When Manhattan employers first began instructing their employees to pack up their desks and start working from home last February, many assumed that arrangement would be temporary. But now, more than a year later, a large number of New York City employers are still having their staff members do their jobs from home. And while some companies are starting to make plans to bring employees back to the office in conjunction with the rollout of coronavirus vaccines, progress has been slow.
In fact, the amount of available office space in Manhattan is now at its highest level in at least 30 years. The availability rate rose to 17.2% during 2021's first quarter. And that's clearly troublesome for office building landlords and real estate investors alike.
Landlords are getting desperate
It's not just coronavirus-related fears keeping companies from bringing their staff back to the office in full force. Many employers are reevaluating their office space needs in light of the changes they've seen over the past year.
At this point, a lot of companies have had success with remote work, so some are already making plans to dump office space and uphold the current work-from-home model. Other employers, meanwhile, are looking at hybrid models that allow employees to work from home part of the time and spend a few days a week at the office. These models will allow many employers to downsize their square footage -- and reap savings along the way.
But while this newfound flexibility may be a good thing for the companies that stand to save money, it's problematic for office building landlords. Leasing activity has been notably sluggish over the past year as many tenants have been hesitant to shore up plans, and landlords have had to offer up rent at a steep discount to entice companies to enter into agreements. In fact, asking rents are down 9% from a year ago across Manhattan office buildings and are now averaging $76.27 per square foot.
Landlords are also throwing in concessions to lure in tenants. Average tenant improvement allowances rose 16% over the past quarter, and free rent offers climbed 17%, up to an average of 13.5 months.
When will the bleeding stop?
At this point, a number of large employers are already making plans for their staff to return to the office, and as coronavirus vaccines become easier to get, more companies should follow suit. So there's a good chance leasing activity will pick up later in the year.
That said, it may take a year or two for Manhattan's office buildings to truly recover. Investors who own real estate investment trusts (REITs) with heavy concentrations in Manhattan office space may have to hang tight until their portfolio values improve. However, once progress is made with regard to the pandemic and the city is able to open back up fully, there's a good chance office space demand will pick up and those same REITs will get a much-needed boost.