New York City’s office market is stalled with the vacancy rate stuck at a record high, and the best hope for improvement in the near future depends on whether the governor and the legislature can agree on legislation to speed the conversion of office space into housing.
Reports issued in the past week by the city’s large real estate firms show 20% of the 463 million square feet of office space in Manhattan is empty. Another 5% is so-called sublease space, which means either it is occupied but available for anyone who wants to take it off the tenant’s hands or vacant but the rent is being paid by the tenant until the lease runs out.
There are some signs of improvement in Midtown, but the vacancy rate remains high and rents depressed, and the situation is far worse elsewhere in the borough.
“There is Midtown and then there is everything else,” said Michael Slattery, research manager with the real estate firm CBRE. “There are pockets that have started to recover. Park Avenue has a single digit availability rate.”
The weak office market continues to hamper the city’s economy, even though total jobs are back to their pre-pandemic level. Long-term, the city is expected to slash the value of many office buildings, which could cost the city $1 billion in tax revenue, according to city Comptroller Brad Lander. While significant, the $1 billion is only about 1% of the entire budget.
While the overall vacancy rate of 20.1% at the end of the first quarter remained at a record level, according to CBRE, the numbers for Downtown and Midtown South were far worse.
Downtown’s vacancy rate is nearing 23%. New leases totalled only about 600,000 square feet in the first three months of the year, one-third of the long term average, and most of those were for small offices. One-third of all the office space is available for sublease.
The vacancy rate in Midtown South surged to a record high of more than 24% as leasing declined. While New York has seen only modest layoffs from big tech firms compared with what has happened on the West Coast, the tech companies that remain heavily concentrated in the area appear to have become cautious.
Midtown fared the best as financial service firms continued to be willing to commit to office space, especially in new or recently renovated buildings near transit hubs, Slattery notes. Still, the vacancy rate exceeds 18%.
He adds that “commodity space” in the city’s older and much less desirable buildings is going begging and that those are the buildings most likely to be candidates for conversion to housing if legislation can clear a series of obstacles.
In January, Gov. Kathy Hochul proposed legislation that would provide a property tax break for New York City conversions when the owners agree to include a percentage of affordable apartments, although her proposal did not include specifics. Increasing the allowed density for residential buildings and relaxing some existing requirements for windows and other open space would be crucial as well.
Sources with knowledge of the talks in Albany say that the issue remains under negotiation as a deal nears on other major issues in the pending and now overdue state budget. Democrats in the legislature have previously been insisting conversions include affordable apartments without a tax break.
While not a magic bullet, conversions would help by removing obsolete office buildings from the market. While Downtown continues to have its problems, the situation would be much worse without the many conversions that have happened in recent decades.
In the last several decades, 272 office buildings have been converted to housing, adding 18,000 apartments to the area, according to the Downtown Alliance. Lower Manhattan is where most reuse has occurred because many of its buildings were built decades ago with smaller, easier to convert floor plates and because existing rules allow them to be renovated.
In recent months, the owners of 111 Wall Street and 222 Broadway have announced they are converting, reducing supply by 1.5 million square feet. Those two buildings alone would have added 2 percentage points to the vacancy rate, had they remained office buildings.
“Conversions have been part of the story downtown for 30 years and have been beneficial in creating housing and building a 24-hour community,” said Jessica Lappin, the former City Council person who is now president of the Alliance. “We saw the benefit of that in COVID and we are seeing it now.”
She notes, however, that 70% of those conversions occurred when the city offered a major tax break, called 421-G, that provided an exemption from property taxes during one year of construction and an 80% cut in real estate taxes for 14 years. It expired in 2006.
“Who knows what the future will bring for office leasing,” she said, “so why wouldn’t we want more flexibility for office buildings?”
The administration of Mayor Eric Adams has taken some modest steps on its own to help owners including establishing a one-stop office for property owners seeking to convert, and zoning changes that would allow residential use in the Garment District and seek to expand flexible zoning rules to other parts of the city allowing buildings built before 1990 to be converted.
But the key remains in Albany. A tax break and the zoning changes could result in 20,000 additional apartments over the next decade, according to the Department of City Planning.
“Empty and underused office space isn’t good for anybody,” said Dan Garodnick, head of City Planning, in a statement to THE CITY. “Office conversions offer a win-win for our city: putting space to better use, helping to create more vibrant neighborhoods, and of course, creating much-needed housing.”