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Demand for New York City office space is improving, but vacant blocks in older buildings remain a drag on asking rents and availability rates across Manhattan. The third quarter of 2022 marked the strongest period of leasing since the end of 2019, a bright spot for owners and leasing brokers in New York’s pandemic revival. With 9.2 million square feet of office deals, leasing volume was up 27 percent compared to the third quarter of 2021, when tenants inked 7.2 million square feet. But despite the improved leasing, Manhattan’s availability rate for office remains high at 16.4 percent, compared to 10 percent at the end of 2019.
Average asking rents were up slightly from a year ago — at $74 a square foot compared to $72 a square foot — but down slightly from last quarter’s $75 a square foot. The Financial District’s availability rate was at 26 percent — the highest in Manhattan — in the third quarter. The neighborhood has some of the city’s oldest commercial buildings, with properties dating back to the 1700s. “Post-Great Recession, Downtown availability peaked at 17 percent.” “It took almost 10 years to become a 24/7 neighborhood and get down to 10 percent by the end of 2019. Those gains have unfortunately been reversed.”
Third Avenue in Midtown East — where most buildings were constructed between the mid-1960s and the early 1980s — has a similarly high availability rate of 24 percent. The vacancy rate would have been identical to the Financial District’s number if Memorial Sloan-Kettering hadn’t purchased 430,000 square feet of the Lipstick Building from SL Green Realty, taking that space off the market in a neighborhood already struggling with high vacancy. Ultimately, office demand will need to keep increasing if New York City hopes to return to pre-pandemic office leasing activity.
Several large blocks of space are scheduled to come on the market in the next year, including Paramount’s offices at 51 West 52nd Street, Cravath’s space at 825 Eighth Avenue and IBM’s Watson Group’s headquarters at 51 Astor Place. And many older buildings undergoing renovation — like Penn 2 — have multiple empty floors that haven’t hit the market yet.
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As those who got used to working from home refuse to return five days a week — and businesses shed the expensive Manhattan footprints giving every employee a desk — the value of America’s costliest real estate is likely to crater. That means that commercial property tax collections, which account for a fifth of all municipal revenue, may soon crater, too. New York has two choices: Wait for massive fiscal growing pains, or adapt now, minimizing the agony. Adapting now means rethinking zoning. There’s no good reason that in a modern city, buildings are so rigidly categorized into classes, with minimal flexibility between light industrial, commercial, residential, medical and other.
A nimbler New York would end unnecessary distinctions to let people find the best uses for space with minimal regulatory hurdles. Second, adapting now means budgeting smartly. Profligate spending that piles ever more recurring spending into the city’s $101 billion-and-growing fiscal plan risks throwing New York off a cliff if and when property receipts revenue plunges (personal income and related tax revenue is already expected to fall sharply this year). State Comptroller Tom DiNapoli projects a potential city budget gap of nearly $10 billion in 2026. Building up reserves and responsibly dialing back bureaucracy are the wisest insurance policies against sudden downward shifts — especially if those coincide with a recession.
Third, adapting now means rethinking property tax collections, which have become unfair and incomprehensible over generations. Not only must New York rationalize levies on rentals, condos, coops and single-family homes; it must accept that golden-goose employers whose taxes have defrayed those from residences might not lay eggs forever. Fourth, adapting now means more sensitively implementing statutes that inflict huge costs on commercial real estate, like the law that will soon start punishing noncompliant buildings with big fines. That’s likely to accelerate a commercial exodus. None of this precludes Mayor Adams and Gov. Hochul jawboning to bring more people back to the office. Let them try, but understand that an ounce of preparation is worth many pounds of hot air.
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A look inside the rebranding of MetroTech, an outdated corporate campus from the early 1990s.
