NYC Real Estate Eyes Pandemic Comeback Q&A: TOPLive Transcript Ruth Colp-Haber’s remarks on April 29, 2021
(Bloomberg) — Here’s a transcript of Ruth Colp-Haber’s remarks during the live blog event “NYC Real Estate Eyes Pandemic Comeback: Q&A.” The blog entries are in the order they were originally posted.
Welcome to TOPLive.
New York City’s commercial and retail market has been battered since the onset of Covid-19. Office supply in Manhattan has reached the highest level in at least 30 years as companies re-evaluate how much physical space they need after a year of remote-working. Retail rents have fallen across every major shopping district in the city, and supply continues to grow, as tourism continues to lag.
Ruth Colp-Haber of Wharton Property Advisors took questions in a live Q&A on what lies ahead for the real estate market as we slowly emerge from the pandemic.
The event was moderated by U.S. real estate reporter Natalie Wong.
Ruth Colp-Haber is president and CEO of Wharton Property Advisors. Over the last 25 years, Ruth has completed roughly 500 NYC office leases for businesses, schools, and nonprofits. Her company Wharton Property Advisors (WPA) is a real estate consultancy that represents tenants leasing office space in New
York. Ruth is a Counselor of Real Estate, and a Fellow of the Royal Institution of Chartered Surveyors.
Hello! My name is Natalie Wong, and I cover commercial real estate for Bloomberg News, with a focus on Manhattan office and retail spaces.
Natalie Wong: It’s been a whirlwind year covering the immense changes occurring in these two sectors throughout the pandemic. We’ve seen office supply jump to the highest levels in at least three decades and retail rents plummet across the major shopping corridors. Key office and retail districts, from Midtown Manhattan, the Financial District to Fifth Avenue are still mostly empty. Major tenants have given up new office space for sublease, and retailers are still embroiled in expensive rent battles with landlords.
Yet it finally feels like we’re on the cusp of a recovery, JPMorgan Chase & Co. became the first major U.S. bank to mandate a return to offices by July, and others have signaled a path back by fall. Demand for new space has perked up. New retail and restaurant deals are also getting signed as companies look to take advantage of cheap rents prior to a larger recovery.
Today, we’ll take a closer look at what a recovery looks like for Manhattan’s office and retail markets as well as the challenges ahead. We have a fantastic panel to discuss this topic.
I’m pleased to introduce:
* Ruth Colp-Haber, the CEO of brokerage firm Wharton Properties,
which specializes in office leasing in the city
Natali Wong: New York City has seen office supply soar to record highs over the past few months and retail rents plummet. Even with signs of growth in the city, key commercial corridors like Midtown and the Financial District are still quiet. Have we reached the bottom of the market yet?
Ruth Colp-Haber: In Wall Street parlance, attempting to predict a bottom in New York’s real estate market is like trying to catch a falling knife. Obviously, the office markets have been thrown for a loop by Covid. Necessity being the mother of invention, the concept of work from home and its stepchild hybrid work were born.
Obviously, real estate savings can be achieved with a smaller office footprint, which can also serve as a perk to employees who prefer to work at home some or all of the time. This phenomenon is just getting started and will result in downward pressure on office rents for several years, all to the benefit of tenants who will reap a windfall on the other side of the equation.
Natalie Wong: Ruth, let’s start with the glut of sublease space in the market. Major firms across finance, tech and media have put up large chunks of their spaces for sublease. Are these just trial balloons? Or will companies actually leave?
Ruth Colp-Haber: Work-From-Home Is Main Driver of Office Glut Let’s start with the basic premise that the companies put their space on the market when they don’t need it. I don’t believe that it’s a trial balloon. Some companies are leaving New York and some are downsizing. But there is another factor that’s more prominent, which is, in the majority of these instances, the primary driver is work from home. Many companies have found that a significant percentage of their employees enjoy working from home, and they are trying to reduce their real-estate footprint because they don’t need all of their space. It’s that simple.
Natalie Wong: Ruth, what are the expectations of tenants, and how have they changed from before the pandemic? How has remote-working altered the way that companies are thinking about space?
Ruth Colp-Haber: Offices Have Become a Choice, Not a Necessity There has been a sea change in tenant attitudes. They have learned from a year of experience that the great workaround (work from home) actually worked remarkably well under the circumstances. As a result, tenants no longer look at the office as a necessity but rather as just another destination or service. This concept of choice is totally new, and therefore landlords will have to compete much harder for tenants’ business
than in the past.
Tenants now expect improved terms, including lower rent, more free rent, larger tenant-improvement allowances, building amenities, termination rights and pandemic protection.
Natalie Wong: Ruth, do you think more flexible, hybrid work could actually mean that companies might need more space?
