BACK TO THE OFFICE?

I just spoke to my friend, an owner of numerous NYC office buildings (B+C).

To cut a long story short - he has "never been busier" with "the smart money" seeing this as a temporary blip, taking advantage of office rents 25+% off their peaks by signing long-term leases.

Hold on. Almost 19% of office space in NYC remains unleased, with a third of leases in large Manhattan buildings set to expire in the next three years and 14 million square feet of new office space expected to hit the market soon.

Other large cities are in a similar position (LA - 24%; Houston 22.9%; Chicago 21.9%; Miami 16.9%).

Not to mention, many large and small companies are going to "work from anywhere" or hybrid models (i.e. Facebook, Microsoft, Twitter, Salesforce, Amazon, Spotify, etc.).

Then there is the "Delta" variant and sky rocketing "break out" cases.

Sounds like this office landlord was just talking his position?

Maybe. But anybody watching the Manhattan apartment market (not to mention trying to get dinner reservations) knows the rental and sales market has rallied significantly from the COVID trough.

Goldman, JPMorgan and Citi want "everybody" or "at least 90%" of staff back in the office by Labor Day (no pun intended).

At the end of June, only 20 percent (from a low of 4%) of office workers in Manhattan had returned to their desks.

Other major cities are doing somewhat better (Houston/Dallas/Austin 47%; LA 27%; Chicago 26%). However, some predict that over 60 percent will return to NYC after Labor Day.

That being said only 7% of companies have concrete "return to office plans".

So is it too early to call?

I don't think so. It makes sense for some people to work remotely 100%, some to work a hybrid model, and some to work full time at the office.

If you commute 1 hour each way (about the average into NYC), that's approximately 500 hours annually (roughly 12.5 weeks or 3 months). That is a lot of lost productivity.

Plus, many people like working from home and are embracing Zoom (vs meeting face to face).

It's clear not everybody is going back.

Seems there will also be a flight to quality (and more affordable) Class A space with high quality HVAC systems, higher ceilings, efficient large floor plates, more/bigger elevators, lower density, desk sharing strategies and amenities to induce workers into the office.

Class B and C office buildings seem very vulnerable. While there is talk about repositioning B+C office to residential or other new uses (lab space, logistics/distribution centers, etc.), it is easier said than done.

But bet against office building commercial real estate at your own peril - especially in NYC (see bounce backs from multiple financial crises, recessions/depressions, 9/11, wars, etc.).

Yes, cap rates could increase - but commercial real estate historically is an asset of choice during inflationary periods.

In addition, many lenders, for regulatory capital purposes, would rather modify loans with low interest rates ("extend and pretend") versus marking them as non-performing and/or foreclosing.

___

O.K. enough back and forth. My prediction for the "new norm":

• 10% of former office workers will be working full time from home
• 50% will be working from home 2 out of 5 days per week

Based on that, we will need 30% less office space.

Assuming those who do work in the office will need more space, let's call it 20% less office space required.

Some of this office space can and will be repurposed - so now we are talking 10-15% in the short term.

Not the end of the world for owners of office buildings - especially Class A.

Class B+C can/will weather the storm.

The winners will be small businesses (less overhead) and office workers with better quality of life.

So as Orson Welles said, "If you want a happy ending, that depends, of course, on where you stop your story."

___

Do you agree or disagree and why? Please comment below.