Even as the coronavirus pandemic in New York seems to be subsiding, companies have hesitated to call their workers back to their skyscrapers and are even more reluctant to make long-term commitments to the city.
Less than 10 percent of New York office workers had returned last month, according to a new survey, and only a quarter of major employers expect to bring their workers back by the end of the year. Only 54 percent of these companies say they will return by July 2021.
The demand for office space has fallen. The signing of contracts in the first eight months of the year was about half that of the previous year. The office market is thus at a 20-year low for the year as a whole. When businesses sign, many opt for short-term contracts that most landlords would have turned down in February.
At stake is New York’s financial health and its status as the world's corporate headquarters. There are more square feet of work space in the city than in London and San Francisco combined, according to Cushman & Wakefield, a real estate agent. Office work is the cornerstone of New York's economy, and property taxes on office buildings make up nearly 10 percent of the city's total annual tax revenue.
Most worryingly, a recovery could be much slower than it did after the 9/11 attacks and the 2008 financial crisis. This is mainly because the pandemic has led companies to rethink their real estate needs.
Robert Ivanhoe, a real estate attorney at Greenberg Traurig, said he had about 20 clients who had postponed the search for new offices. "You think a lot about developing a new operating model – how much of my workforce will work from home and for how long?" he said. "It's never been turned upside down like this."
Real estate data confirm this. According to Colliers International, a real estate brokerage company, the number of office rentals signed from January through August totaled 13.7 million square feet, less than half of the first eight months of last year. In contrast, leases hit an 18-year high late last year with nearly 43 million square feet of new leases and renewals.
"When it comes to making office rental decisions, the words are postponed, adjourned and delayed," said Ruth Colp-Haber, general manager of Wharton Property Advisors, a real estate brokerage firm.
Executives at the food delivery company Freshly were ready to sign a lease for 50,000 square feet of office space on 2 Park Avenue, a stately 29-story Art Deco tower in Midtown, in March.
But the coronavirus abruptly shut down New York for a few months, and the company has taken a hiatus from its expansion, said Michael Wystrach, founder and CEO of Freshly. The company is still considering new office space, but isn't sure when to sign a lease. "We believe in New York City for the long term."
Every weekday in Midtown, the sidewalks are as empty as they are on a Sunday, which highlights how few employees have returned. In August, a Partnership for New York survey of major employers found that only 8 percent of workers had returned to the office, and most expected workers to return by next summer, and another quarter of them hadn't decided when they would return.
Elected officials, real estate agents, and even Jerry Seinfeld, the comedian, have praised New York's resilience, arguing that the city has a history of boom. The city will soon be full of people.
But pessimists – including some New York hedge fund managers – see dark days ahead. They claim that companies will tell most employees to stay away until a vaccine is widely available and maybe much longer.
Which of these two visions is closer to the right depends on how quickly New York recovers its energy, economic and tax revenues.
Investors don't expect a quick recovery. Stocks of companies with lots of New York office space like Empire State Realty Trust, which owns the Empire State Building and SL Green Realty, which owns the huge new One Vanderbilt Tower next to Grand Central Terminal, have fallen this year.
"I think the New York office market will be broadly challenged for the next three to five years," said Jonathan Litt, founder of Land & Buildings hedge fund. His fund released a report in May on why it believes the Empire State Realty Trust's stocks are overvalued.
A big part of the problem is that many companies are holding back new leases.
In recent years, the largest tenants of office space have been cooperating companies like WeWork, New York's largest private tenant. Such companies closed nearly 8 percent of new leases in Manhattan last year and 12 percent in 2018, according to Cushman & Wakefield. But cooperating companies are in dire straits, and some may not survive.
Other potential office tenants aren't sure what to do or are waiting for landlords to cut rents by considering incentives like rent-free months and cash for office improvements. "What's the point of signing a 15 percent drop in lease if you think it's going to drop?" said Michael Colacino, president of the brokerage firm SquareFoot.
Some companies with leases ending this year or next seem to be ahead of the curve and signing short-term renewals rather than committing to typical deals that last several years. In the past few weeks, NBC Universal renewed a lease on a second office at 1221 Avenue of Americas, and law firm Stroock & Stroock & Lavan did the same for their downtown office. According to Colliers, both of them only did this for a year. A spokeswoman for NBC Universal declined to comment and Stroock & Stroock did not return a call and multiple emails.
In normal times, owners of large office buildings would typically not consider extending the lease for a large tenant for a year or two, said Franklin Wallach, senior managing director of the New York Research Group at Colliers. “You can see that new leasing activity has decreased while the amount of sublet space coming into the market has increased. Therefore, the average landlord wants to keep the tenant in the building. "
One of the biggest concerns is that businesses may soon be trying to sublet hundreds of thousands of square feet of space that they don't intend to use anytime soon. For businesses looking for offices, sub-leases often offer a shorter lease at a steep discount to market prices.
Starr Insurance Companies, which is run by Maurice R. Greenberg, is looking to sublet 190,000 square feet it rents on 399 Park Avenue, according to Colliers. And First Republic Bank, which signed a 211,521-square-foot lease for 410 Tenth Avenue last April, provided a 151,000-square-foot sublease, according to a report by real estate agent Savills. Starr and First Republic spokesmen declined to comment.
According to Savills, sublet space accounted for about a quarter of total office space available in New York at the end of the second quarter, and many real estate agents expected it to increase in the coming months.
In January, Ms. Colp-Haber showed a construction company offices that she said were on the market for a five-year lease in Manhattan. Last month the company signed a one-year sublease at a 40 percent discount on the original lease, she said.
Still, property owners claim not to be overly concerned as most renters pay their rent. They point out that office rentals last for years and are very difficult to end early. And big financial firms, which are some of the biggest tenants in New York, aren't as stressed as they were in the last recession.
The most optimistic sign that the New York office market will recover quickly is that big tech companies that are on the rise are gaining square feet. In early August, Facebook rented all of the office space – 730,000 square feet – in the Farley Post Office next to Penn Station. Amazon acquired the former Lord & Taylor building on Fifth Avenue from WeWork in March.
Retail tenants in Hudson Yards, the sprawling housing estate on Manhattan's Far West Side, may be in turmoil, but businesses are still moving into the project's office buildings.
"They still believe that New York is where they can have their business and grow their business," said William C. Rudin, executive director of Rudin Management Company. “Amazon's commitment is amazing. The Facebook engagement is incredible. "
Some landlords see encouraging signs in their office buildings in the suburbs, where social distancing is easier because people tend to commute by car. This, they argue, suggests that employers and employees will want to return to the office, and more of them will return to New York as well.
Anthony E. Malkin, executive director of the Empire State Realty Trust, which owns the Empire State Building, said the number of people entering its Connecticut office buildings in mid-August was 40 percent year-on-year in the spring because of the then-date strict blocking policies as good as nothing. "That's a very high number and it's growing."