A grim future for central city office space--and a case we might hear for Site 5 in Brooklyn

The pandemic has cast doubts about future of office space in New York City, notably Manhattan, as well as high-rise buildings. 

That doesn't preclude a recovery for post-vaccine New York. But it may reshape office work and commuting. 

And I wouldn't be surprised to hear that as an argument for the proposed bulk transfer to Site 5, longtime home of P.C. Richard and Modell's, to enable a giant two-tower complex: office space for Brooklynites to enable a shorter commute. Stay tuned.

Meanwhile, let me survey some recent news coverage of the general issue.

The office space picture

From the New York Times, 10/26/20, Why N.Y.C.’s Economic Recovery May Lag the Rest of the Country’s:

“This is an event that struck right at the heart of New York’s comparative advantages,” said Mark Zandi, chief economist for Moody’s Analytics, a Wall Street research firm. “Being globally oriented, being stacked up in skyscrapers and packed together in stadiums: The very thing that made New York New York was undermined by the pandemic, was upended by it.”

Zandi said that, while the nation should recover from pandemic economic losses by 2023, for New York City it could take until 2025. Notably, many companies have adapted to working from home, and others plan a smaller footprint, with employees less often at the office.

The near-term problem goes far beyond empty offices and widespread unemployment, with the portent--absent significant federal help and innovative city management--of lowered tax collections, constrained city services, little long-term investment, and declining quality of life.

A 10/26/20 Real Deal article, The metamorphosis of the metropolis, asked "Is this the end of the central business district?" The answer: maybe. At the last World Trade Center site, suggested one expert, residential may make more sense than office space. And older office buildings could turn into housing.

Getting uneasy

An 11/10/20 article, Office unease: Tenants are paying up but staying away, the Real Deal reported that major office landlords nationally, in reporting their third quarter results, said most tenants maintained rent payments, but that most people are still working from home. Likely a significant return depends on widespread adoption of an effective vaccine.

In A New Setback for Big Cities as Return to the Office Fades, the Wall Street Journal reported 12/1/20 that only about a quarter of employees had returned to work in major cities nationally as of Nov. 18, according to Kastle Systems, a security firm. 

That devastasted nearby retail and services, lowered residential rents, and savaged transit systems. The New York City office return rate: 15.9%. 

A former Forest City exec

Former Forest City Ratner/Forest City New York CEO MaryAnne GIlmartin, now at MAG Partners and interim CEO of Mack-Cali Realty, says "the New York region really needs more business districts outside of Manhattan. People increasingly want to live near where they work, they want access to open space during the workday, and they want manageable density that is convenient without feeling overcrowded."

That message came in sponsored (by Mack-Cali) content published 10/26/20 by Crain's New York Business. And while it dovetails with her company's project in "the commercial-residential Harborside neighborhood in Jersey City," it surely has logic.

She also cited Downtown Brooklyn and Long Island City, "places that are very accessible but where you can take a call on a waterfront esplanade and your employees can walk to work from great residential neighborhoods."

That's an argument we might hear for Site 5.

The end of big cities?

Consider suburban contrarian Joel Kotkin, the Presidential Fellow in Urban Futures at Chapman University and Executive Director for Urban Reform Institute — formerly the Center for Opportunity Urbanism.  

The 11/15/20 Salt Lake Tribune reported Utah urged to build more single-family homes, with Kotkin arguing for “smart sprawl" to endure future lockdowns. (Of course, a housing policy reliant on single-family cars is the opposite of sustainability.)

In The Office Space Apocalypse, published in the 11/8/20 Tablet, Kotkin argued that "COVID has been especially severe in cities due to what the demographer Wendell Cox labels “exposure density” brought on by insufficiently ventilated places like crowded housing, subways, elevators, and the office environment." 

(Poor timing, since we now have seen the pandemic spread to rural states.)

I think Kotkin is way too pessimistic He's right that we haven't seen the worse, in terms of retail and restaurant closings, but I'm not sure that the "successful core city can thrive only by downsizing and learning to like it." 

It's just too soon to tell.

His conclusion:

Contrary to the claims of urban boosters, real estate speculators, and planners, the urban future is not assured. American cities—indeed cities everywhere—have usually done best by establishing neighborhoods, those “urban villages” within the greater metropolis, each with its own distinctive character.

I guess it depends on the definition, and boundary, of such neighborhoods. Again, don't be surprised at the new argument that the zone in and around Downtown Brooklyn will appeal to commuters compared to Midtown Manhattan.

A conversion opportunity

Midtown Is Reeling. Should Its Offices Become Apartments?, the New York Times reported 12/11/20.

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 of Manhattan office space into housing.

The Real Estate Board of New York cites 210 million square feet of outdated office space:

The real estate group estimates that converting even just 10 percent 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.

So they actually estimate converting 21 million square feet, not "more than one million." The proposal, though requires approvals at the city and state levels, as well as the departure of tenants.

The article also cites the possibility of converting hotels into residences--after all, there have been some recent bankruptcies.

Housing to save Manhattan?

In a 12/18/20 op-ed in the Daily News, How to use all that vacant space, Alex Yablon similarly supported turning offices into housing;

If the city and state forgo tax revenue in a hopeless bid to bring all these office tenants back, services and quality of life will deteriorate, driving residents away. As New Yorkers leave, more local businesses will fail. After retailers, restaurants, theaters and music venues go under, it will be harder to attract tourists when travel is safe again. The city’s political power will decline along with population — indeed, the city is likely to lose two Congressional seats in the next redistricting

New York can avoid this vicious cycle and tap pent-up post COVID demand if it preserves its unique non-office assets. It is the national capital of culture, fashion and media, with unparalleled amenities and global connections. The city needs people here to patronize those businesses and keep that culture vibrant.

He pegs conversion at less than $100 per square foot, less than one-third the cost of building new apartments.

The trends are grim

A 12/18/20 Bloomberg article, The World’s CFOs Have a Dire Message for Real-Estate Investors, summarized a grim trend:

Hundreds of corporate executives tracked in earnings calls around the world in the past five months addressed the urgency to cut real-estate costs, according to an AI model trained by Bloomberg to scour transcripts. Tactics include cutting office space, accelerating branch closures, renegotiating rents on warehouses and even shutting data centers.