Manhattan’s commercial office market absorbed 3.87 million square feet of space in July 2026, pushing year-to-date leasing volume to 26.66 million square feet and putting the borough on pace for its strongest annual total in more than a quarter century, according to Colliers’ latest monthly report released August 3. Available office inventory dropped to 66.24 million square feet, the lowest level since September 2020, while sublease supply hit a mark not seen since August 2019. For investors, landlords, and corporate tenants tracking the trajectory of one of the world’s most closely watched commercial real estate markets, the data points to a structural tightening that has moved well past early-stage recovery.
- July leasing velocity rose 22% over June and 28.4% year-over-year, led by commitments from Anthropic, NBCUniversal, and Aon.
- Available office space has declined 32% from the post-pandemic peak of 98 million square feet in February 2024, compressing at a rate that has accelerated in each of the past three quarters.
- Sublease inventory shrank by 700,000 square feet in a single month, removing a pricing lever that tenants used to negotiate below-market deals during the 2021 to 2024 recovery period.
- Average asking rents reached $78.03 per square foot, within 1.8% of the $79.47 recorded in March 2020, the last data point before pandemic-era disruptions reshaped the market.
- AI companies leased 670,000 square feet in Q1 2026 alone, more than a third of all technology-sector activity, with Q2 volume climbing further to 800,000 square feet.
- Approximately 5.5 million square feet of positive absorption was recorded during the first half of 2026; if that pace holds, pre-pandemic occupancy levels could be restored within two years.
The Supply Picture Has Shifted Faster Than Most Forecasts Predicted
The headline number, 66.24 million square feet of available space, represents a market that has compressed by nearly a third in just over two years. At the post-pandemic peak in February 2024, Manhattan’s office inventory overhang stood at 98 million square feet, a figure that led some analysts to project a decade-long recovery timeline. That projection has not held. The current availability rate is declining across all three major submarkets that Colliers tracks: Midtown, Midtown South, and Lower Manhattan. Each has shed roughly a third of its surplus since its respective post-pandemic high, a convergence that Frank Wallach, executive managing director of research at Colliers, described as remarkable given how differently the three markets operate.
Midtown’s overall availability now sits just 1.6 percentage points above its March 2020 level. Midtown South has tightened more aggressively, with availability dropping by about half a percentage point in July alone to 12.2%. That kind of single-month compression is atypical for any submarket and suggests that demand is absorbing space faster than new inventory or sublet returns can replenish it.
The drivers behind the compression are threefold. Healthy tenant demand, particularly from technology and AI firms, accounts for the largest share. Office-to-residential conversions have physically removed some buildings from the commercial pipeline, though that trend has slowed in recent months amid increased city regulatory scrutiny. And the sublease market, once a flood of discounted space that undercut direct landlord offerings, is draining rapidly. July’s 700,000-square-foot reduction in sublease inventory was partly driven by Snap’s 199,000-square-foot sublease at Vornado’s Penn 2, which absorbed one of the more prominent blocks sitting on the market.
AI Firms Have Become a Structural Force in Tenant Demand
Artificial intelligence companies are no longer a novelty footnote in Manhattan leasing reports. AI tenants accounted for more than a third of all technology-sector leasing in Q1 2026, absorbing 670,000 square feet, according to Colliers. That figure jumped from a 12% share in 2025. By Q2, AI leasing volume climbed to 800,000 square feet, surpassing the combined total for all AI deals across Manhattan in the whole of 2025.
July’s largest single transaction reflected this trend. Anthropic’s 465,630-square-foot lease for the entirety of AEW Capital Management’s 330 Hudson Street building in Hudson Square anchored Midtown South’s outsized share of the month’s activity. The AI company, which builds the Claude chatbot, plans to double its New York workforce to approximately 1,000 employees by year-end 2026, with the 16-story building capable of housing 1,700 workers at full occupancy.
Anthropic’s deal is part of a broader pattern. OpenAI leased 90,000 square feet at the Puck Building in SoHo. EliseAI signed a 109,000-square-foot lease at 401 Fifth Avenue near Grand Central. Legal AI startup Harvey committed to 185,000 square feet at One Madison Avenue. These firms tend to lease large, contiguous blocks of Class A space with long-term commitments, which tightens the premium end of the market and pushes other tenants into Class B and Class A-minus buildings that had previously struggled to attract demand. First-half 2026 data from Colliers and Avison Young confirms a notable rebound in Class B leasing, a spillover effect that is broadening the recovery beyond trophy towers.
