When the coronavirus pandemic first reached U.S. soil, many employers were quick to kick workers out of the office and ask them to do their jobs from home. But now, nearly a year later, the remote work trend is still holding strong.
First, things haven't improved enough on the pandemic front to make congregating in office buildings a safer prospect than it was back in March of 2020. But also, a lot of employers are now rethinking their need for office space in the first place.
Over the past year, many employees have adapted to remote work. Technology has made collaboration from afar possible, and if it's viable under forced conditions, there's no reason to think it can't be successful when the pandemic ends. As such, there's a good chance a large number of companies will seek to downsize their office space, or possibly dump it altogether, in the coming months and years.
That's bad news for real estate investment trusts (REITs) with large concentrations of office buildings in their portfolios. And in Manhattan, it's particular worrisome, especially given what office building availability looks like today.
Manhattan office vacancies are high
Known for its skyscrapers that house corporate offices, Manhattan's commercial real estate scene has nosedived in the course of the pandemic, and things could be dire for quite some time. In January, the office available rate rose to 14.9%, which is the highest level on record dating back to 2000, according to Colliers International (NASDAQ: CIGI). In fact, office leases fell by almost 47% from the same period a year prior.
Offering rents at a steep discount doesn't seem to be doing the trick, either. In January, Manhattan office rents fell for the seventh straight month to an average of $73.65 per square foot -- the lowest level in nearly three years.
Compounding the problem for Manhattan is that many of the city's workers rely on public transit to get to their jobs. And while cramming into subway cars is a dubious prospect during the best of times, in the midst of a pandemic, it's out of the question for a lot of people. Employers, meanwhile, don't want to assume the liability of forcing workers back to the office, so many are erring on the side of waiting until the pandemic is well behind us to even contemplate bringing remote work arrangements to an end. And so in the near term, there's a good chance that office space availability in Manhattan will remain high, leaving tenants with a ton of negotiating power and potentially forcing landlords to take a haircut in an effort to generate any amount of rental revenue.
Of course, empty office buildings are taking a serious toll on REITs. SL Green Realty Corp (NYSE: SLG), Manhattan's largest office landlord, for example, has seen its shares lose more than one-third of their value over the course of the past year alone.
While office buildings should stage a respectable recovery once the pandemic is truly a thing of the past, that's not going to happen in the course of 2021. And even beyond the next 12 months, many companies are likely to stick with remote work because of the cost savings involved. As such, Manhattan office vacancies may be something inventors are forced to grapple with for years to come.