Market Observations | 4-Year Anniversary of COVID Shutdown

Today is the four-year anniversary of New York shutting down for COVID in 2020 (Friday, March 13th), and I recently came across the quote below which struck me in the context of my own New York experiences, the ongoing conversations I have with family and friends, and recent discussions with clients. Much has changed, much has not, and many are feverishly working to reinvent the City (and themselves).

“London is satisfied, Paris is resigned, but New York is always hopeful. Always it believes that something good is about to come off, and it must hurry to meet it.” ― Dorothy Parker (1928)

Below I’ve recapped some noteworthy updates/statistics on the state of the New York office market and RTO, as well as my anecdotal observations:

• Office continues to be an ugly word for most investors, but certain groups (i.e., SL Green, Brookfield, Reven Office REIT, Ares and RXR) are raising $1bn+ funds to invest in distressed assets Blackstone’s RE leadership recently commented, “Real estate values are bottoming, inflation and interest rates are receding, new supply is continuing to decline, and secular demand continues to grow in our key sectors”?
• Financing has become prohibitively expensive for most office product as both rates and spreads have expanded since 2021 across lender types. Money center banks are slowly reentering the market, with insurance funds and regional banks reentering on an asset-by-asset basis. Private capital drove almost 60% of total investment volume in 2023-2024 (YTD) as risk-averse investors remain quiet
• While public news sources focus on record-high vacancy rates, the market realities are quite nuanced: 33% of buildings comprise 88% of Manhattan’s total vacancy, and 5% of buildings comprise 37% of Manhattan’s total vacancy. Many of these vacant assets may be functionally obsolete for future office use, and are likely to be removed from the measured office stock over the coming years. Meanwhile, 25% of buildings across Manhattan’s 471M sf of office stock are 100% leased. Despite an accepted “flight to quality” trend, new development has slowed significantly. 43M sf has been delivered over the past 5-years, and the pipeline of new supply over the next 5-years is expected to be less than one-third of this amount
• Concurrently, sublease additions have significantly declined since December 2022 (falling 1.6M sf from a peak of 7.2M sf in December 2022) Historically, sublease additions have borne a strong correlation to public equity prices, particularly in the technology sector. Equity prices in the NASDAQ hitting a 52-week high in recent weeks bodes well for the continued stabilization of the sublease market throughout 2024
• Certain corridors (i.e., Park Avenue north of Grand Central) have lower vacancy rates and higher face rents than in 2019. Douglas Durst published an article in Crains this weekend indicating that the vacancy rate in The Durst Organization’s 13M portfolio is lower now than it was pre-COVID
• 80% of leases signed by PE firms over the past 3-years have been expansions, with 23% of those firms subsequently expanding further. In a particularly dramatic instance, a large-scale occupier has undershot their anticipated headcount requirement for a new facility by more than 3,000 seats, which will likely inure to the benefit of neighboring landlords
• According to VTS, demand has reached 75% of pre-pandemic times, with a forecast for 2024 leasing velocity to exceed 30M sf for the first time since before the pandemic
• Distress in other national markets (i.e., San Francisco) has led leadership teams to focus their hiring and expansion initiatives in New York, as most recently illustrated in Techstars announcement to move their headquarters from Boulder to NYC
• A modest density reversal is in place as companies reevaluate how they design and construct workplaces. Tech and creative companies pushed density as low as 150 sf/employee pre-COVID, while Google opened their new 1.3M sf St. John’s Terminal office in Hudson Square this week for 3,000 employees (representing 433 sf/employee)
• Executive teams have become louder and firmer with RTO policies, oftentimes in parallel with announcements of layoffs. While the unemployment rate is still low by historical standards, employees do not have the same opportunities today (vs. 2021-2023) to jump to competitors for workplace flexibility. Recent news articles indicate that layoffs at BOFA, Wayfair, WebMD, and other firms have targeted remote workers. Concurrently, remote positions have declined to the lowest share of new job postings in 3-years
• The City of Yes initiatives proposed by Eric Adams include a number of programs intended to facilitate office-to-residential conversions. Ultimately, buyers/landlords need to have an acceptable basis in order to facilitate these expensive and time-consuming projects The Economic Development Corporation, in conjunction with Eric Adams, recently granted $100M in tax breaks for two properties (850 Third Avenue and 175 Water Street) to incentive the respective landlords to reinvest in and ultimately lease the largely-vacant assets. Asset prices for Class B office stock in weak-demand corridors are reaching valuations not seen in 20-years, which will likely enable more conversions to be facilitated
• Within the residential rental universe, vacancy for Manhattan units priced above $1,650/month has fallen from 10% to 2.3% between 2021-2023, showing a clear reversal of the outflows that occurred between 2020-2021. Between 2020-2021, housing prices dropped by 30%. The housing affordability crisis in New York is top-of-mind for many policymakers, and this drop from 2020-2021 is a case study baseline for how tax abatement programs could help to alleviate housing pressure across the City?
• Green shoots are emerging in corridors that have struggled since COVID (i.e., Lower Manhattan and Third Avenue), with a slew of recent leases completed in redeveloped and stabilized assets
• While amenities (i.e., conference facilities, fitness centers, and F&B opportunities) continue to be important draws to tenants, a significant percentage of leasing velocity is occurring in micro-markets where a strong retail landscape exists (i.e., grab-and-go restaurants and white tablecloth dining)
• The single greatest inhibitor to leasing velocity is and will continue to be uncertainty. Landlords achieving significant leasing volume are affording today’s tenants more flexibility (i.e., term length, expansion, contraction, and termination options) than they would have been afforded in 2019.??

Wishing everyone health, happiness, perspective, and optimism in the years to come.