Office Vacancies Break Records

Office vacancies are rising across the US, as the latest tech layoffs see corporations ditching expensive office buildings to cut costs.

Companies like Lyft ($LYFT) and Salesforce ($CRM) started subleasing more of their office space through 2022, while the latter recently announced an exit from the 30-story office tower known as Salesforce East in Downtown San Francisco.

While tourism in New York City keeps booming, office space has been battered by remote work. According to urbanism experts Edward Glaeser and Carlo Ratti, 74,582,671 sqm of vacant office space are enough to fill more than 26 Empire State Buildings.

According to the real estate firm Colliers, the total square footage of office space in Manhattan available for lease — roughly 94 million — has set a record. The vacancy rate of 17.4 percent, however, matched the rate from February 2022, which was the highest since Colliers started tracking the New York City office market in 2000.

Real estate investor Steven Roth reflected on the current labor market trends.

“Friday is dead forever…Monday is touch and go,” said Roth, chairman, and founder of Vornado Realty Trust ($VNO) – an office REIT whose common stock has declined approximately 60% in the last year and got booted from S&P 500.

Vornado is a textbook example of ongoing real estate struggles. As an equity REIT, it owns income-producing properties: Manhattan’s office space and street-level retail.

REITs are popular among yield-seeking investors, as they must distribute at least 90% of their taxable income through dividends annually. In 2022, Vornado paid out over $400MM, but facing a challenging market, the company suspended their dividend for the year.

Even mega-cap companies like Microsoft ($MSFT), which just hit a new stock all-time high, are undergoing real estate reductions. The company is looking to sublease more than 42,000 sqft of its offices at 11 Times Square while abandoning plans for a new office complex in London.

Yet, the State of New York doesn’t see the glass as half empty but half full. A worker who commutes to Manhattan, even for two or three days a week, remains a New York taxpayer, while one who now works permanently from home in bordering states is not.

In addition, property taxes are a significant source of New York City’s income, attributing to $7 billion in FY 2021 and showing further growth, according to the city comptroller’s report.

However, NYC-based real estate brokers are scrambling to find buyers for once prized commercial properties, now vacant in Manhattan. According to MSCI Real Assets, office prices were down 26% in Q1 2023 from a peak in 2017.

According to the Financial Times, family offices managing wealth for the ultra-rich are among the buyers, as evident from RXR and Blackstone Group’s sale of an office building on Sixth Avenue. A consortium of family-run businesses purchased the building for $320m, a $30m discount from the listed price. Meanwhile, in 2010 the sellers paid $400m for the property ($556m inflation-adjusted to 2023).

Blackstone has already said US offices are now less than 2% of its total portfolio, down from more than 60% in 2007.

Another Manhattan building, Tower 56, was unloaded in February for $110mn when the owner could not refinance its debt — down from the $158mn paid for it in 2008. One broker estimated that only the top 10 percent of office buildings in New York were not distressed — either in terms of the level of debt or occupancy.

“There’s going to be tonnes and tonnes of workouts,” Steven Stuart of Fortress Investment Group, one such lender, predicted at a conference hosted in May by The Real Deal, a real estate news outlet. “The basic problem is a lot of these assets were financed with short-term, floating rate debt a few years ago.”

Manhattan office sales by buyer type, Source: Savills Research

According to Knight Frank, private investments outpaced institutions in 2022, attributing to 41% of total global commercial real estate markets. Total investments exceeded $450b, with ultra-wealthy individuals like Amancio Ortega of Zara and Joe Tsai of Alibaba Group among the most active.

Still, domestic capital is more cautious. TwinFocus, a Boston-based multi-family wealth management service managing $7.5b, decided not to co-invest in an NYC office building.

“The risk is, what do these cities look like over the next 10 years?” said its co-founder Paul Karger.

In a recent interview for Fox Business, a self-made real estate billionaire Jeff Greene gave a stark warning, pointing out that many investors never experienced such market conditions.

“I see people all the time who are panicked because they’re thinking, how am I going to pay off my construction loan when the apartment building I’m building is done, when rates have now gone up way beyond what I can afford, and rents are dropping?”

He pointed out that the ongoing turbulence is happening while we still have record-high employment levels.

“What’s happening in office space today is before the slowdown. Wait until we have the recession,” concluded Greene, predicting unstable times for the entire real estate industry.