Many real estate professionals, writers and talking heads on television have recently been pontificating on the death of New York City real estate due to COVID-19. The prevailing view point is that the virus has caused a fundamental shift in the way people live and work. The narrative portrays a bleak scenario where life in New York City is irreversibly changed and hordes of residents will permanently move to the suburbs or to other parts of the country and the work force will telecommute remotely. Property values and the tax base will decrease and there will be millions of square feet of vacant commercial real estate. The short answer to the question, “Is New York City commercial real estate dead in a post COVID-19 world?”, is no. Every time a devastating event has affected New York City (the Spanish Flu of 1918, the Great Depression, the 1970’s severe crime issues, 9/11 and the 2008 Great Recession, to name a few), the prevailing view has been the same: New York City and in particular New York City real estate will never recover. The end result is also always the same, the city and the real estate market persevere and come back stronger than before.
The real estate sector that people most talk about being affected is the office market. Workers have moved out of the city in mass and are working remotely. Employees love it. They work from home or anywhere in the world and do not have to spend time commuting. They get to take their kids to school, coach their kid’s sports teams, go to the gym, complete home improvement projects, go for walks, take naps and generally enjoy more of life. Employers, on the other hand, may personally love working from home but do not think it is good for their businesses. Even the greatest employee is not as efficient while working at home and dealing with the multitude of distractions. Moreover, training new and existing employees is non-existent or extremely challenging at best. The osmosis of passing on knowledge by over hearing co-workers’ conversations and phone calls does not happen. Even passing on basic instructions or sharing information now requires multiple emails or phone calls instead of just walking over to that person in the office, resulting in very slow response times. Managers also have no ability to oversee their employees in regards to attendance, punctuality, leaving early or taking 2-hour lunch breaks.
Experienced employees may enjoy working remotely but new, inexperienced or younger workers miss out on all of the positive aspects of being in an office. Aside from the points raised above, workers cannot absorb the culture of a firm and understand what makes the firm successful while working from home. It is also difficult to cultivate life long business relationships with co-workers and senior management. The normal social interaction of talking in the break room, sharing lunch or building camaraderie after work does not occur without a formal office space. New York City in particular also offers a large and diverse talent pool that many other cities cannot offer. Employees cannot interact with and benefit from this diverse work force by working on a computer at home.
For all of these reasons and dozens more, the New York City office culture and need for office space may be modified in the future, but it is far from dead. Firms will adapt and perhaps allow more flexible work hours and accommodate less time in the office, but will still require their workers to come to work in person. The lay-out of office space may also be modified to accommodate more conference rooms and flexible offices.
The New York City multi-family apartment market currently has high vacancy rates and a vast oversupply of units. Landlords are offering multiple months of free rent and other concessions in an attempt to fill apartments. Although this is a difficult time, this is a temporary situation that is related to COVID-19 and will reverse itself in the future. People from all over the country still want to live in New York City and take advantage of the culture, food, entertainment and overall atmosphere of the city. For the past few years, college graduates have ranked Manhattan and Williamsburg, Brooklyn as the number one location in the country to work and live. Once the threat of COVID-19 is neutralized, affordable apartments will be more in demand than ever.
The retail market in New York City was already in turmoil prior to COVID-19. Due to e-commerce and an over supply of space, it is very challenging for landlords to rent vacant retail space. If the tenant is not a necessity retailer like a restaurant, bar, dry cleaner, nail salon, food store, drug store or bank, then it is difficult to find a user that can stay in business. This is a national problem and the retail market in general will probably continue to deteriorate. The bright side for New York City is that due to its population density there is a need for a large amount of necessity retail. If the delivery of new space does not increase dramatically, then over time, the existing space will be absorbed. Additionally, landlords continue to innovate and find alternative uses for traditional retail space i.e., art galleries, virtual reality / gaming concepts, escape room experiences and many more.
Nationwide the hospitality market has been hit extremely hard by COVID-19 and the same is true for the New York City market. Tourists either cannot travel or do not want to travel which has resulted in very low occupancy rates. Tourist are craving to travel again and there is massive pent-up demand for destinations like New York City. People want to be able to experience the vibrant culture and night life of the city. They want to go to Broadway shows, museums, sporting events, bars and restaurants, walk central park and go sightseeing. Additionally, once firms are allowed to open their offices for business again, the demand for business travel and hotel rooms is going to sky rocket.
In the short term, while COVID-19 is still an issue, the New York City commercial real estate market will continue to suffer. However, once the threat of COVD-19 is mitigated, the desire to get back to working and living in Manhattan will be stronger than ever. Commercial real estate in New York City in a post COVID- 19 world is definitely not dead. In the long run, New York City always comes back bigger and better then in the past and this time will be no different. It is one of the greatest cities in the world and as many people have learned in the past, never bet against New York City.
This article was written by Richard Berlinghof. Richard is the President of Target Rock Partners, a commercial real estate advisory and investment firm with offices in New York City; Long Island, NY; Atlanta, GA; and Huntington Beach, CA. Target Rock Partners is a member firm of RECA, a national alliance of commercial real estate professionals.