The comparison to historical precedent is instructive but also carries limits. During the dot-com era’s peak in early 2000, internet companies captured roughly a quarter of all Manhattan office leasing and briefly overtook financial services as the city’s largest tenant category. AI firms currently represent only 2% to 3% of total Manhattan leasing by volume, even as their growth rate commands disproportionate attention. The question for the market is whether AI demand continues scaling or plateaus as the sector matures and capital deployment normalizes.
Rent Recovery and the Disappearing Tenant Leverage
Average asking rents at $78.03 per square foot in July place the market within striking distance of the $79.47 recorded in March 2020. Midtown South has already surpassed its pre-pandemic rent levels, driven by constrained supply and premium demand from AI and technology tenants competing for a shrinking pool of quality space.
The sublease market’s contraction is a key factor in the rent dynamic. Sublease space, typically offered at significant discounts to direct asking rents, gave tenants pricing leverage throughout the pandemic recovery. At its peak in late 2022, Manhattan’s sublease inventory exceeded 22 million square feet. It has since been cut by more than half, and all three major submarkets recorded sublease reductions in July. As that inventory drains, one of the primary mechanisms tenants used to negotiate below-market deals is disappearing, shifting pricing power back toward landlords.
For investors evaluating Manhattan commercial real estate exposure, the rent trajectory carries direct implications for net operating income and cap rate compression. Publicly traded REITs with significant Manhattan office portfolios, including SL Green Realty and Vornado Realty Trust, have seen leasing activity data feed into revised earnings outlooks. SL Green projected over 900,000 square feet of leasing in Q1 2026 alone, a company record, with AI tenants accounting for a growing share of major transactions.
Absorption Pace Faces a Sustainability Test
Manhattan absorbed approximately 5.5 million square feet of office space during the first half of 2026, according to Colliers. If demand continues at that rate, the market could return to March 2020 occupancy levels within two years. But sustaining this pace presents challenges. The large-block leases that drove 2025 and early 2026 activity, transactions in the 200,000-to-500,000-square-foot range from firms like Anthropic, NBCUniversal, and Bank of America, are not easily replicated quarter after quarter. The pool of tenants seeking that scale of space is finite, and many of the most active firms have now committed to long-term deals.
Year-to-date leasing volume through July is running 12.8% ahead of the same period in 2025. The full-year 2025 figure was already the strongest since 2019, supported by 15 million square feet of positive absorption. Matching or exceeding that level in 2026 would require continued momentum in the mid-market segment, where leases between 10,000 and 50,000 square feet have quietly kept the pipeline moving even as headline deals capture most of the attention.
Wallach characterized the market as “on solid footing” and “moving in the right direction” but stopped short of declaring a full recovery. The data supports that measured read. With availability still above pre-pandemic norms in two of the three major submarkets, and with conversion projects and economic uncertainty as variables, the trajectory is favorable but not guaranteed.
FAQs
What Is Driving Manhattan’s Office Leasing Recovery in 2026?
Three forces are converging: strong tenant demand led by AI and technology firms, a shrinking sublease market that has removed below-market pricing options, and office-to-residential conversions that have physically reduced available commercial inventory. AI companies leased 800,000 square feet in Q2 2026 alone, more than all AI deals in Manhattan throughout 2025.
How Close Are Manhattan Office Rents to Pre-Pandemic Levels?
Average asking rents reached $78.03 per square foot in July 2026, within 1.8% of the $79.47 recorded in March 2020. Midtown South has already exceeded its pre-pandemic rent levels. The sublease market’s contraction is accelerating the rent recovery by reducing the pool of discounted space available to tenants.
What Does the Manhattan Office Market Recovery Mean for REIT Investors?
Tightening availability and rising rents have direct implications for net operating income at publicly traded landlords with Manhattan exposure. SL Green Realty reported a record 900,000 square feet of leasing in Q1 2026. As sublease leverage disappears and occupancy rates climb, cap rate compression and improved NOI could support revised earnings outlooks for Manhattan-focused office REITs.
Is the Current Leasing Pace Sustainable Through the Rest of 2026?
Year-to-date volume is running 12.8% ahead of 2025, which was already the strongest year since 2019. Sustaining the pace will depend on continued mid-market leasing activity in the 10,000 to 50,000 square foot range, as the supply of large-block transactions available to anchor quarterly numbers is finite. Colliers estimates that if absorption continues at its first-half rate, pre-pandemic occupancy levels could be restored within two years.
