Manhattan office leasing sees strongest gains in 20 years
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A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox. The recovery in Manhattan's office sector is gaining steam, as demand hits levels not seen in over two decades. During the second quarter of the year, 11.02 million square feet of office leasing was signed, 29.4% above the five-year quarterly average and 31.3% above the 10-year average, according to a new report from Colliers, a commercial real estate services firm. Quarterly demand was up just over 19% year over year, and while it was down slightly from the previous quarter, it was the first time since 2002 that demand exceeded 11 million square feet for three consecutive quarters, Colliers found. For the full first half of the year, demand was the strongest in more than two decades, while supply has tightened or remained stable for the longest quarterly period in nearly 20 years, according to Colliers. Asking rents also saw the largest mid-year annual growth since 2016. "Return to office movements mixed with rising demand from key industries – such as tech/AI, legal, media and financial services – across nearly every corner of the Manhattan office market have converged and driven the very healthy demand in Q1 and Q2 2026," said Frank Wallach, executive managing director of research and business development at Colliers, in written comments to CNBC. "Complementing this is millions of square feet of planned building conversions to non-office uses and a wave of leasing stemming from office tenants relocating from these buildings," he added. AI leasing volume in the second quarter rose to 800,000 square feet, up from 700,000 square feet in the prior quarter and surpassing all of the leasing by AI firms in Manhattan combined in 2025. Manhattan and San Francisco office markets are both seeing big gains from AI, but other parts of the country are still in severe distress. There is a definite flight to quality, with newer, more amenity-rich buildings — known as Class A buildings — seeing strong demand, while older buildings sit half empty. More buildings are being converted to other uses, like residential or hospitality, but it is a long, slow process. While Manhattan continues to see office conversions, it is also an outlier in seeing Class B buildings return to favor. A separate report from CoStar found that Class B leasing in the first half of this year was up 14% from pre-pandemic levels and up 28% from last year. The Class B share of leasing in the first half of this year was 45%, versus 43% pre-pandemic. "New York's office recovery may be entering a new phase. After several years in which leasing activity was heavily concentrated in higher-end Class A buildings, first-half 2026 data shows a notable rebound in Class B demand," said Victor Rodriguez, CoStar Group's senior director of analytics, in the report. "The result suggests that the city's office recovery is no longer limited to trophy or top-tier buildings, with more price-sensitive and mid-market demand returning to the leasing market." Availability has narrowed considerably in Manhattan's older buildings, according to Colliers, and the Class B inventory ended the second quarter with the highest average asking rent on record.