Manhattan’s office market recorded its most robust first-half leasing activity since 2002, with 22.8M SF of space signed through June. Driven by law firms and a surge in artificial intelligence sector demand, the city’s overall office availability rate fell to 13%, the lowest level since October 2020.
A Historic Rebound in Leasing Velocity
The Big Apple’s office sector is moving with a momentum not seen in over two decades. According to data from Colliers, companies signed 11 million square feet of leases in the second quarter alone, putting the city on track for its busiest year since 2000. This surge represents a clear shift in market dynamics, as landlords who struggled through years of pandemic-era vacancy now find themselves back in the driver’s seat.
The tightening market is particularly evident in the premium segment. In Midtown, buildings constructed after 2000 currently report an availability rate of just 6.7%, a figure lower than pre-pandemic levels. This scarcity has pushed Park Avenue’s average asking rent to $120 per square foot—well above the $105 recorded in March 2020. Even Class-B office space is seeing upward pressure, hitting a record average asking rent of $70.58 per square foot citywide during the second quarter.
The AI and Law Firm Growth Engine
While traditional powerhouses like law firms remain the bedrock of the market, the rapid entry of artificial intelligence companies has provided a significant tailwind. Law firms anchored the largest recent deals, including Simpson Thacher & Bartlett’s 916K SF prelease at 570 Fifth Ave, as reported by The Real Deal.
Simultaneously, AI-focused firms signed a combined 800K SF of leases in the second quarter, doubling their commitment from all of 2025. According to Frank Wallach, executive managing director of research at Colliers, this trend is reshaping the competitive landscape.
"That was definitely a ‘wow,’" Wallach said regarding the 5.7% year-over-year rent increase. He noted that the conversion of older office buildings into other uses is further tightening supply, creating a "spillover" effect where displaced tenants must compete for remaining inventory.
The Vanishing Sublease Overhang
Perhaps the most significant correction in the market is the rapid absorption of sublease space—a lingering shadow over Manhattan since the pandemic. Data from JLL indicates that sublease inventory dropped to below 11 million square feet in the second quarter, less than half of its 23 million square foot peak in late 2022.
Jamie Katcher, executive managing director at JLL, identified this as the "most notable development" in recent market performance. "Growth from AI firms, as well as financial services companies and law firms, is driving long-term leasing decisions, while landlords are increasingly pulling back available sublease space to pursue direct deals at substantially higher rents," Katcher said.
Large-scale AI players are actively claiming this former sublease territory. Notable expansions include the AI healthcare platform Tennr, which secured 125,000 square feet of former Google space at 345 Hudson St, and Datasite, which took 76,000 square feet at 3 Columbus Circle previously occupied by the marketing firm VML.
New Leverage in the Landlord-Tenant Dynamic
The shift in market power is forcing a change in negotiation culture. For years, tenants benefited from "concession wars" as landlords scrambled to fill empty desks. That era is fading. In 2024, taking rents were 10% below asking rents, but that gap narrowed to 8% last year and continued to shrink in the first quarter of 2026.
"We went through the concession wars of the last 15 years, and that’s definitely entering a new chapter," Wallach said. "It’s the first time in a long time that it’s not just going in one direction."
For commercial tenants, the implications are clear: the window for securing deep discounts is closing. As landlords regain the ability to hold firm on pricing, the market is moving toward a period of stabilization—or perhaps, for landlords, a period of sustained growth. The immediate question for the second half of 2026 remains whether the current pace of AI-driven demand can be sustained, or if the market will normalize as the most aggressive expansion phase concludes.
