Midtown Is Reeling. Ought to Its Places of work Turn into Flats?

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Midtown Is Reeling. Should Its Offices Become Apartments?

The pandemic hits New York City's commercial real estate industry, one of its major economic engines, and threatens the future of the nation's largest business districts as well as the city's finances.

The damage caused by the emptying of office towers and the permanent closure of many stores is far more significant than many experts predicted at the beginning of the crisis.

The powerful real estate industry is so concerned that the changes in work culture caused by the outbreak are permanent that they are advocating a flashy proposal: convert more than a million square feet of Manhattan office space into housing.

Nearly 14 percent of Midtown Manhattan office space is empty, the highest rate since 2009. On Madison Avenue in Midtown, one of the wealthiest retail areas in the country, more than a third of all retail space is empty, twice as much as five years earlier.

The commercial real estate collapse is another major drag on New York as the industry generates a significant portion of the city's tax revenue.

Applications for new buildings in the city, a key indicator of industry confidence, are down 22 percent this year to 1,187, the lowest number since 2010.

According to a survey by the Partnership for New York City, an influential group of companies, only 10 percent of the one million office workers in Manhattan were in the office at the end of October.

And that already grim picture could get worse, said real estate experts and industry executives.

"It would probably be fair to say we haven't bottomed out yet," said James Whelan, president of New York's Real Estate Board.

It doesn't seem like the city's major commercial landlords are facing a financial collapse, but the shares of those that are publicly traded have fallen sharply since March.

The aftermath of the crisis has been seen in an increasing number of legal disputes between landlords and tenants, even at some of New York's best-gilded addresses.

In stores on Columbus Circle, a luxury mall overlooking Central Park, the developer has accused a group of high-end retailers, including Michael Kors and Hugo Boss, of more than $ 7 million in rents and fees to have renounced. On Fifth Avenue, Italian designer Valentino has sued his landlord to get rid of a nearly $ 1.6 million a month lease.

New York City's finances – money to pick up trash, repair parks and police streets – depend heavily on the health of the industry.

Property taxes are the city's largest source of income, and commercial real estate accounts for the largest portion of that total tax, at 41 percent, according to state auditor Thomas P. DiNapoli.

Commercial property sales fell nearly 50 percent through October, according to Rahul Jain, an assistant state auditor.

A weakened commercial real estate market will "make it much harder for businesses and the economy to get back to normal," DiNapoli said.

The labor shortage affects rents. According to CBRE, a commercial real estate company, asking rents in Manhattan retail corridors are down nearly 13 percent year over year. The largest declines have been seen in areas dominated by office buildings like Times Square and Grand Central Terminal, as well as in shopping destinations like SoHo.

The problems in the industry, originally sparked by the brain drain during the state's spring-home orders, have continued as many commuters have opted for long-term or permanent remote working arrangements. The tourists have also largely disappeared.

As a result, tensions are mounting between the city's powerful landlords and some of its equally powerful tenants. Homeowners have accused blue-chip companies of using the pandemic to withhold rent they can afford, while tenants have portrayed landlords as greedy and unwilling to acknowledge the economic reality.

"It's not easy, but we have to make sacrifices and landlords have to make sacrifices," said Lawrence Berger, chairman of FanzzLids Holdings, which owns Lids, a sports headwear store whose flagship store is in Times Square.

The store was sued for more than $ 511,000 in unpaid rents and fees in four other Manhattan stores that were closed for months.

"The amazing thing for us is that they are looking for times in New York when we were not allowed to be open," said Berger. "We have contracts with our landlords across the country except New York City."

Landlords like Related, who owns the Columbus Circle stores and sued five of their tenants there, say they have their own financial obligations and should pay renters who can afford rent.

The litigation does not capture the behind-the-scenes negotiations that resulted in resolutions without going to court, said William H. Mack, a corporate attorney at Davidoff Hutcher & Citron in New York.

Mr. Mack was hired by Hugo Boss to reduce or nullify his Columbus Circle lease. "That's 80 to 90 percent of my activities since March and April," he said.

The New York Real Estate Board, whose members include almost all of New York's major landlords and developers, has the prospect of systemic changes in work habits.

