Important points
A version of this article first appeared in the CNBC Property Play newsletter with Diana Orrick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large publicly traded companies. Sign up to receive future editions directly to your inbox. The recovery in Manhattan’s office sector is gaining momentum as demand reaches levels not seen in more than two decades. A total of 11.02 million square feet of office leases were signed in the second quarter of this year, 29.4% above the five-year quarterly average and 31.3% above the 10-year average, according to a new report from commercial real estate services firm Colliers. Colliers said quarterly demand rose more than 19% year over year, down slightly from the previous quarter, but marked the first time since 2002 that demand exceeded 11 million square feet for three consecutive quarters. Colliers said demand for the first half of this year was the strongest in more than 20 years, while supply was tight or stable for the longest quarter in nearly 20 years. Asking rents also recorded the largest mid-year growth rate since 2016. “A concentration of return-to-office activity mixed with increased demand from key industries such as high tech/AI, law, media, and financial services across much of the Manhattan office market drove very healthy demand in the first and second quarters of 2026,” Frank Wallach, executive managing director of research and business development at Colliers, said in written comments to CNBC. “Complementing this is the planned conversion of millions of square feet of buildings to non-office uses and the wave of rentals that will result from the displacement of office tenants from these buildings,” he added. AI lease volume rose to 800,000 square feet in the second quarter, up from 700,000 square feet in the previous quarter and exceeded all lease volume by Manhattan AI companies in 2025 combined. While the Manhattan and San Francisco office markets have both benefited greatly from AI, other parts of the country remain in dire straits. The flight to quality is clear, with strong demand for newer, amenity-rich buildings, known as Class A buildings, while older buildings remain half-vacant. More buildings are being converted to other uses such as housing and hospitality, but the process is long and slow. While office conversion continues in Manhattan, it is also an outlier in that Class B buildings are returning in popularity. Class B leases in the first half of this year were up 14% from pre-pandemic levels and 28% from last year, according to a separate CoStar report. The Class B share of leases was 45% in the first half of this year, compared to 43% pre-pandemic. “New York’s office recovery may be entering a new phase. After several years in which leasing activity was concentrated in luxury Class A buildings, data for the first half of 2026 shows a notable recovery in Class B demand,” said Victor Rodriguez, senior director of analysis at KoStar Group, in a report. “These results suggest that the city’s office recovery is no longer limited to trophy or prestigious buildings, and that more price-sensitive mid-market demand is returning to the rental market.”According to Colliers, vacancy in older buildings in Manhattan has narrowed significantly, with Class B inventory ending the second quarter at record average asking rents.
