New York City, Up and Down

The New York state of mind is suffering from cognitive dissonance. On the one side, several news outlets have reported that residential real estate sales are roaring back. They are roaring back from a rather low base, but roaring back they are.

To throw a little cold water on that statistic, we suggest the real estate developers and their marketing divisions must be hawking the story, the better to keep rents and sale prices from collapsing completely.

I know several savvy New Yorkers who believe that the story is hype.

The New York Post reports this story.

NYC real estate froze at the start of the pandemic, but for the first time since March 2020, real-estate transactions have exceeded those of the same period last year. And it’s not just dirt-cheap purchases, either, according to a new report from New York-based brokerage Douglas Elliman today.

Brokers closed 50 more sales in the first quarter of 2021 than they did in 2020, narrowly beating pre-pandemic measures and officially marking a break from — if not the end of — COVID-related losses, according to the report.

And now for a brief glimpse of pessimism. Commercial real estate is still on life support-- and that is being nice about it. Office buildings are emptying out. People are not returning to work. Some are working from home. Others have followed the companies who have moved to the sunnier climes down South. 

I realize that optimism is the order of the day. I understand that Joe Biden’s supporters are cheerleading for a roaring recovery, one that will save the Democratic Party in the 2022 elections.

Zero Hedge has the sorry tale of the state of commercial New York real estate.

Savills said the amount of office space available in Manhattan is at a three-decade high. The report, released on Thursday, said the availability rate soared to 17.2% in the first quarter. The rise in the rate was primarily due to a massive surge in sublease space, which now stands at 22 million square feet, or 62% higher than 2019 levels. 

There’s more, though the story portrays the lower prices as a great opportunity for companies to lease new space on the cheap:

Savills said rents fell for the fifth consecutive quarter to around $76.27 a square foot, down 9% from a year earlier. These cheaper rents are creating a massive opportunity for companies who want to enter the city. 

Desperate landlords were offering generous concessions for long-term leases at newly constructed buildings: "Average tenant improvement allowances jumped 16% and free rent surged 17% to an average of 13.5 months. The tenant-friendly market is expected to last for at least the next 12 to 18 months," Savills said.

The Manhattan office market continues to struggle more than one year after the pandemic hit, which has emptied Manhattan's skyscrapers. And since most employees are still working from home, just around 24.21% of workers in the New York metropolitan area were back at their desks as of this week. 

24% were back at their desks. That means that 76% of the spaces were empty. This is not good news. Perhaps there’s more to it than Zoom meetings:

Even with the vaccine rollout now reaching 100 million Americans, companies are still opting for "hybrid" work as remote working dominates. 

When major tenants stop paying rent, things are not good:

As more proof the work environment is rapidly changing, major magazine publisher Conde Nast (who owns brands such as ARS Technica, GQ, Teen Vogue, The New Yorker, Vanity Fair, Vogue, Wired, among other popular magazines) is a major anchor tenant in the new World Trade Center, recently skipped out on rent as it asked for rent discounts and a reduction in square footage.

Other major tenants are trying to sublet massive amounts of office space:

Last month, JP Morgan was reportedly looking to sublet hundreds of thousands of square feet at 4 New York Plaza in the financial district and 5 Manhattan West in the Hudson Yards area. 

The latest and greatest development project, Hudson Yards is a “ghost town.”

To make matters worse, Hudson Yards, a massive complex on Manhattan's Far West Side with condos, office space, and retailers built over an enormous railroad yard had investors panic because the company refused to open its books. The combination of work-at-home and folks moving to suburbs has left Hudson Yards and other places across the borough a 'ghost town.' 

This all suggests that the virus pandemic has brought years of technological change to the work model that has possibly made companies more productive and cut costs as employees work from home or adopt a hybrid work model. Without office workers returning to the borough, there can't be a robust recovery in the near term. 

In other words, don’t hold your breath waiting for a recovery. Note that the article claims that it’s just the at-home work phenomena that is driving the office vacancy rate. If there is more to it, if people have simply left and gone to other parts of the country, perhaps employers like JP Morgan Chase want to sublet their office space in order to open up new satellites in other parts of the country.

Anyway, don’t count New York City back in just yet.