New York is poised for its biggest real estate slump in at least thirty years, and the office-lease market may be hit especially hard.
Over the past few months, the coronavirus pandemic has pushed the $16 trillion US commercial real-estate market into unchartered territory. Buildings across New York, San Francisco, and other key markets were forced to shut down for months. SL Green, New York’s largest office landlord, has collapsed more than 40% in stock price since the beginning of the year.
WeWork ($PRIVATE:WEWORK), which became New York’s largest tenant in 2018, is now scrambling to tread water. The short-term office-lease company was struggling well before the virus became a concern, but a country-wide switch to working from home has pushed WeWork into dangerous territory. The embattled company just shut down its first-ever location in Soho this week as a part of a portfolio overhaul, the Real Deal reported.
WeWork’s workforce has also continued to shrink since October, despite the company bringing on a new CEO in February.
But WeWork isn’t the only New York real estate company suffering. While some companies have begun reopening offices, billionaire property investor Barry Sternlicht, who appeared on Bloomberg last week, suggests that the New York offices are poised to collapse at least 40% in value.
For one thing, several companies have begun considering pivoting to a remote-first working model. That’s a decision likely to drive down office rent, which has already tumbled down 25% according to Sternlicht.
Already, the CEOs at Morgan Stanley and Barclays have both questioned the need to hold on to their pre-virus office square footage. A Gartner survey in March found that 74% of the surveyed CFOs, half of whom oversee the financials of companies with revenues above $1 billion, plan to adapt their workforces to allow some employees to work from home.
Meanwhile, expenses are likely to rise, as companies rearrange their offices to accommodate for social distancing and other measures to prevent the spread of COVID-19. WeWork's open-floor plan will likely deter startups from using the co-working space unless the company makes some radical changes to its layout.
Whether or not New York City is able to attract back its commercial tenants still remains to be seen. But as Sternlicht noted, the city’s high taxes and dense infrastructure makes it difficult to predict that companies will return to their skyscraper offices without some sort of incentive.
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