint in Manhattan. Meta, the parent company of Facebook and Instagram, did not renew its leases at Related Companies’ 30 and 55 Hudson Yards. The deals totaled about 250,000 square feet and ran through 2024.

Meta announced plans in October to spend $3 billion on office consolidation. The company spent $413 million in the third quarter terminating office leases, including at Orda Management’s 225 Park Avenue South. Meta expected to spend an additional $900 million on office reshuffling in the fourth quarter.

Amazon reportedly reversed an office expansion last summer after discussing space at Brookfield Properties’ 5 Manhattan West in Hudson Yards.

While the TAMI sector still accounts for a significant portion of Manhattan office rents, there are signs that its footprint is shrinking. FIRE tenants led office rentals in Manhattan in the fourth quarter, accounting for 38 percent of deals, according to a report from Colliers. TAMI tenants made up 23 percent.

According to CBRE, FIRE tenants accounted for 43 percent of Manhattan office rental activity last year, up from 38 percent in 2021. Meanwhile, TAMI’s share fell from 27 percent to 19 percent.

Colliers’ Frank Wallach, author of the company’s quarterly report on Manhattan office rentals, warned against announcing a market shift. He noted that the 60 percent share of FIRE and TAMI tenants in the council’s office rent was similar to pre-pandemic numbers.

“In the third quarter of 2022, two of the top five leases were driven by technology,” said Wallach, pointing to Datadog rebooting and expanding to more than 300,000 square feet at 620 Eighth Avenue and Indeed growing to about 250,000 square feet at 1120 Sixth Avenue.

“We see some space, if not coming back into the market from some technology companies, being leased or acquired,” Wallach acknowledged. “But as the situation can still change from quarter to quarter, it is still too early to say.”

Another factor may be landlords’ preference for tenants whose employees come to work, as FIRE companies usually do. TAMI tenants, not so much: their jobs are generally more adaptable to hybrid or remote work.

“Ultimately, it’s the tenants who pay rent, allowing the landlords to pay the mortgage,” said Doug Regal of Raise Commercial Real Estate. “I think the driver is incentivizing credit tenants to pay rent. But I think there is definitely consideration to want to have a building that is activated and alive.”

Regal said if tenants use a building’s amenities and “there’s a buzz about the building,” it “makes other people want to be there.” Filling space in a home that feels abandoned can be more difficult.

If Big Tech does pull out of Manhattan, smaller tech companies could leave.

“There’s always a new hot ticket, and I’d say we’re looking at AI right now,” said Avison Young’s Larry Zuckerman. “They are working hard. Deals are being struck. I think a stronger, more experienced group of AI tenants will emerge in the future.”

While TAMI space will most likely be recycled within the industry, private equity and hedge funds like KKR, Apollo Global Management and Ken Griffin’s Citadel, which are flush with capital, could set the pace for FIRE tenants in Manhattan this year, Colliers office broker Michael Cohen said.

“Those guys are growing,” he said. “If you depend on a growth economy, you will cut back. But if you’re raising capital to take advantage of the expected problems in many sectors of the economy, you’re running at full throttle.”

He recalled Warren Buffet’s adage: “Be afraid when others are greedy and greedy when others are afraid.”

“I think we’re seeing certain financial firms saying, now is a good time for us to step in.”