Ruth Colp-Haber: Wall Street Returning to Office With Smaller Footprint.
As a broker, I wish that it were so, but that is a fantasy. We just have to look at the news of the last few days to see that is not the case. For example, Jamie Dimon of JPMorgan Chase said the bank will be coming back to the office in two months, which is the good news, but the bad news is that it will only need 60 seats for 100 employees. Similarly, HSBC said it’s looking to reduce the office footprint by 20% to 40%.
However, there are some companies that believe full-time office presence is necessary for reasons of culture, collaboration, creativity and apprenticeship. We are seeing all types of approaches from our clients.
These changes will take up to 10 years to work themselves out, as we are in the beginning of a new experiment in work. That experiment will probably result in an overall decreased demand for office space. This is a threat to the major gateway cities in both the United States and worldwide, particularly those in dense areas such as New York. However, the news is not all bleak. If you are a tenant, you are in the driver’s seat, and the likelihood is for those who enjoy office life they will be able to pay less and receive more. As an alternative, tenants can upgrade to a better space at the same rent they are paying now.
Natalie Wong: Ruth, Manhattan’s Financial District has seen large chunks of office-sublease space being put on the market this year, a bigger increase than other commercial districts like Midtown. Why is that, and what does the future of the area look like?
Ruth Colp-Haber: For starters, we need to appreciate that the Financial District has always been considered a secondary market as compared to the tony midtown areas such as Grand Central and the Plaza District. As a result, space in the Financial District has always traded at approximately a 15% to 20% discount to Midtown.
Downtown Sublease Availability Seems ‘Overwhelming’ The sublease availability downtown seems very overwhelming, as much of the space is in newer or large buildings such as the World Trade Center, Brookfield Place and 55 Water Street, where there are very large floor plates. When subleasing these spaces, the floors cannot be divided easily. Accordingly, they’re harder to lease. Further, sublet prices trade at greater discounts than the large spaces.
Since Downtown has a larger residential presence than Midtown, it may actually be less affected by a diminished office presence. The key question is what happens when a decent percentage of employees come back to an office much larger than the current 15% employee attendance.
Natalie Wong: If so many companies are permanently adopting work from home or hybrid working, then will there inevitably be an oversupply of office space post-pandemic? What will happen then?
Ruth Colp-Haber: This is an excellent question, as your client has a fine appreciation of the basic laws of supply and demand. In the short run (the next few years), demand will fall along with office rents as the market needs to find equilibrium due to an oversupply of office space.
Offices Can Be Repurposed to Meet New Demands However, in the long term much of this office space will be repurposed, some of it into residential space, schools and healthcare facilities to meet current needs. Many of those needs have been emphasized in the new Biden infrastructure plan.
Natalie Wong: What does a recovery look like for the office and retail markets? How long will it take?
Ruth Colp-Haber: NYC Office Rents at Start of ‘Cyclical Bear Market’ Unlike many of the other markets Bloomberg follows, such as the fixed income and equity markets, real estate moves in long-term cycles. Accordingly, change does not technically come to the market until leases expire and new leases are written. In this case, we are at the beginning of a cyclical bear market in office rents.
I expect the cycle will take about five to 10 years to potentially get back to where we were before the pandemic, as there have been fundamental changes to how people work. As a result, this will be a period of transition with some turbulence for many major cities.
Of course, this is also a time of great opportunity for both retail and office tenants. In the first instance, we will see retail tenants snapping up discounted spaces. Thus far office space has lagged, but we are hopeful the turning point will come soon, when people feel safe in our city, which is the densest urban environment in the world.
Natalie Wong: This is my last question for the panelists. What are the biggest lasting changes to the office and retail markets that you see emerging from the pandemic?
Ruth Colp-Haber: This is a great experiment, so we make predictions at our peril. Nobody knows what’s going to happen, so we must be humble in our prognostications.
That said, I’ll take a stab anyway. The hybrid work model is here to stay. As a result, companies are going to take about 20% less office space. This will not be all bad. They will retain offices in New York, and many companies will have employees coming in three or four days a week and for major meetings. Office-design structures will change to accommodate large meeting rooms and hotel-type arrangements will spring up. Flexible work spaces such as WeWork will benefit as companies will prefer shorter leases and flexibility. Companies that could not afford the rent in Manhattan previously will now be able to locate here.
NYC Will Remain ‘Business Capital of the World’ Some businesses and residents will decamp elsewhere as they already have for lower taxes or a less expensive cost of living. But just in the last few days, I have seen neighborhoods around the city springing back to life with crowded restaurants, streets and parks. All of these amenities will be attractive to future residents. New York is ever evolving and will adapt to the new chapter in its civic life, as it always has. It will remain the business capital of the world.