NYC Office Space Glut Made Worse By Remote Work As Older Towers Face High Vacancy

Is New York City’s central business district finally recovering after Covid-19? The simple answer is no. Although residential rents in Manhattan were inflated to record highs, the rise of remote work quelled any recovery for the office space market in the borough. 

Bloomberg reported blocks of decades-old office buildings sitting partially empty are becoming a multibillion-dollar problem for building owners. 

Even though Goldman, Morgan Stanley, and other Wall Street firms have pushed for a return to the office after the Labor Day holiday, NYC’s office-occupancy trends are still below half, according to card-swipe data provided by Kastle Systems. 

Office vacancy rates have skyrocketed in NYC and other major cities worldwide, though it appears the US will have a slower office-market recovery — this is likely due to persisting remote working trends. 

Columbia University and New York University released a report that found remote work trends could force companies to reduce office space. They said lower tenant demand could result in a 28%, or $456 billion loss in the value of offices across the US. About 10% of that comes from NYC. 

Partially empty office towers are leading to slower economic recovery in NYC. Many buildings with high vacancy rates were constructed between 1950-80 and had no meaningful upgrades. 

The area is clustered with buildings from the 1950s to 1980s, many of which haven’t been meaningfully upgraded in decades. The few that have been renovated struggle to compete with counterparts in tonier addresses on Park, Fifth and Madison avenues and new mega-developments on Manhattan’s far west side.

The Third Avenue buildings have become “leave-behind space” rather than the types of offices that attract world-class tenants, said Nick Farmakis, vice chairman at Savills. — Bloomberg

The picture remains cloudy for NYC because converting office space buildings to residential is challenging and expensive. Manhattan has had some conversions, but owners and developers are met with many challenges of zoning and architectural restrictions. 

“The problem with Midtown is a lot of buildings need air and lights that the city requires, and you don’t always get that,” said Ran Eliasaf, founder and managing partner of investment firm Northwind Group, which is exploring residential conversions in the city. “Not every Class B building is an ideal target for conversion.”

Older buildings are also being left behind as businesses desire newer ones or relocate out of the city. This leaves NYC with a rising number of older office buildings with high vacancy rates and has begun to impact how much property taxes the city brings in. 

New York, like other cities, relies heavily on property taxes to fund schools, police and firefighters, as well as other services. Property taxes are the biggest source of revenue for the city, delivering about $1 out of every $3 taken in. And offices account for about a fifth of that.

Before the pandemic, the levies had climbed by about 6% a year on average, driven by rising property values. That helped finance new programs and services, as well as keep up with rising labor costs, said Ana Champeny, the vice president for research at the Citizens Budget Commission, a nonpartisan budget watchdog and research firm.

Manhattan’s major office districts were no exception, generating steadily more revenue. But, in the fiscal year that ended June 30, the first to take into account the impact the pandemic had on real estate, tax levies from those areas declined by 11% to $5.24 billion.

The biggest drop was in a part of Midtown East north of Grand Central that the city’s Department of Finance calls “Plaza,” which contains some of the Third Avenue properties.

— Bloomberg 

The takeaway is that NYC has too many old office buildings that are no longer appealing to companies because of various factors due to remote working and the desire for new shiny new towers with top-of-the-line amenities. 

Remember, we’ve pointed out There’s An Amazing Glut Of Office Space In Every Major Metro Area and Office Space Market Faces “Economic Downturn” Due To Perfect Storm Of Factors.