New York City’s most populous borough has many crowd-pleasing attractions: the Brooklyn Bridge, the Brooklyn Botanic Garden, the Brooklyn Nets. Now there’s Brooklyn Commons. It’s better known as the MetroTech Center, a dull and insular back-office hub for financial firms and city agencies in Downtown Brooklyn that many New Yorkers have largely ignored — unless they’ve worked or studied there — since the early 1990s. Now, a $50 million renovation aims to transform it into a leisure destination, with trendy cafes, cultural programming and refreshed green spaces. The old MetroTech had something of an image problem. The inward-facing complex was not seen as particularly welcoming, even though it was open to the public.
Brookfield Properties, a real estate company that acquired part of the complex in 2018, is trying to fix that by overhauling MetroTech’s public spaces, including a courtyard with a mini-forest of 110 honey locust trees (it’s keeping those). Out will go the hard green metal benches, dim lamppost lighting and kitschy, oversized shrubs. In their place: comfortable wooden benches, modern lighting and more natural-looking plantings. The pandemic also brought new and expanded programming to the courtyard, like Zumba classes, badminton, ice skating, movie nights, art exhibits and a pop-up beer garden.
Blank Street Coffee and restaurants like Naya and Chinah are moving in. “I would come back here again,” said Adineek Singh, 19, a college student from Queens who did not ignore the MetroTech courtyard the other day, but instead took time to discover and enjoy it, while walking to a job. The dated, blocky office park, with its 11 buildings and 3.5 acres of public space, is ripe for an update, as the clamor for more elbow room in a crowded city grows. City and business leaders have increasingly recognized the health and environmental benefits of parks and plazas, as well as their economic value in attracting companies, boosting foot traffic and luring workers back to the office.
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Governments should help convert unused commercial real estate into multifamily units
The US’s office buildings could take a lot longer to recover than the rest of the economy as workers continue to work from home even after the pandemic subsides. In New York City, for example, it could take 10 years for properties to recover what they were worth in 2019, according to a study released in the National Bureau of Economic Research on Monday (Oct. 3). The researchers, from New York and Columbia Universities, developed a pricing model that wraps in a variety of data, including remote job postings. Extrapolated to the whole country, their findings suggest US office real estate could lose 39% of its value in the long term, wiping out $453 billion.
Their analysis shows an already bleak picture. Office building occupancy rates went from 95% in February 2020, to 10% the following month. By mid-September they were still below 50%. The study also looked at how much lease revenue dropped during roughly the same time period: by nearly 18% from January 2020 to May 2022, driven by a lack of new leases versus decreased rents. Indeed, over the past six months, the amount of newly leased office space collapsed to 59 million square feet from 253 million square feet per year before the pandemic.
How much office real estate declines in coming years will depend on the battle between employers and employees over the future of flexible work. If New York City employers push hard for a return to the office, office building valuations will be about 39% below 2019 levels in 2029, according to the study. If New Yorkers continue working from home at current rates, however, valuations will stay nearly 60% below 2019 levels even after 10 years.
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US data shows booming demand for industrial property, while office space struggles
The scarcity of US industrial property continues to be at odds with readily available office buildings, as the commercial real estate sector faces significant risks amid rising interest rates. In the third quarter of 2022, average office vacancy rates in the US rose for the 12th consecutive quarter to reach 17.8%. By comparison, US average industrial vacancy rates stood at 3.2% — up slightly from an all-time low of 3% in the second quarter. This was the first increase in two years and remains well below the 5% average national vacancy rate recorded in 2020.
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In the heart of midtown Manhattan lies a multibillion-dollar problem for New York, building owners and thousands of workers. Blocks of decades-old office towers sit partially empty, in an awkward position: too outdated to attract tenants seeking the latest amenities, too new to be demolished or converted for another purpose. It’s a situation playing out around the world as employers adapt to flexible work after the Covid-19 pandemic and rethink how much space they need. Even as people are increasingly called back to offices for at least some of the week, vacancy rates have soared in cities from Hong Kong to London and Toronto.
From today's story: $456 billion - The value US office buildings stand to lose due to lower tenant demand, according to a study by Columbia University and New York University.