***
KPMG inked a 20-year deal for 456,000 square feet across 12 floors of the under-construction Hudson Yards skyscraper to consolidate its 800,000 square feet spread across 345 Park Avenue, 560 Lexington Avenue and 1350 Avenue of the Americas, the largest lease so far this year in the city. KPMG’s move is another blow to New York City’s office market, which has recently seen several major firms reveal plans to jettison unused space.
Amazon and Meta announced they would slow their expansion plans and Yelp said it would close its Flatiron District offices as it shifts to a remote work model. HSBC Bank USA cut its New York City footprint in half when it signed a lease in May to move its headquarters to Tishman Speyer’s The Spiral, part of the company’s attempts to ditch 40 percent of its real estate worldwide. Unlike HSBC, KPMG didn’t plan to cut back on its office space when it started searching for new digs in 2018. But after the COVID-19 pandemic pushed the firm into a remote model, KPMG decided to look for smaller offices to save money on its New York City real estate costs.
Remote work has pushed other companies to cut back too. A July survey from flexible workspace software provider Robin found that nearly half of 250 companies contacted would cut their office space in the next year and a Federal Reserve Bank of New York survey found that 16 percent of service firms had already reduced their office footprints after adopting a hybrid work model. Meanwhile, Manhattan saw a record-high office availability rate of 18.3 percent in the second quarter as leasing remained slow.
***
One-time unicorns like Peloton, Snap and Casper agreed in recent boom years to create hundreds of jobs in exchange for tax credits offered under the state’s lucrative but controversial Excelsior Jobs Program, which aims to keep jobs from leaving the state. With the economy now slowing, a number of these companies have made layoffs, downsized offices or otherwise transitioned from growth mode to focus on profitability, and may struggle to deliver all the jobs they pledged. A spokesperson for Empire State Development, which administers the program, noted the pandemic and macroeconomic factors affected many companies, particularly those in New York City. The program, launched by former Gov. David Paterson’s administration in 2010, offers companies $2,500 to $5,000 for each job they create in the state. Officials typically offer the incentives to retain growing companies seeking more office space.
Peloton, for example, agreed to quadruple its roughly 400-person New York City workforce in 2018 when it relocated from a small office in Chelsea to a 300,000-square-foot spread at Cove Property Group and Baupost Group’s Hudson Commons office redevelopment at 441 Ninth Avenue. The fitness company said it would add 1,263 jobs over 10 years in exchange for $20 million worth of tax credits. In 2019, its first year in the program, Peloton exceeded its goal by creating 206 jobs, earning about $265,000 in tax credits. Peloton’s business exploded in the early months of the pandemic, when lockdowns shuttered gyms and fitness enthusiasts eagerly shelled out thousands of dollars for its stationary bikes. But the company has since run into huge problems: It replaced its CEO in February and announced plans to cut 2,800 jobs, or 20 percent of its workforce, and to stop making its own bikes and treadmills.
In June, Peloton put about a third of its Hudson Commons office space up for sublease. It’s not clear how the job cuts and hiring will affect Peloton’s job numbers in New York.
***
Some say congestion pricing will harm small businesses, adding to woes for contractors working across the city and resulting in even higher prices for consumers. New Jersey Gov. Phil Murphy voiced his opposition this week, saying it will place an undue financial burden on commuters from the Garden State. But leaders in CRE believe that the tolling, which could be as high as $23, will pay off in the long term for the city's environmental goals, quality of life, and for property types from aging office buildings to retail corridors. It could also have an impact on where companies lease space and shift the way e-commerce companies lay out their distribution networks in the city.
The city hopes to reduce the number of vehicles stuck in traffic on the roads through congestion pricing, improving travel speeds and reducing vehicle emissions in one fell swoop. The funds collected through the fee will be funneled to the Metropolitan Transit Authority, which is facing a $2.5B budget deficit and fears of a fiscal cliff. The MTA held several public hearings during the final days of August — the first of which lasted almost seven hours — attended by zealous advocates, angsty opponents and New Yorkers unclear about exemptions. The public comment period is in effect until Sept. 9, after which the MTA is expected to present a clear-cut final version of its congestion pricing policy.
Public confusion hasn't been helped by the fact that the MTA has yet to announce exactly how much drivers will pay, which vehicles are exempt and what times the tolls will be in effect. At present, exceptions are in place for a select few vehicles: emergency transportation like ambulances, vehicles transporting people with disabilities, and vehicles belonging to residents in the CBD earning less than $60K. Midtown neighborhoods, filled with aging office buildings, have struggled to retain tenants as employers fill up shiny new properties on Manhattan's Far West Side. But congestion pricing could provide a boost to Midtown.
While it could prove yet another hurdle for employers struggling to entice workers back to offices, most Manhattan workers commute via public transit anyway, and the policy is unlikely to discourage commuters who were already planning on driving to work.
***
The Steven Roth-led REIT is in contract to sell its 29-story office building at 40 Fulton Street to investor David Werner for between $105 million and $110 million. That’s a notable discount on the $130 million to $140 million Vornado was eyeing when it put the property up for sale in May. Vornado lowered its pricing on the building as rising interest rates made acquiring it more costly for potential buyers, according to a person familiar with the deal.
The 250,000-square-foot building is about 80 percent leased.
Vornado put the 1980s-era building up for sale as part of a broader move to trim older, less-profitable parts of its portfolio, including office and retail properties. Vornado bought the building in 1998 and completed a $15 million renovation in 2019. It has signed tenants to about 110,000 square feet of leases there since the start of the pandemic. The building’s largest tenant is Fortune Media, which accounts for about 20 percent of its leasable area.