While much attention has been given to COVID-19’s impact on residential real estate patterns in the and around New York City (i.e., the migration to the outer boroughs, Upstate New York, and the Tri-State suburbs), less has been said about the short- and long-term prospects of commercial real estate and the disproportionate effect that the pandemic has had on them.
As of now, early predictions about the retail, hospitality, and office sectors being hit the hardest have been proven right. Throughout the city, thousands of restaurants, chain stores, and small businesses have been shuttered due to a lack of foot traffic and untenable overhead costs – many of which are fixed. Programs like outdoor dining and curbside pick-up have helped some restaurants stay afloat, but it is unlikely they will be able to do so indefinitely if the climate doesn’t improve.
Offices have been emptied for months and, though some companies have partially reopened for their employees, it remains to be seen how many will return to full capacity even after the pandemic has been controlled and vaccinations are widespread. It is possible that office culture has been permanently transformed by what has been shown as a viable work-from-home workforce. Cities like NYC and San Francisco that have large technology sectors will likely see a larger exodus from offices due to their existing ability to communicate remotely. We have already seen some technology companies in more expensive cities offer employees additional pay for relocating to secondary and tertiary markets as a means of saving on office rent. In 2020, Manhattan and San Francisco had the worst performing residential markets in the country – which is also correlated to the office market1. Adapting to that reality and reimagining the communal workplace is something companies will have to account for. Staggered in-office work weeks, employee choice, and come-in-as-needed policies are all possible options in this new landscape.
Commercial landlords should be prepared for tenants to shift their needs to issues centered around building safety (hepa air filtration and circulation as well as overall cleanliness) and technology integration. Commercial-to-residential conversion is another option – albeit this is no easy task as MEP construction and providing legal air and light are difficult to integrate particularly with office buildings that have large floor plates. To that end, the state has proposed new zoning rules to make that transition easier. In the short-term, there is also the potential for commercial spaces to become temporary testing/vaccination sites.
Not all commercial spaces have been affected negatively. What was once a gradual consumer shift from shopping in-store to buying online has been accelerated by the pandemic. Government measures, while prudent and pragmatic in their intent, has also accelerated online purchasing. Demand for industrial sites, warehouse space, and last-mile delivery infrastructure around the city has risen as consumers have adjusted their routines to adapt to shelter-in-place orders and stay-at-home recommendations. How stable this new paradigm will be in the future will depend on continued consumer appetite for the convenience of home delivery. It may well happen that consumers will seek a return to pre-pandemic customs in an effort to put this trying time behind them.
While it is impossible to say how quickly the real estate sector will recover, it can be said that commercial outlook will likely depend more on tenant, employee, and consumer habits than residential multi-family property trends. People will return to live and work in the City, but how and when they do so is the question that will determine what shape the recovery will take.
https://www.foxbusiness.com/economy/new-york-empty-commercial-real-estate-covid-testing-sites
https://www.newyorker.com/magazine/2021/02/01/has-the-pandemic-transformed-the-office-forever