The new coronavirus has greatly impacted New York City real estate. It’s going to take a long time for the city to bounce back fully. Things might never go back to their pre-pandemic state. But the emergence and approval of a vaccine offer hope that 2021 might bring us closer to normalcy.
However, the normal that we’re hoping for is very different from what we used to know. While NYC’s real estate market has seen times of crisis before, including 9/11 and the Financial Crisis of 2008, this time, things are different. The pandemic has caused a massive shift in the way we live, the way we work, and how we do business. It catalyzed trends that were already in motion, and at the same time, it put an end to others. In a recent report, PwC compiled a list of the main trends impacted by the Covid-19 pandemic in 2020:
Courtesy of PwC
As 2020 comes to a close, it’s time to look forward. That’s why we wanted to share a few of our predictions for 2021 for the NYC commercial real estate market. Though the pandemic is nowhere near over, these past few months have caused a shift in how we live, work, and play. Trends are now emerging that will impact the market in the long run.
Remote and hybrid work setups are here to stay.
This year, countless workers were forced to give remote work a try. As most of the world went into lockdown in the spring, companies quickly adjusted to the situation. They sent their staff to work from home, and for many of these companies, the experiment proved to be successful.
Giants like Facebook, Twitter, Google, Microsoft, and even Morgan Stanley have decided to allow employees to work from home permanently. Others have chosen to downsize. They adopted a hybrid style of work, thus reducing their office footprint to fit a lower number of in-office personnel. Due to reduced office occupancy and fewer commuters, the NYC subway ridership in December was 71% below last year’s numbers, and bus ridership decreased by 57%.
There’s no doubt that as restrictions subside and it becomes relatively safe to return to the office, many will choose to do so. However, many have discovered that remote work can be equally, if not more, productive than working in a busy office, and it’s unlikely that they’ll go back to their pre-pandemic work setup.
Coworking might make a comeback
For many businesses, remote work proved highly beneficial and cost-effective in 2020, yet this work style doesn’t fit everyone. There are business sectors where an in-office presence is necessary for overall productivity and profit. However, working from home might not be a suitable option for people who have roommates or children or need constant communication with others to spark creativity.
Eventually, these people will go back to the office, but in the meantime, they need a temporary solution to their workplace problems. Those who are unable or reluctant to commute to work, satellite offices, or temporary coworking spaces might be the best fit. Providers like WeWork are offering the option of renting a desk by the day or even by the hour. It’s a compromise that many people who are tired of working from home are starting to embrace.
High-density areas like NYC might lose some of their appeal
While there is no strong evidence linking urban density to a faster spread of the coronavirus, high-density cities like New York might likely lose some of their appeal in 2021. Some 300,000 New Yorkers have already moved out of the city, and many are sure to follow given the new openness from employers towards remote work.
People are not moving out of big cities simply because they’re scared of becoming infected with the new coronavirus. As remote work becomes the norm, at least for a while, many people no longer have a reason to stay in an expensive city like New York and might choose to settle elsewhere. Others might decide to do the opposite, staying put to see whether rental rates start to drop in the aftermath of the pandemic. It remains to be seen how the situation evolves and whether prices will drop low enough to make it worthwhile for people to stay in the city.
Building amenities, safety measures to become deal-breakers
A trend that is already going strong in New York City and across the country relates to access to modern building amenities. Moving forward, tenants will undoubtedly factor in anti-Covid-19 measures and hygiene features when looking to rent office space in NYC. Old buildings with poor ventilation and outdated HVAC and mechanical systems might have trouble finding tenants, yet the costs of retrofitting or upgrades pose problems for landlords.
According to data cited by The New York Times, roughly 140 million square feet of Manhattan office space is older or of ‘average quality.’ The real estate board of New York suggests that converting just 10% of that space to residential would create 14,000 apartments citywide and as much as 10,000 in Manhattan. According to the newspaper, this solution would create much-needed housing options for New Yorkers and alleviate landlords’ pressure to upgrade their older office buildings.
Office tenants will have the upper hand
The global pandemic has caused a permanent shift in the way people work and is likely to have reversed the open-office trend. This trend reversal poses a challenge to landlords. In recent years, open-plan layouts were the configuration of choice in most office buildings. Now, tenants are demanding extra hygiene and safety features. These include walls and dividers, floor-to-ceiling bathroom stalls, modern HVAC systems, and proper ventilation, hand sanitizer dispensers, and enough space to ensure social distancing in the office. There will also be a greater demand for private offices within the same space. However, this will be expensive to build. From a landlord’s perspective, open-plan layouts are inexpensive to construct, while retrofitting old layouts is very costly.
Reduced demand for office space caused by the acceptance of remote work is turning NYC into a tenant’s market. Landlords will have no choice but to negotiate terms, build-outs, and even lower rents to retain existing tenants, lease vacant space, and maintain sufficient rental income to cover their expenses. Tenants have the upper hand already, as landlords continue to struggle: nearly 14% of office space in Midtown Manhattan was vacant in December 2020, according to a recent study by The New York Times.
2021 – A year of recovery for the NYC market?
By all accounts, 2021 is likely to be the year when the economy starts to recover, albeit at a slow pace. As more and more people get vaccinated, restrictions will gradually lift, and NYC can start the long recovery process. Experts in the industry suggest that the recovery will be slower for high-density cities, including NYC and San Francisco, as these areas are dependent on mass transit and pose a higher risk of overcrowding.
At the same time, landlords will face the challenge of upgrading their properties to meet the new safety requirements. As CBRE puts it in a recent report, “occupiers are increasingly demanding flexible space options, shared meeting space, indoor air quality, connected building apps, and touchless technology when considering new leases.” Properties that can offer these amenities will stand a higher chance of finding long-term tenants. Even if companies embrace a hybrid style of work and reduce their office footprint, the quality of that space will become a crucial factor for potential tenants.
Remote work to cut the overall need for Office Space
According to another CBRE report, remote work might cut the overall need for office space by as much as 15% in 2021 in major urban areas. Thus, coworking providers are likely to switch focus from big cities to suburban areas and satellite towns, where demand is likely to increase. A short-term coworking space or a satellite office closer to home would be desirable for workers who can’t adopt or adapt to a remote work style. Avoiding commutes and busy business districts will keep employees away from Manhattan, at least for a while. Instead, these employees will look for more private options close to home. Options that don’t require using public transportation to get to.
The bottom line is that we cannot expect the real estate market to bounce back too soon. The first half of 2021 is likely to continue along the same lines as in 2020. However, experts are cautiously optimistic. The second half of 2021 will hopefully see an increase in the number of new leases and subleases.
