In the aftermath of 9/11, New York City companies put millions of square feet of office space up for rent even though they had years left on their leases. By mid-2002, the amount of sublease space available in Manhattan hit a record high 17.5 million square feet.
That record appears likely to be broken before the pandemic anniversary in March, says a new report from researchers at the real estate firm Savills, marking a sign of how the coronavirus crisis has shaken the city’s crucial commercial real estate sector.
After a 50% increase in recent months, sublease space in Manhattan now exceeds 16 million square feet and is approaching half of all the office space for lease.
“Companies are conserving cash, the technology sector is leaning into work from home and companies are reassessing things,” said Danny Mangru, tri-state research director for Savills.
The changing state of the office market comes as the latest pulse-taking on the New York economy shows the recovery from the pandemic shutdown has slowed.
The unemployment rate in the city in September fell to 14.1% from 16.3% in August.
The city added a disappointing 41,000 jobs, putting the loss since the record 4.7 million posts logged in February at 648,000. The national jobless rate in September was 7.9%
A report last week from the investment banking firm Goldman Sachs using new data indicated New York is among the hardest-hit cities in the country.
Google mobility data tracing movement by people on transit, shopping and other travels shows activity down 40% in New York compared with the average of the first two months of the year, representing the biggest drop in the country, according to the report.
Consumer spending in the city has fallen 6.3%, a drop 4 percentage points deeper than the national average. Small-business revenues are down 40%, compared to a little over 20% nationally.
Billions at Stake
Manhattan boasts more than 400 million square feet of office space and those buildings provide 10% of all the city’s $60 billion in tax revenue, as well as housing the companies and workers that propel much of the city’s economy.
While office markets are expanding in Brooklyn and Queens, they are a small fraction of the space in Manhattan and are not tracked closely.
Media companies are trying to shed the most space as the pandemic shakes up an already vulnerable sector, Mangru said. There’s also been an uptick in sublease space from the financial services sector.
In all, only 2.57 million square feet of space were leased in Manhattan between July 1 and Sept. 30 — down 50% from the five-year average for the period. Business leaders estimate about 15% of workers have returned to offices in recent weeks.
“The pandemic is keeping a lid on the market with a lot of office workers who are not in their offices,” said Nicole LaRusso, director of research at the real estate firm CBRE. “There is uncertainty on the long term.”
CBRE’s most recent report shows the average asking rent remained virtually unchanged from a year ago at $79 per square foot annually. But that is because landlords say that there is no reason to lower their asking rents since so few companies are actually looking for space.
Effective rents, though, have slid with building owners offering more concessions, such as free rent and rebates for the cost of renovating interiors.
The amount of sublease space is almost certain to force declines in rents soon, Mangru said.
Investors have lost confidence in New York real estate’s future as the city’s two largest publicly held have seen their stocks plummet. SL Green shares have fallen 48% to $47 a share. Vornado is down about the same amount to $34.
‘Little Bright Spots’
All this is taking a toll on construction. A forecast issued this week by the New York Building Congress projected that construction spending this year would reach $55.5 billion — $10 billion less than it estimated at this time last year and 8.5% below the 2019 level.
But the Building Congress does see a rebound, especially in non-residential construction and government projects that will result in a slight increase in 2021 and 2022.
“There are a lot of little bright spots in this picture,” said Carlo Scissura, president of the group, which represents everyone from building owners to the construction trades. “Healthcare, life sciences and government,” where construction continues apace.
He notes Hudson Yards needs to be completed, another office building remains to be built at the World Trade Center, and that Gov. Andrew Cuomo is determined to continue development of the Penn Station area.
Scissura believes that no matter who wins the presidential election, a massive infrastructure bill will be passed in Washington sometime next year, which would jumpstart many projects for the MTA, Port Authority and other agencies.
The Tech Paradox
The largest deal of the most recent quarter came with Facebook signing a lease for 730,000 square feet at the old Farley Post Office, which Vornado is redeveloping across from Penn Station.
It marked one of several recent leases for the nation’s largest tech firms in New York — among them Apple, Google and Amazon, which optimists say is a sign that this fast- expanding sector is committed to the city.
Those companies have also announced plans to permanently allow a large percentage of their employees to work remotely. The normally reticent companies haven’t explained the apparent contradiction.
Office space recessions often last longer than the downturn measured by jobs, according to CBRE data.
Rents did not return to their peak at the end of 2000 until the fourth quarter of 2006. It took until the end of 2015 for office rents to regain the pre-recession level of 2008. In both cases, job losses had been overcome years earlier.
While conceding that the city’s economy could suffer long-term damage from the pandemic recession, Goldman Sachs also sides with the optimists.
“There is encouraging evidence the city is poised for a speedy recovery following a vaccine,” its report says. “Business scarring is so far limited and the sectors that were hurt the most by the virus should benefit the most from a vaccine.”