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Empty office space across Manhattan reached a record 18.7 percent as of 1 July, according to Newmark, a real estate services company, with downtown’s office towers standing 21 percent vacant.
The vacancy rate is 15 percent higher than at the end of the 2020 and more than double that of February 2020, just before the virus-related economic crisis began, the New York Times reported.
The national office vacancy rate on 1 July was 16.2 percent, the NYT noted.
While JPMorgan Chase, Morgan Stanley, and other firms are summoning most workers back to their offices, most companies are offering workers more flexibility in their choice of workplace.
Only 12 percent of workers had come back downtown as of 1 June, the NYT said, with about 60 percent due to return this fall under companies’ mandates.
As a result, businesses in the city are still downsizing their leased space or letting some leases lapse entirely to accommodate working from home, at least part of the time, as the new normal.
The city’s commercial real estate market is coping with its worst crisis since the 1970s, when New York City teetered on bankruptcy and half of the city’s Fortune 500 companies fled, at the same time that the World Trade Center and other gigantic office towers were being built, Kathryn Wylde, president of the business group Partnership for New York City, said in comments quoted by the NYT.
Before 2020’s economic collapse, New York’s office ecosystem drew 1.6 million weekday commuters who sustained a web of retailers, restaurants, bars, and other businesses, thousands of which closed or failed outright last year when the commuters stayed home.
Landlords unable to collect rent also are increasingly unable to pay the city’s property taxes, which make up 41 percent of New York’s budget.
The plight could worsen.
A third of leases in many large Manhattan office buildings will expire over the next three years, real estate services firm CBRE has reported. Many of those tenants have already announced that they will need much less office space, according to the NYT.
Also, new buildings that began construction before last year’s crisis will soon be completed, adding 14 million more square feet of offices at a time when several companies have announced plans to move out of town. (See “U.S. Financiers: Bye-Bye Wall Street,” Trends Journal, 2 February 2021.)
In addition, employees simply may not obey corporate orders to report back downtown.
“Other cities have become more competitive as a result of the remote-work phenomenon,” Wylde said.
“It’s going to require a real shift in public policy focusing on quality of life, a positive business climate, and affordability” to bring New York City’s office workers back and the real estate industry back from the brink,” she said.
PUBLISHER’S NOTE: We predicted the plight of commercial real estate landlords, as well as city coffers, in “Work From Home = City Real Estate Down” in our 20 October, 2020, issue.
Since then, we have documented the plight as it has worsened (“Office Workers’ Slow Return Endangers Landlords, City Finances,” 9 March, 2021).
TRENDPOST: Some large employers, such as JPMorgan Chase, are ordering workers back to central offices for at least a portion of the workweek. However, those workers will return to city centers in daily numbers too small to support the same broad downtown business ecosystems that depended on commuters.
As a result, downtown businesses will shrink in numbers. Lease prices and real estate values will continue to spiral down until they reach a level businesses and investors will accept.
The smallest commercial landlords, which have fewer reserves than the Bigs, will sell out or go bankrupt; property owners and investors with deep pockets will buy those properties and grow even bigger.
As we noted in our “Real Estate Industry Update,” 13 April, 2021, moves to change zoning laws to turn empty commercial buildings into residential ones will not replenish the loss of rental income from commercial tenants and economic loss for retail, restaurant, tourism, and hospitality businesses that thriving commercial cities generated.
At the bottom of this downward spiral: city treasuries, which depend heavily on property taxes for revenue. (Property taxes account for more than 40 percent of New York City’s annual budget.) Less revenue means fewer services, leading to a reduced quality of life, persuading even more people to move away, reducing property tax revenue.
TREND FORECAST: To keep residents, businesses, and property tax revenues, cities will become laboratories for innovation in everything from marketing their brand identities to negotiating with businesses over taxes to the ways in which essential services are provided.