Law Firm Leasing Surges in 2023, Signaling Potential Turnaround for Commercial Real Estate Market

NEW YORK — Office leases in New York City were disappointingly small in 2023, signaling a slowdown in the commercial real estate market. While some deals were larger than in the previous year, they still fell short of the record-breaking leases seen in 2019. However, the market made a surprising recovery towards the end of the year, with several significant leases signed in December.

The largest lease of 2023 was signed by the white shoe law firm Paul Weiss, who took 765,000 square feet at Fisher Brothers’ 1345 Avenue of the Americas. This lease seemed to set off a chain reaction, with more notable deals following suit. Spotify secured a 69,000-square-foot sublease at 4 World Trade Center, while Success Academy renewed and expanded their headquarters to 94,000 square feet at Silverstein Properties’ 120 Wall Street. The Major League Baseball Players Association also scored a 50,000 square foot lease at Paramount Group’s 1325 Avenue of the Americas. Additionally, DoorDash took a whopping 115,000 square feet at 200 Fifth Avenue.

Law firms played a significant role in the leasing activity, making up around 12 million square feet nationwide in 2023. This trend is not surprising, as law firms typically seek high-quality office space. Avison Young reported that law firm activity accounted for 14.3 percent of all leases in Manhattan, more than double the previous year. This aligns with the industry’s history of making real estate moves during turbulent periods.

While the market still faces choppiness and uncertainty, there are signs that it may be reaching a bottom. Real estate professionals were optimistic after the Federal Reserve announced a pause in rate hikes. The market seems to be aligning with the capital markets, leading to increased transaction activity. Notable purchases have already been made, such as UCLA’s acquisition of One Westside and Westside Two in Los Angeles for $700 million.

Although distress sales and increased vacancy rates in certain areas indicate ongoing challenges, there are investors who are well-prepared to navigate the turbulence. Greg Freedman, co-founder and co-CEO of BH3 Management, explained that their countercyclical approach allows them to invest in various parts of the capital stack, making them well-positioned to take advantage of market conditions.

As the commercial real estate market enters 2024, the hope is that the recovery seen at the end of the previous year will continue. Increased transaction activity, favorable interest rates, and cautious optimism from industry professionals point towards a potential turnaround in the market. Only time will reveal the full extent of the market’s resilience and its ability to adapt to the challenges ahead.