Even when the coronovirus epidemic appears to be spreading in New York, corporations are reluctant to let their employees return to their skyscrapers and make even more pretense about the city’s long haul.
According to a new survey, less than 10 percent of New York office workers returned as of last month and just a quarter of major employers expected their people back by the end of the year. More than half of these companies say they will return by July 2021.
There is a decline in demand for office space. Lease signings in the first eight months of the year were almost half of what they were a year earlier. It is bringing the office market back on track to a 20-year low for the entire year. When the companies sign, many are opposed to short-term contracts that most landlords rejected in February.
At stake is New York’s financial health and its position as the world’s corporate headquarters. According to Cushman & Wakefield, a real estate brokerage firm, the city has more square feet of work space than London and San Francisco. Office work forms the cornerstone of office buildings from New York’s economy and property tax to about 10 percent of the city’s total annual income.
What is most unnecessary is that a recovery can come out much more slowly than in the aftermath of the September 11 attacks and the 2008 financial crisis. This is largely because the epidemic has prompted companies to radically rethink their real estate needs.
Robert Ivanhoe, a real estate attorney at Greenberg Trarig, said he had about 20 clients who postponed searches for new offices. “They are very considerate of coming up with a new operating model – how much force is my job to work from home and for how long?” He said “It has never been turned upside down like this before.”
Real estate data confirms this. According to real estate brokerage firm, Colliers International, the number of offices from January to August totaled 13.7 million sq ft, down from half in the first eight months of last year. In contrast, the lease saw nearly 43 million square feet of new leases and renovations at the end of last year, with an 18-year high hit.
“When it comes to making decisions about office leases, the words get postponed, and it’s late,” said Ruth Kolp-Haber, chief executive of Wharton Property Advisors, a real estate brokerage firm.
In March, food delivery company officials were ready to sign a lease for 50,000 square feet of office space at 2 Park Avenue, a stately, 29-story Art Deco tower in Midtown.
But Coronovirus abruptly shut down New York for several months, and the company “hit the pause” on its expansion, said Michael Vistrack, founder and chief executive of Freshly. The company is still considering new office space, but is not sure when it will sign the lease. “We are long-term believers in New York City.”
During any week in Midtown, the sidewalks are empty as they usually are on Sundays, outlining how many employees have returned. In August, a survey of major employers by Partnership for New York found that only 8 percent of employees had returned to office and most expected to have employees back by next summer, and a quarter of them decided that Didn’t know when they would return.
Elected officials, real estate tycoons, and even comedian Jerry Seinfeld have issued pennies to New Yorkers, arguing that the city has a history of bouncing back. The city will soon be inundated with people saying that.
But pessimists – including some of New York’s hedge fund managers – see the days ahead. They argue that companies will ask most employees to stay away until a vaccine is widely distributed and perhaps for a very long time.
Which of those two approaches is close to being correct will help determine how quickly New York gets its energy, economic health, and tax revenue.
Investors are not expecting a quick recovery. Shares of several New York office location companies, such as Empire State Realty Trust, which owns the Empire State Building, and SL Green Realty, which owns a huge new Vanderbilt Tower next to Grand Central Terminal, have fallen this year.
“I think the New York office market is usually being challenged for the next three to five years,” said Jonathan Litt, founder of hedge fund Land & Buildings. His fund published a report in May on why it appears that Empire State Realty Trust’s shares are overvalued.
A major part of the problem is that many companies are occupying new leases.
In recent years, the largest tenants of office space are co-working companies such as WeWork, New York’s largest private tenant. According to Cushman & Wakefield, such businesses signed up about 8 percent in Manhattan last year and 12 percent in 2018. But co-working companies are in crisis and some cannot survive.
Other potential tenants of offices are unsure of what landlords have to do or wait to reduce rent, incentives such as rent discounts and cash for office improvements. “If you think the rent is going to be lower, what does it mean to sign a lease with a 15 percent reduction in rent?” Said Michael Colacino, president of brokerage firm SquareFoot.
Some companies with leases that are ending this year or next appear to be kicking down the road, instead of signing short-term extensions for typical deals from years past. In recent weeks, NBC Universal expanded a lease for a secondary office at 1221 Avenue in the US, and the Stroke & Strock & Reaper law firm did the same for its city of offices. But according to Colliers, he did this for only one year. A spokesperson for NBC Universal declined to comment and Stroke and Stroke did not return a call and several emails.
In normal times, owners of large office buildings typically won’t entertain a one-or-two-year lease extension for a larger tenant, said Franklin Wallach, senior managing director of the New York Research Group at Collieries. “They see that the new leasing activity has stopped, while the amount of sublet space coming to the market is increasing, so the average landlord wants to keep the tenant in the building.”
One of the biggest concerns is that companies may soon be trying to submerge hundreds of thousands of square feet of space that they are not planning to use anytime soon. For companies seeking offices, sublets often offer a short lease at a steep discount to market prices.
According to Collier, Maurice R. Greenberg-led Star Insurance companies are trying to suicide 190,000 square feet. First Republic Bank, which signed a 211,521-square-foot lease for 410 Tenth Avenue in April, granted a 151,000-square-foot lease, according to a report by real estate broker Savills. Star and First Republic spokespersons declined to comment.
According to Saville, Sublabel space made up about a quarter of the total office space available in New York at the end of the second location, and several real estate brokers said they expected the increase to happen in the coming months.
In January, Ms. Colp-Haber was showing the office to a construction company that she said was in the market for a five-year lease in Manhattan. Last month, the company signed a 40 percent discount on the original lease for a year, she said.
Nevertheless, property owners claim not to be overly concerned as most tenants are paying their rent. They state that the office lasts for years and is very difficult to finish early. And large financial firms, among New York’s largest tenants, were not stressed because they were in the last recession.
The most optimistic sign that the New York office market will bounce back quickly is that large technology companies, which are acquiring land, are taking scarves up to a square foot. In early August Facebook leased the office space – 730,000 sq ft – to everyone at the Farley Post Office next to Penn Station. Amazon acquired the former Lord & Taylor building from Fifth Avenue WayWork in March.
The retail tenants at Hudson Yard, a vast development on the far west side of Manhattan, may occur again, but companies are still moving into the project’s office buildings.
William C., chief executive of Rudin Management Company. “They still believe that New York is the place to grow and grow their business,” Rudin said. “Amazon’s commitment is amazing; Facebook’s commitment is amazing. “
Some landlords find encouraging signs in their office buildings in a suburban area, where social disturbances are easy as people make uproar by cars. This, he argues, employers and workers want to return to office and more of them will make their way to New York as well.
Company e. Malkin, the chief executive of Empire State Realty Trust, which owns the Empire State Building, said in mid-August the number of people coming to their office buildings in Connecticut was 40 percent from what it was a year ago, and up on time. Nothing next in spring due to strict lockdown policies. “This is a very high number and it is growing.”