Why Manhattan Office Leasing Jumped 20% — What Norway’s $543M Bet and Falling Mortgage Demand Mean for the US CRE Recovery

August’s 3.7 million square feet of newly leased space marked the highest monthly tally since 2019 and ran well ahead of the 10-year monthly average of 2.72 million square feet. If that run rate persists, annual leasing would top 40 million square feet for the first time since before the pandemic, versus a long-run average of roughly 32–33 million. After returning to that average in 2024 for the first time since 2020, the latest acceleration underscores how far core demand has normalized.

The composition of demand is key. Larger deals are re-emerging, and activity is clustering in prime submarkets that offer modern buildouts, infrastructure, and transit access. Colliers highlights healthy take-up from legal and tech tenants, including more than one million square feet taken by Amazon since late 2024 through a mix of leases, subleases, and enterprise agreements with flex operators. That tenant mix aligns with a firmer return-to-office cadence and resilient office-using employment in services sectors.

Availability is tightening where quality is highest. Manhattan’s overall availability rate fell to 15%—its lowest since January 2021—while newer, amenity-rich buildings posted availability of 6.7% versus 17% for older, prewar stock. Average asking rents edged up 1% month over month in August to $74.73 per square foot, though they remain about 6% below March 2020 levels. The monthly increase reflects both mix (more high-priced space coming to market) and landlords repricing amid firmer top-tier demand.

Conversions are quietly tightening the market. Nearly 9 million square feet of office space has been removed for conversion over the past four years. Colliers estimates that for every million square feet slated for conversion, roughly 270,000 square feet of leasing occurs as displaced tenants relocate—shrinking availability and, in some cases, lifting average asking rents by removing lower-priced and sublet inventory.

Bifurcation is stark. Tenants are prioritizing new and recently upgraded buildings, where availability has compressed to the mid-single digits, while commodity and unrenovated stock faces longer downtime, heavier tenant improvement packages, and persistent shadow vacancy. That skew gives owners of top-tier assets greater confidence to firm effective rents, even as headline asking rents rise only modestly.

Shadow vacancy—space held but not marketed or subleased—continues to cloud effective supply, and sublease inventory remains a competitive headwind in several submarkets. Conversions and relocations absorb some of the overhang, but it can still limit how quickly net effective rents rise. The risk is that headline leasing volume masks a deeper divergence between stabilized trophy assets and older buildings needing significant capex to compete.

Watchpoints from here: the durability of multi-month leasing velocity, net absorption across Class A versus B/C, concession and net effective rent trends, and sublease inventory trajectory. Midtown and Midtown South tightened in August, while Downtown remained stable. Sustained, broad-based tightening would mark a more cohesive recovery. For now, flight-to-quality continues to dominate—well-located, amenitized assets are clearing space; secondary buildings face a longer path to equilibrium.

Norges Bank Investment Management (NBIM), manager of Norway’s $2 trillion sovereign wealth fund, agreed to pay $542.6 million for a 95% stake in 1177 Avenue of the Americas, a roughly 1 million-square-foot Midtown tower, in a joint venture with Beacon Capital Partners. The deal implies a total property valuation of about $571.1 million—roughly $571 per square foot—providing a concrete price signal for a well-leased, high-quality Sixth Avenue asset. The sellers are CalSTRS and Silverstein Properties, with closing expected in the third quarter.

The transaction illustrates how global capital is distinguishing sharply between prime and secondary office. While NBIM has long held stakes in marquee Manhattan properties, the timing is notable: with pricing still adapting to a higher-rate regime, a marquee buyer stepping in with substantial equity suggests bid-ask gaps are narrowing and that top-tier underwriting is gaining traction.

The takeaway: price discovery typically begins at the core, where tenancy, location, and building quality support more predictable cash flows. Expect a two-tier market to persist. Core trades will reset benchmarks and re-open select financing channels, while value-add and commodity buildings rely on bespoke capital stacks and more complex business plans. As more reference trades print, cap rate ranges should stabilize—first for prime, then gradually for secondary as leasing risk and capex needs clarify.

