Sublease availability in Manhattan’s office market has decreased sharply, signaling a significant shift in the commercial real estate landscape that has been challenged since the onset of the COVID-19 pandemic. Data from commercial real estate services firm JLL show that the inventory of sublease space in the second quarter of 2026 fell to below 11 million square feet, less than half of the 23 million square feet recorded at its peak in late 2022.

This contraction in sublease inventory is largely attributed to increased demand from technology and artificial intelligence companies, sectors that have expanded rapidly and now account for a considerable portion of leasing activity. Jamie Katcher, Executive Managing Director at JLL, noted that the “most notable development” in the quarter was the swift absorption of the sublease overhang. According to Katcher, growth from AI firms, along with financial services and law firms, is influencing long-term leasing decisions, while landlords are opting to reclaim sublease spaces to secure direct leases at higher rents.

AI-related tenants have been particularly active in the market this year. JLL reported that AI companies signed 21 deals totaling 719,200 square feet through mid-2026, on pace to match or surpass the 845,000 square feet leased by the sector last year. Significant leases on former sublease spaces include AI healthcare platform Tennr taking 125,000 square feet at 345 Hudson Street, previously occupied by Google, Uber expanding into 86,000 square feet at 3 World Trade Center in space formerly leased by WPP, and Bank of Montreal occupying 82,000 square feet at 151 West 43rd Street, previously held by Roivant Sciences. Additionally, advisory platform Datasite secured 76,000 square feet at 3 Columbus Circle, space formerly leased by global marketing network VML, which it will use for its Grata and Blueflame AI units.

Meanwhile, Manhattan’s retail sector continues to show signs of recovery, though some nuances temper a fully optimistic outlook. The Real Estate Board of New York’s (REBNY) first-quarter 2026 report highlights ongoing momentum in retail leasing, with particularly low vacancy rates on prime shopping corridors such as Bleecker Street’s key blocks. Fifth Avenue in the Flatiron district has emerged as a desirable location for new-to-market brands, with retailers like Canada’s Garage and Cozey occupying former Club Monaco space at 160 Fifth Avenue.

The report also underscores strong demand for Madison Avenue locations north of East 57th Street, particularly from Italian fashion brands, leading some to establish outlets on adjacent side streets, including Milan-based LDJ’s townhouse store at 18 East 69th Street. Herald Square has seen average asking rents rise from $383 to $412 per square foot between late 2025 and early 2026, driven by larger tenants such as a 40,000-square-foot TJ Maxx at Herald Towers. Meanwhile, Times Square continues to diversify beyond entertainment-related uses, with new food and beverage tenants like Nan Xiang Dumplings occupying former restaurant spaces.

However, the REBNY report excludes certain well-trafficked corridors such as Sixth Avenue in Midtown and a segment of Fifth Avenue between East 34th and East 42nd streets, where notable retail vacancies linger. For example, prominent storefronts like the former Gap location at 1212 Sixth Avenue have remained vacant despite aggressive leasing efforts. Similarly, large swaths of the east blockfront between East 38th and East 39th streets on Fifth Avenue remain unoccupied, suggesting that retail recovery is uneven across the borough.

Overall, the Manhattan commercial real estate market is undergoing a transformation shaped by the resurgence of tech and AI firms as office tenants and a measured, if uneven, retail rebound. The absorption of sublease space and rising retail rents point to a demand-driven market dynamic, though challenges remain in fully revitalizing all segments of the city’s office and retail inventory.