SL Green profits from Manhattan office rebound

Manhattan’s largest office landlord is capitalizing on a tightening market. With little new office construction on the horizon, tenants are scrambling for the city’s best buildings, and SL Green is reaping the benefits.

SL Green Realty Corp. raised its full-year earnings guidance by $1.20 per share, a more than 26 percent increase. The bump was largely driven by strong Manhattan office leasing, particularly early renewals and tenants snapping up pre-built space, as well as faster tenant move-ins and tighter expense controls. CFO Matt DiLiberto said the positive outlook during a second-quarter earnings call.

The company signed 53 Manhattan office leases encompassing 445,000 square feet during the second quarter. During the first quarter, it signed 51 leases covering 929,000 square feet. CEO Marc Holliday attributed the momentum to the city’s “extraordinary, prolonged surge in business activity.”

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“Our economy is in a league of its own compared to any other [Central Business District] in the country or indeed even the world, driven by the financial services sector performing as well as I’ve ever seen it,” Holliday said.

SL Green has also benefited from a wave of AI-driven tech leasing. Holliday pointed to a recently signed 100,000-square-foot lease by an unnamed “leading artificial intelligence company” at 11 Madison Avenue as evidence of the trend.

The REIT saw dramatic rent growth across its portfolio, particularly along Park Avenue and Sixth Avenue. DiLiberto said asking rents have been rising throughout the year and predicted the company would post another quarter of strong leasing spreads.

At One Vanderbilt, which is fully leased, the REIT is looking to recapture space from expanding tenants and re-lease it at significantly higher rents. The building has been such a cash machine that SL Green has already recouped its investment, and the profits are now flowing into earnings.

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The bullish outlook comes as Midtown’s supply of Class A office space continues to tighten. The shortage is driven by a dearth of new construction, pent-up tenant demand after years of uncertainty, and a shrinking inventory as older office buildings are converted to apartments.

“A growing scarcity of premier space in desirable Midtown districts has turned the tables in our favor,” Holliday said during the call. “We now know that we’ll exceed our leasing goals again this year. It’s just a question of whether it’ll be by a wide margin, or a really wide margin.”

For businesses locked into long-term leases, the rising rents for new space create a difficult calculus. While they may be able to negotiate lower rates than the market asks, they are often paying a premium compared to what was available just a few years ago. This creates a financial drag on companies that need stability, forcing them to decide whether to absorb the costs or risk the disruption of relocating to a less expensive, and likely less desirable, building.