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Midtown is facing what analysts are describing as a glut of sublease space as the pandemic continues to gnaw at market fundamentals and turn the country’s premier commercial real estate district into a tenant’s market. The stats are grim from a landlord perspective and are quickly starting to echo the bad news that owners digested during the financial crisis of 2008 and 2009, and even the dotcom bust of two decades ago. The rise in sublease space might present opportunities, however, to tenants once priced out of what’s quarter after quarter the nation’s most expensive office district. That’s the bright side, analysts say. “Any change is a positive for one group and potentially more challenging for another,” Franklin Wallach, senior managing director of research for a brokerage, said. “Value-seeking tenants squeezed out of certain neighborhoods might take advantage of the asking rents we are seeing. An increase in supply — sublet and direct space returning, asking rent decreasing — creates that opportunity.”
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Fitch Ratings downgraded troubled coworking company WeWork and warned that the once-high-flying startup could default on its obligations. The agency said Thursday that it lowered the company’s long-term issuer default rating to CCC from CCC+. That indicates “substantial credit risk” and suggests “default is a real possibility,” according to Fitch’s rating scale. The startup tried and failed to go public late last year. The spread of the coronavirus worsened WeWork’s predicament, as people opted to work from home rather than in the communal offices the company rents out. WeWork’s bonds maturing in 2025 last traded at about 63 cents on the dollar, according to Trace pricing data.
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New York governments and authorities are projecting $59 billion of revenue shortfalls through 2022 because of the continuing coronavirus crisis, one of the deepest funding holes of any state. Gov. Andrew Cuomo, a Democrat, said services will be cut and taxes will increase if Congress doesn’t pass another relief package—which Democrats say should include direct aid to states and cities hit by the pandemic. Mr. Cuomo said recently that he will postpone decisions in the hope that Democrats make gains on Election Day Nov. 3. New York reported more than 32,000 deaths due to the coronavirus, and the pandemic decimated public finances. New York’s state government lost an estimated $14 billion in the current fiscal year and $16 billion in the coming fiscal year. Transportation authorities around New York City expect to take in $15 billion less revenue due to drops in subway, train and air passengers. And New York City and other local governments will be grappling with $13.5 billion in shortfalls over the next two years, Mr. Cuomo’s office estimates.
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Craig Deitelzweig made his mark in real estate by buying office buildings and making them look and feel like hotels. “Why shouldn’t you feel like you’re on vacation when you’re at work?” he asks. His redevelopment of the offices at 10 Grand Central is evocative of a chic, boutique hotel with a signature scent pumping through its ducts. Deitelzweig has done that at properties around the city, but now that tourism is in tatters and hotels sit empty and in danger of default, the chief executive of Marx Realty is looking at a new strategy: buy cheap hotels and turn them into offices. As a result of the pandemic, not all of the city’s 700 hotels will make it. Some 25% are expected to close by 2023, experts say.