When the coronavirus pandemic first hit, New York City office and retail REITs (real estate investment trusts) got hammered. Not only did most companies instruct their employees to pack up their desks and work remotely until told otherwise, but nonessential retailers were forced to shutter early on in the pandemic, and even once they got the green light to reopen, they had to operate under capacity restrictions.
It's not surprising, then, that leasing activity across New York City remained sluggish for much of the pandemic. After all, companies didn't want to renew office building leases at a time when the future of in-person work was so unknown, and retailers didn't want to renew their leases when it was unclear as to when they'd be able to welcome back customers at full capacity.
All of this hesitation hurt REITs with large concentrations of New York City properties in their portfolios. And while leasing activity did take place, it was shorter-term in nature. The number of lease renewals for a period of under five years was up 46% in 2020 compared to 2019, reports CBRE. But that trend finally seems to be changing.
Tenants are getting ready to commit once again
Over the past few months, New York City has begun to stage its recovery from the pandemic. Restaurants and retailers have reopened in full. Tourists have come back to fill the streets. And companies are finally beginning to call workers back to the office, at least in some capacity. All of this is prompting companies and retailers to commit to longer-term leases.
Between April and December of 2020, 54% of all lease renewals larger than 15,000 square feet were shorter than five years. But that share of short-term renewals dropped to 32% between January and May of 2021.
Now the news isn't all great, at least as far as office buildings are concerned. The average deal size for office space has shrunk from about 60,000 square feet in 2019 to 42,000 square feet this year so far.
But still, tenants are finally starting to commit to longer-term arrangements. And that means a few things.
First, it means NYC office and retail REITs can anticipate incoming rental income for a longer period of time. That's something investors are apt to appreciate.
Secondly, the commitment to longer-term leases is an indication that more tenants have faith in New York City's ability to move forward from the blow of the pandemic and stage a full recovery. Let's not forget that the city was the first to be brutalized by the outbreak when it reached U.S. soil. And the pandemic's impact extended well beyond the commercial real estate market.
Many New York City residents fled to the suburbs when the outbreak got bad, and new renters were slow to come in. Things got so bad that residential landlords were forced to give away free rent just to get leases signed.
As such, anyone who's invested in New York City, whether in the form of an office REIT or a residential building, should be happy to see longer-term leases being signed. It's an indication that things are turning a corner after a very bleak year and change.