As New York City works toward recovery from a pandemic that’s unlike anything we’ve seen in our lifetime, a few words continue to resonate — Resilience. Reinvention. Recalibration. Rebound.
The pandemic hit hard and had outsized impacts on all economies and all businesses. It’s caused us to question much about life in general — how we balance what we do for a living with how we live, how and where we work — and in NYC everything scales large. Landlords scrambled to maintain their tenant base by making concessions, forgiving rent and finding creative ways to keep their revenue coming and pay their debt service. To many, it looked like NYC might not recover this time, but this city cannot be counted out so easily.
New York City commercial and residential real estate has come a long way since the pandemic’s start. Encouraging reports and forecasts throughout the final quarter of 2021 and into 2022 offer hope that we’re on our way back.
Commercial Real Estate on the Up-Tick
Commercial leasing in Manhattan improved throughout 2021, with Q4 2021 reaching levels of activity unseen since 2019, according to a report by Newmark. Total leased space grew by approximately 20% over the prior quarter, with over 8 million square feet leased in the quarter and over 25 million square feet leased through the year. February 2022 saw a dip related to the Omicron variant before rebounding to bring the Q1 volume to over $9 billion, with almost 5.7 million square feet of transactions, according to a report by CBRE.
Average asking rents have also grown, but these averages are somewhat skewed as many tenants have looked to upgrade into premier class A buildings. Overall, demand has increased significantly; however, available space has grown at an even greater pace as new construction and projects are completed, leaving vacancies high. Frank Wallach, Colliers’ Senior Managing Director of Research, noted, “We are still in this period where the increasing demand is not enough to offset the increasing supply.”
Of course, certain sectors have fared better than others. For example, as healthcare and biotech industries have grown in importance in the past two years, landlords have made significant efforts to accommodate the growing life sciences and healthcare industries, retrofitting existing spaces to fulfill the requirements of such industries or building space suitable for their needs. Every crisis creates opportunities.
An increase in the filings for construction projects at the end of the year is another positive indicator of the returning confidence in the NYC commercial real estate market, as reported by REBNY. “This significant quarterly increase in large-scale construction is creating good jobs and much-needed housing at a critical moment in the city’s path to full economic recovery,” REBNY President James Whelan said in a statement.
Resourceful Landlords Continue to Adapt
Landlords have adapted over time by finding creative ways to attract new tenants. Whether it be by agreeing to take on increased build-out costs or providing more generous rent concessions, landlords have managed to keep leasing velocity up, even if at the cost of net lower revenue in the short term. Offering amenities, such as better food options, gyms, shared conference rooms, improved security and green spaces, has made returning to the office more palatable, thereby driving more leasing activity. Other landlords have considered repurposing underutilized space and properties into much-needed residential or mixed-use developments.
SL Green Realty, Manhattan's largest office landlord, saw significant leasing activity throughout its portfolio, surpassing their earlier expectations. They believe this trend will continue through 2022 as Manhattan’s workforce increasingly returns to the office.
Although the prospect of working remotely for an extended time period has appealed to many, indications are that a return to some semblance of pre-pandemic normalcy is imminent. The need for workers to convene to exchange ideas, socialize and coordinate their work efforts side-by-side will always be necessary. Perhaps workers will adapt to a hybrid work environment over time, but, certainly, the office as we know it will not become extinct. It’s true that postings for work-at-home positions have grown, but this remains a small percentage of all postings. Major firms continue to renew their leases as they prepare for a return of their workforce. Building sales also grew throughout 2021, indicating investors’ confidence that the office market will return.
Normalizing Residential Properties
The return to offices and the improving economy have also led to a new surge in the residential real estate market. Average asking rents have risen to historic levels while demand has seen varying patterns of increasing and decreasing activity as confidence from rising vaccination rates and returning office workers drove demand for periods of time, and then demand fell when variants arose. These patterns are expected to normalize over time as the market for New York City apartments will continue to be competitive.
Likewise, after an initial pricing dip in early 2020, cooperative and condominium prices have risen back to normal, pre-pandemic levels. Rising rents and high occupancy rates are a clear indication that many who have migrated away from the city in the heart of the pandemic have been hungry to return, and predictions of a mass exodus out of New York City were off base.
There continues to be much uncertainty, but the state of real estate in New York City is improving. Naturally, new changes will arise. One variant might recede to the background while a new one emerges. New trends in leasing activity, space availabilities, asking rents, vacancies, economic indicators, job growth and more will develop quickly; uncertainty is the only true constant.
Nonetheless, we believe that New York City will continue to emerge stronger than ever. We will pivot and adapt and remain ever resilient by reinventing how we do things and recalibrating the model that has brought success in the past, and we will rebound to heights never seen before.
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