More short-term doubts for Site 5, since the market for a new office tower in NYC surely tanked

The coronavirus crisis is upending the world of real estate in multiple ways; as I wrote recently, a lesser demand for market-rate units in New York City suggests a possible shift to a greater number of affordable units, at least in the short term.

That said, none among the two Atlantic Yards/Pacific Park towers under construction and the two scheduled to start later this year were supposed to be finished by 2021, which is the best case for a vaccine and a key step--but only a step--to the recovery of the New York economy.

So perhaps a stalwart developer build for that potential future demand. Or, perhaps, without significant government support, the shock to the system might last for years.

What about office space?

The crisis has also changed the outlook for office space, notably the long-percolating but long stalled plans for a two-tower complex at Site 5, opposite the Barclays Center and currently home to Modell's and P.C. Richard. Condemnation has been stalled by resistance from P.C. Richard, and surely all legal proceedings are slowed.

In 2017, as I reported, then Forest City Ratner CEO MaryAnne Gilmartin talked up a "Class A, 21st-century iconic office building," which she called "Brooklyn's own version of  Time Warner Center." That site was later offered to Amazon in its HQ2 search.

Now everyone's rethinking office life and office space, as shown in the slide below from Gov. Andrew Cuomo's message yesterday. That, to me, suggests launching a tower in the near-term an unwise and risky effort, and I suspect lenders would agree.

First, a larger percentage of workers will simply work from home, at least part time, and telecommute.

Employees will take new precautions on public transport. Workplaces will be redesigned for social distancing among employees, and new measures will be required for public-facing employees.

Some more ominous considerations come to mind. Given New York's disproportionate brunt of coronavirus deaths, partly due to crowding related to social inequities, it's not unreasonable to think that jobs will move to smaller cities.

How are people going to crowd onto the subway, at least in the short term, at least until and unless New York adopts the stringent practices that have worked in other large cities like Singapore and Seoul?

Compounding the problem is that some of New York's advantages, such as cultural, entertainment, and food offerings, are likely to be diminished, severely in the near term.

That suggests the market for new-build vertical office space may not be that robust, especially if there's existing office space to retrofit, and the opportunity for telecommuting. And larger, more horizontal spaces needed for social distancing may be cheaper to build or retrofit elsewhere, where land costs are lower.

If and when a vaccine arrives, that could help restore some of the previous practices, but it's hard not think everyone will be scarred.

The new office space

As the New York Times reported 4/7/20, What Will Tomorrow’s Workplace Bring? More Elbow Room, for Starters:

Returning workers can expect stepped-up cleaning and a reinforcement of social distancing. Hand sanitizer stands will probably be positioned in lobbies. Maintenance staff will swab door handles. There may be limits on the number of people allowed in an elevator.
Workplaces may have significant changes in the long run, including new seating arrangements and the addition of building materials that discourage the spread of germs. New technology could provide access to rooms and elevators without employees having to touch a handle or press a button.

That sounds like a not-unreasonable stopgap, but how can you operate a high-rise office building with one or two people per elevator? If you can't, that suggests constraints through 2021, at least.

From Sam Chandan, dean of NYU’s Schack Institute of Real Estate, in a 4/15/20 Real Deal interview:

“It may be that certain people go in Monday, certain people go in Tuesday, and we de-densify,” he said. “That does affect the viability of some of the co-working spaces in the market today.
It does imply lower rents. It implies a smaller number of leases.”
The Manhattan-based economist noted, “If density is out of favor, that presents a major challenge [to urban centers].”

In a 4/15/20 New York Times op-ed headlined I Helped New York Rebound From 9/11. Here’s How to Recover After the Pandemic., former Deputy Mayor Dan Doctoroff suggested the potential for staggered business hours.

More space, fewer workers

The Times article on the workplace suggests reasons for contracting and expanding space:

If companies do allow more of their employees to log in from home, some may consider reducing their office footprint, which could have significant ramifications for commercial real estate.
But if the amount of space devoted to employee workstations and other functions increases, demand for space could balance out.

Yes, but... the value/efficiency of the space goes down. That portends higher costs for tenants, and lower profits for operators.

Again, that makes it less likely, in the short term, at least, to build a giant iconic office tower in Brooklyn. The tech firms that might have wanted to make a splash--say Google or Facebook--surely have other things on their mind.

The impact on co-working

A 4/14/20 Wall Street Journal article, Co-Working Envisioned the Office of Tomorrow. Suddenly It Feels Like the Office of Yesterday., points to trouble for companies like WeWork not just in the short term but the long term, given that a model with less space per worker now seems "like a liability."

Moreover, a shrinking economy limits the number of tenants.

The article suggestions some long-term optimism:

Despite these challenges, demand for furnished office space under short-term deals is unlikely to disappear. Some co-working CEOs say that in the long run, the industry could benefit from the current crisis. As more companies eschew expensive long-term leases, adopt flexible schedules and let employees work from home on some days, the flexibility of a co-working membership could become more appealing.

But that also makes the market for a ground-up office building less likely.

Rethinking cities?

An interesting 4/13/20 article from The Guardian, Smart lifts, lonely workers, no towers or tourists: architecture after coronavirus:

Some are using the current crisis to take a step back and reassess fundamental assumptions about how cities are structured. “This is the best time ever to think of a walkable city,” says Wouter Vanstiphout, professor of design as politics at Delft University of Technology in the Netherlands. “Could coronavirus be a catalyst for decentralisation? We have these enormous hospitals and people living on top of each other, but still having to travel long distances across the city to get to them. The pandemic suggests we should distribute smaller units such as hospitals and schools across more of the urban tissue and strengthen local centres.”

Of course larger entities offer economies of scale.

More from Doctoroff

The former deputy mayor argued for "a more inclusive and sustainable city," which was not--in some ways--the business-friendly goal of the post-9/11 city, which notably rejected mandatory affordable housing.

He recommended a focus on public hygiene, pandemic preparation, and a new strategy for growth:

Even before the coronavirus struck, New Yorkers were demanding a different growth model than the one we used after Sept. 11 — one that paid greater attention to concerns about gentrification and the distribution of economic opportunity. We saw that play out in Amazon HQ2 and a number of proposed rezonings that have recently been defeated. Communities want more of a voice in decision-making. Add to that imperatives on affordable housing, climate action and now public health, and it seems apparent that to thrive after the pandemic, New York must become the global leader of inclusive, sustainable and resilient growth.

To lower construction costs, he suggests modular techniques, as well as the use of wood.

But none of that, in the near term, will solve the issue of overcrowding in multiple neighborhoods, as well as homeless shelters.