DiNapoli: New York’s office market will take years to recover from pandemic

The COVID-19 pandemic has wiped out years of growth in the New York City office sector, wiping out nearly $ 28.6 billion in market value and over $ 850 million in property taxes over the course of the city’s fiscal year (FY) 2022. The timing of its resumption is an open question, however, as employers continue to offer work-from-home options, according to a report released today by the Comptroller of the City. ‘State Thomas P. DiNapoli.

“Midtown and the Financial District are two of the largest business districts in the world. Demand for space more than doubled the value of city-wide office sector properties in the decade leading up to the pandemic, ”said DiNapoli. “When the pandemic hit, companies moved office workers to remote work, rents went down and vacancies increased. I’m optimistic about the sector’s recovery, but its near-term future remains uncertain as employers assess future use of space. The city should closely monitor trends in the sector and consider the future impact on tax revenue. “

Questions about space configuration and a potential increase in square footage per worker can take years to resolve. The continuation of the pandemic, firmer changes in travel habits, the increase in sublets and vacancies, and the return in demand for residential space are likely to influence conversations about the best use of the city. physical space in the months and years to come.

The total market value of New York City office buildings, estimated at $ 172 billion in FY2021, fell 16.6% in FY2022’s final valuation roll, the first decline in the total market value of office buildings since at least fiscal 2000, reflecting the drop in demand caused by the COVID-19 pandemic. The city had 463 million square feet of inventory in the second quarter of 2021, representing 11% of all office space nationwide.

Job growth before the pandemic boosted demand for space

The New York City office sector reached a total of 1.6 million jobs in 2019, the highest level on record. Employment in the office sector accounts for about a third of all jobs in the city, compared to a quarter in the rest of the state and country. In 2019, the sector contributed $ 705 billion to the city’s gross product, accounting for 66% of the city’s output.

Most of the city’s office workers were well paid, with an average annual salary of $ 183,900 in 2020. Even excluding the top earners in the financial stocks industry, the average salary was $ 145,290. That’s higher than the citywide average ($ 110,190) and much higher than the average for non-office jobs ($ 62,730).

In fiscal year 2021 (assessed before the start of the pandemic), the value of office buildings reached $ 172 billion and billable values ​​(the market value on which property tax is levied) reached $ 71 billion. of dollars. Both had more than doubled in the previous 10 years. Office market values ​​represented approximately 13% of the total market value.

Office space after the pandemic

In 2020, office employment fell 5.7% while total employment fell 11.1%. Many office workers have made the switch to remote work, with just 5% on-site as of April 2020.

DiNapoli’s report found that average asking rents showed little change at the start of the pandemic, but began to decline significantly in the fourth quarter of 2020. In the second quarter of 2021, asking rents were down 4.2% compared to the previous year and vacancy rates were at 18.3%, a level not seen in over 30 years. The large volume of vacant offices reignited the conversation about converting some of these spaces into residential housing.

The office sector began to experience measurable changes in demand in the second quarter of 2020, when new rentals in Manhattan fell to 2.5 million square feet, 75% below the level a year earlier. Renewal activity performed better at 7.2 million square feet, a decrease of 15% from 2019.

Lower office demand contributed to a 5.2% drop in overall billable values ​​in fiscal 2022, the first drop in over 20 years. Some of the city’s most expensive office buildings have fallen significantly. For example, the market price of the World Trade Center complex fell 23.1%.

Tax revenues

In fiscal 2021, the office sector generated estimated direct revenues of $ 6.9 billion in property taxes, real estate transaction taxes, mortgage taxes and commercial rental taxes. Property taxes in the office sector increase more than any other property type sub-component (for example, single-family homes or multi-family rental properties). The office sector’s property tax revenues alone have exceeded all budgets for the city’s sanitation, fire, transportation, and parks and recreation departments combined.

Commercial real estate such as office and retail buildings represent a disproportionate share of tax revenue as they are valued at a much higher rate than residential properties. In fiscal 2021, office buildings represented 12.6% of the market value of properties on the assessment roll, but more than a quarter (26.2%) of taxable values ​​billable at $ 71 billion.

The city collected $ 1 billion in transfer duties and $ 816 million in mortgage taxes in fiscal 2021, the second year of decline due to the impacts of the pandemic. DiNapoli estimates that $ 216 million of those taxes were generated by office buildings, less than half of the $ 461 million generated in fiscal 2020.

Look ahead

Office employment has remained more stable than overall employment and is expected to continue to grow, which should support future demand for space. Multi-year leases extending through 2023 and healthier landlord balance sheets have also provided some near-term stability in the office property market.

The city’s interim assessment roll for fiscal year 2023, to be released in January 2022, will provide further information on the potential duration and magnitude of the impact on the city’s finances.

DiNapoli urged the city to monitor all labor and real estate markets, including differences in submarkets, to deliberate carefully on its choices to influence employment and office space, and ensure that policy decisions will mitigate negative impacts on tax revenues and the economy.

Reporting
Office area in New York City


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Jose C. Birney