When the coronavirus crisis first began, employers were quick to shift their staff to remote work. This was especially true in New York City, which had the misfortune of serving as the outbreak's epicenter back in March 2020.
More than a year later, New York City office buildings are still largely sitting vacant. In fact, the office vacancy rate in Manhattan hit 16.3% during 2021's first quarter, according to Cushman & Wakefield. That's the highest level on record since 1994. It's also much higher than the 11.3% vacancy rate recorded a year ago. But while things may seem pretty dire for New York City office building investors, the reality is that things could turn around pretty quickly.
Vaccines could save offices as permanent remote work threatens them
Office REITs (real estate investment trusts) have gotten hammered during the pandemic as vacancy rates have soared and new leasing activity has remained sluggish. In fact, there's still the fear among office investors that the remote work trend could become a permanent fixture, thereby hindering those REITs' recovery.
But while some companies may in fact decide to keep their staff remote on a permanent basis to reap the cost savings involved, a large number of employers are already making plans to bring staff back to the office. And as coronavirus vaccine rates increase, there's a good chance more companies will alter their work-from-home policies and require employees to come into the office, at least on a partial basis.
As such, while New York City office REITs may be looking at daunting vacancy rates right now, things could change in the very near future. This especially comes in conjunction with an announcement late last month from New York City Mayor Bill de Blasio that the city will open in full come July 1. That means no more capacity limits at businesses and no more curfews and restrictions at restaurants and bars.
Once the city makes its fully reopening official, employers will have even more of a leg to stand on when they request that employees transition out of remote work and back to the office buildings that once housed them during the week from 9 to 5. And so while office building vacancies are high right now, we could see very different numbers by the end of the summer.
Of course, office building tenants may still have the upper hand when it comes to lease negotiations. Office buildings are desperate for tenants, so landlords may need to make certain concessions to get those agreements signed. But if occupancy rates slowly but surely pick up during the latter part of 2021, it could set the stage for a sooner-than-expected recovery for a corner of the real estate market that's been notably hard-hit. The fact that the CDC has also advised that fully vaccinated people can stop wearing masks indoors should lend to a swifter office return, too.
All told, investors shouldn't get too down about the current office building vacancy rate. Chances are, it won't last long.