Even as office leasing improves, consumer housing signals remain cautious. Total mortgage applications fell 1.2% week over week, with purchase applications down 3%, despite the average 30-year fixed mortgage rate easing to 6.64%—its lowest since April. Refinancing rose 1% on the week and was 20% higher than a year ago, aided by FHA rates averaging about 30 basis points below conventional loans this year. Purchase demand, however, remains highly rate sensitive and constrained by affordability.

Affordability has been a binding constraint for more than a year. The NBC Home Buyer Index registered 81.1 in July—an extreme difficulty reading that has hovered in the high 70s to mid-80s for over a year. Prices fell in 39 of the top 50 markets in July, but sellers also pulled listings, keeping supply tight. New home completions in July were down 6% year over year as builders navigated weaker buyer pools, tariff-driven input costs, and labor frictions amid tighter immigration enforcement in a sector with a high share of foreign-born workers.

For commercial real estate, the consumer pulse matters through multiple channels. Slower household formation and muted move-ins can weigh on retail traffic, hospitality demand, and eventually office-using employment via services consumption. With mortgage rates still in the mid-6% range, residential transaction volumes are likely to lag any improvement in office leasing. A clearer Federal Reserve path—especially lower term yields—would ease affordability and support CRE refinancing. Until then, expect operating demand to lead capital markets activity.

JLL’s global Bid Intensity Index improved in July for the first time since December, signaling a modest uptick in bidding competition and liquidity across private real estate markets. The index, which blends bid-ask spreads, bids per deal, and bid variability, suggests buyers and sellers are finding firmer footing on price, especially in sectors with resilient fundamentals.

Sector divergences mirror leasing trends. Multifamily (“living”) leads the improvement; retail cooled in recent months amid tariff uncertainty after outperforming last year; and industrial lags on supply chain and trade headwinds. In office, more bidders are showing up and more lenders are quoting, consistent with anecdotal signs that some investors see a bottom in stabilized, top-tier assets and are willing to accept measured leasing risk for normalized yields.

What to monitor: depth of lender participation across property types; pace of spread compression; stabilization of core cap rates; and whether bid intensity picks up for value-add offices as leasing and conversion pipelines clarify. If July’s improvement persists through fall, capital flows should gradually re-accelerate.

Supports:

- Flight-to-quality is translating into real leasing gains and tighter availability in top-tier offices.

- Selective but sizable core transactions are re-establishing price points and drawing global capital back into gateway office, aiding lender confidence.

- Liquidity indicators have stopped deteriorating; narrowing bid-ask spreads allow more deals to clear at realistic pricing even without rapid rate cuts.

Risks:

- Elevated rates keep refinancing walls high and capital costs elevated, particularly for assets with near-term rollover or heavy capex.

- Office shadow vacancy and sublease overhang continue to challenge legacy buildings; WFH keeps structural desk demand below 2019 levels, making reuse and conversion strategies essential.

- On the consumer side, high borrowing costs weigh on housing turnover and discretionary spending, pressuring parts of retail and hospitality—and, with a lag, office-using employment.

Watchlist into year-end:

- Fed policy path and term yields; net absorption versus gross leasing; effective rents and concessions by class; sublease clearance pace; lender appetite and pricing; CMBS/bank maturity cadence as a proxy for refinancing stress. In New York, track office-using job growth and the conversion pipeline’s ability to right-size older stock.

Bottom line: Recovery remains uneven by design. Prime, well-leased assets in gateway markets should continue to lead. Secondary offices require time, capital, and creativity to reset. Rate relief would accelerate timelines, but even without it, the combination of tenant flight-to-quality, targeted conversions, and selective global capital can keep the green shoots alive—barring a sharper macro demand shock.