Should New York's Midtown offices become apartments?

New York

THE pandemic is pummelling New York City's commercial real estate industry, one of its main economic engines, threatening the future of the nation's largest business districts as well as the city's finances.

The damage caused by the emptying of office towers and the permanent closure of many stores is far more significant than many experts had predicted early in the crisis.

The powerful real estate industry is so concerned that the shifts in workplace culture caused by the outbreak will become long-lasting that it is promoting a striking proposal: to turn more than one million square feet (sq ft) of Manhattan office space into housing.

Nearly 14 per cent of office space in midtown Manhattan is vacant, the highest rate since 2009. On Madison Avenue in midtown, one of the most affluent retail stretches in the country, more than one-third of all storefronts are empty, double the rate from five years ago.

The collapse of commercial real estate is another major burden for New York, since the industry provides a significant portion of the city's tax revenues. Filings to erect new buildings in the city, a key indicator of industry confidence, have dropped 22 per cent this year to 1,187 - the lowest number since 2010.

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As of late October, only 10 per cent of Manhattan's one million office workers were reporting to the office, showed a survey by the Partnership for New York City, an influential business group. And this already bleak picture could even get worse, real estate experts and industry executives said. "It would probably be fair to say we haven't hit bottom yet," said James Whelan, president of the Real Estate Board of New York.

It does not appear that the major commercial landlords in the city are facing financial collapse, but the stocks of the ones that are publicly traded are down sharply since March.

The fallout from the crisis can be seen in a rising tide of litigation between landlords and tenants, even at some of New York's most gilded addresses.

At the Shops at Columbus Circle, a luxury mall overlooking Central Park, the developer has accused a group of high-end retailers, including Michael Kors and Hugo Boss, of skipping out on more than US$7 million in rent and fees. On Fifth Avenue, Italian designer Valentino has sued its landlord to free itself from a lease of nearly US$1.6 million per month.

New York City's finances - money to pick up trash, repair parks and police streets - rely on the health of the industry. Property taxes represent the largest source of city revenue, and commercial property accounts for the largest share of that overall levy - 41 per cent, said state comptroller Thomas P DiNapoli.

Commercial property sales have plummeted by nearly 50 per cent through October, said deputy state comptroller Rahul Jain.

A weakened commercial real estate market will make it "much harder for businesses and the economy to get back to normal," Mr DiNapoli said.

The lack of workers is having a ripple effect on rents. Across Manhattan's retail corridors, asking commercial rents have dropped nearly 13 per cent from last year, said commercial real estate firm CBRE. The steepest declines are in areas dominated by office buildings, including Times Square and Grand Central Terminal, and shopping destinations such as SoHo.

The industry's troubles, initially sparked by the exodus of office workers during the state's stay-at-home orders in the spring, have persisted as many commuters have settled into long-term or permanent remote-work arrangements. Tourists have also largely disappeared.

As a result, tensions are growing between the city's powerful landlords and some of their equally powerful tenants. Property owners have accused blue-chip companies of using the pandemic to withhold rent they can afford, while tenants have portrayed landlords as greedy and unwilling to acknowledge economic reality.

At the Real Estate Board of New York, whose members include nearly every major landlord and developer in New York, the prospect of systemic changes in work habits looms large.

"Anyone that thinks the way that people used the workplace in the past isn't going to change post-pandemic is fooling themselves," said Scott Rechler, chair of the Regional Plan Association and chief executive of RXR Realty, which controls 26 million sq ft of city office space.

Employers have discovered that productivity does not necessarily suffer in the absence of shared workspaces and that smaller office footprints and more lenient work-from-home policies might make lasting economic sense. As a result, the landlord group is proposing that the city and state allow developers to more easily convert Manhattan and borough offices into residences.

Roughly 140 million of Manhattan's 400 million sq ft of office space is considered to be of average quality or is in older and less luxurious buildings, said real estate brokerage Cushman & Wakefield. The real estate board puts the citywide supply of those buildings at roughly 210 million sq ft.

The real estate group estimates that converting even just 10 per cent of that office space to residential would create 14,000 apartments citywide, including as many as 10,000 in Manhattan - a significant amount in a city routinely short of enough housing, especially affordable homes.

Changes to zoning rules needed for any conversions would require that some portion of new housing be set aside as affordable, the board said.

Mark A Willis, a senior policy fellow at New York University's Furman Center for Real Estate and Urban Policy, said that before the pandemic, job growth was outpacing housing growth in the city, causing demand to far outstrip supply and exacerbating the city's persistent housing shortage. "Facilitating the reuse of buildings to adapt to changes in the economy is, to me, a very smart idea," he said.

Some tenants are using the current downturn - and the resulting lower prices per square foot - to trade up for nicer office space, the board said. That is a boon for higher-end office landlords, but could bode ill for landlords of lower-rated buildings.

Converting office buildings to homes would not only provide a potential financial lifeline to landlords, but would also benefit retailers, the real estate board argues, because the presence of office users during the day and apartment dwellers at night would increase foot traffic.

There is no reason, they argue, for midtown to retain its status as New York's last predominantly office district, bustling during the day but quieter at night. They cite the success of lower Manhattan, which in recent decades has turned from an almost exclusively office district into a vibrant residential neighborhood.

The proposal would require changes to zoning and density rules that would have to be approved by the City Council and the state Legislature, and embraced by the mayor and governor. Governor Andrew Cuomo's office would say only that he would review the idea. NYTIMES