The coronavirus pandemic has battered Manhattan ever since New York City emerged as its initial epicenter on U.S. soil. Since then, the city has grappled with high unemployment levels, widespread business closures, and residents who have fled in search of extra living space.
Office buildings have been hammered as well. With so many employees working remotely, companies are starting to rethink their office space needs as we head into 2021. And with big names in the finance world like Goldman Sachs (NYSE: GS) making plans to relocate from Manhattan to Florida, there's a real fear among real estate investors that things could get a lot worse before they get better.
In fact, Manhattan now has the most available office space since 2003, according to a report by Colliers International (NASDAQ: CIGI). The availability rate climbed to 13.5% in November. A lack of interest in office space has already had an impact on real estate investment trusts (REITs) like SL Green Realty (NYSE: SLG), Manhattan's largest office landlord. As of September 30, 2020, SL Green held interests in 93 buildings totaling 40.6 million square feet in New York City.
If vacancies increase or hold steady, investors could be in for a world of hurt.
Will Manhattan offices recover?
REITs with large interests in New York City could be in trouble if office space demand doesn't pick up. Vornado Realty Trust (NYSE: VNO), for example, which holds a substantial amount of commercial space in Manhattan, recently announced that it was laying off 70 employees in an effort to cut costs. In 2020's third quarter, Vornado's rental revenue dropped by 25% compared to 2019, down from $428 million to $322 million. Vornado is also in the process of suing retail tenants over missed rent -- another problem many commercial landlords are grappling with.
Making matters worse is a recent projection from Cushman & Wakefield (NYSE: CWK) stating that the U.S. office market may not recover until late 2022. Another 24 months of lost rental revenue could be catastrophic.
But while things may look bleak in the world of Manhattan real estate at present, the introduction of a widely available, effective coronavirus vaccine could help turn an otherwise dire situation around. While it's true some firms may seek to downsize their office space in the wake of the pandemic or even move out of Manhattan completely to save money, the remote employment setup doesn't work for everyone.
The Millionacres bottom line
Right now, companies are allowing remote work out of necessity, but once the prospect of returning to an office becomes less precarious, many employers will, in fact, seek to gather their staff back under the same roof. This especially holds true if things improve on the pandemic front to the point where social distancing need not be a major concern.
As such, while Manhattan's office availability rate may be high now, the right set of circumstances could turn things around for this struggling city -- and pump cash into REITs that rely on a steady stream of commercial tenants.