"Anyone who believes that the way people have used the workplace in the past will not change the post-pandemic is mistaking themselves," said Scott Rechler, chairman of the Regional Plan Association and chief executive officer of RXR Realty, April 26 Millions of square meters of office space controlled by the city.

Employers have found that if there is no shared workspace, productivity does not necessarily suffer, and that smaller office space and milder work-from-home policies may make long-term economic sense.

As a result, the rental group is suggesting that the city and state allow developers to more easily convert offices in Manhattan and the boroughs into apartment buildings.

Updated

Dec. 11, 2020, 1:25 p.m. ET

According to Cushman and Wakefield, a real estate agent, around 140 million of the 400 million square feet of office space in Manhattan are considered to be of average quality or are in older and less luxurious buildings. The real estate authority estimates the city-wide supply of these buildings at around 210 million square meters.

The real estate group estimates that converting just 10 percent of that office space into residential buildings would create 14,000 homes across the city, including up to 10,000 in Manhattan – a significant amount in a city that is routinely lacking in housing, in particular affordable housing.

Changes to zoning rules required for remodeling would require some of the new housing to be classified as affordable, the board said.

Mark A. Willis, Senior Policy Fellow at New York University's Furman Center for Real Estate and Urban Policy, said pre-pandemic employment growth outpaced housing growth in the city, causing demand to far outstrip supply and the persistent housing conditions in the city exacerbated shortages.

"Facilitating the reuse of buildings to adapt to changes in the economy is a very smart idea for me," said Willis.

Some tenants are taking advantage of the current downturn – and the resulting lower prices per square foot – to trade in for nicer office space, the board said. This is a boon for high-end office landlords, but it could be bad for landlords of lower-rated buildings.

Converting office buildings into apartment buildings would not only provide a potential financial lifeline for landlords, but also benefit retailers, argues the real estate agency, as the presence of office users during the day and apartment dwellers at night would increase pedestrian traffic.

There is no reason for Midtown to maintain its status as New York's last predominantly office district, bustling during the day and quieter at night.

They cite the success of Lower Manhattan, which has developed from an almost exclusively office district to a vibrant residential area in the last few decades.

The proposal would require changes to zoning and density rules, which would need to be approved by the city council and state legislature and adopted by the mayor and governor.

Governor Andrew M. Cuomo's office would only say he was reviewing the idea.

A spokesman for Mayor Bill de Blasio, who is on a temporary basis and is about to enter his final year in office, welcomed the apartment proposal.

"The town hall is always looking for sensible and just ways to create more living space," said the spokesman, Bill Neidhardt.

Converting office space into apartments is not easy, however. Landlords would have to wait until the buildings are empty, which can take years.

The landlord group says the city and state should help speed up remodeling by lifting the zoning restrictions that require manufacturing in areas like the Clothing District, changing density requirements for apartments, and creating new tax breaks for landlords.

Whether elected city and state officials give the green light for a measure that would help real estate developers when so many tenants are having problems is an open question.

Several candidates fighting to succeed Mr de Blasio have vowed to decline campaign donations from real estate developers.

It's also not clear how many landlords would actually take advantage of the proposed changes.

Jeff Gural, who controls a large portfolio of aging buildings in Manhattan, said he would rather stick with his current job.

"We don't have that much free space at first," said Gural. "And I think there will be a demand for the kind of space we have."

Another possible source of housing expansion would be hotel remodeling, many of which have closed as the industry was decimated by a slump in tourism and business travel.

This idea is gaining traction among some developers and proponents of affordable housing. A group trying to shape the 2021 mayor debate, United for Housing, will argue in an upcoming report that the next mayor should prioritize converting hotels into permanently supportive and affordable housing.

Regarding the property agency's proposal, some housing advocates say the pandemic is an opportunity to find a creative way to alleviate the city's housing crisis.

"We need a comprehensive plan on how to create new residential resources and the idea of ​​converting office buildings into residential buildings has many advantages in my opinion," said Brenda Rosen, President and CEO of Breaking Ground, who describes herself as such largest state provider of supportive housing.

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