As we approach the dog days of August, I thought it would be nice to revisit one of my favorite lines from a Shakespearean sonnet for obvious reasons. Of course, we hope everyone is having an enjoyable and restful (but not too restful) summer.
I say that because it seems like things are bubbling up under the surface in the commercial real estate world, and there are some conflicting currents. On the one hand, inflation appears to be settling in around the 3% range, which may allow the Federal Reserve to stop its campaign of interest rate increases. That will be very helpful, because the real estate industry has been particularly hard hit by the 525 basis point increase since last year. However, the recent Moody’s downgrade of 10 regional and mid-sized banks and placement of 6 major banks including BNY Mellon, US Bancorp and State Street on review for credit downgrade is sobering. There were a variety of reasons for the downgrades, but we can throw into the mix the potential exposure on office loans given as the commercial mortgage backed securities delinquency rate rose 41 basis points to 4.94% in July. One hopes that the inflation hawks at the Fed will tread carefully as they attempt to follow what Chicago Federal Reserve president Austan Goolsbee called “the golden path” to a soft landing after Friday’s stable jobs report.
In breaking news, any improvements to the office leasing situation may come too late for co-working giant WeWork, which stated in a regulatory filing yesterday afternoon that “substantial doubt exists about the company’s ability to continue as a going concern”. Looking ahead, if WeWork does actually close the adverse impact on landlords could be significant if its leases are not picked up by another co-working operator (or operators).
On a more positive note, many major companies are seeing the value of returning to the office and or directing employees to come in three or four days a week. Even Zoom, which was a great business savior during the pandemic, has symbolically directed its employees to return part-time. In another significant development, the Washington Post reports that President Biden is calling on his cabinet officials to urge more of their workers to return to the office in the fall.
Further, some of the research that was done on the so-called productivity gains which were much ballyhooed at the beginning of the pandemic is starting to be called into question. Indeed, a working paper just issued by scholars at MIT and UCLA found that the productivity of employees working from home was a whopping 18% lower than those in the office. Surprise, surprise – there is no substitute for in-person communication, creativity, and community. And while I am appalled by the sexist terminology of the so-called “lazy girl jobs” which went viral recently with millions of views, the fact is that remote work is an invitation for less dedicated employees to shall we say, seek diversions during the business day. Take my husband Eric (please) as an example. Who knows what he is doing all day, but I am stuck with him despite his laissez-faire attitude because he is so smart.
Turning to our neck of the woods, employee attendance continues in the roughly 50% range in NYC as it has for an extended period. No changes are expected until the fall, and maybe not even then. However, good things are happening in the city in general. According to the latest 28-day NYPD statistics, crime continues to trend down compared to last year in all major categories except car theft (and that is because Kia and Hyundai have defective security systems for some models). In addition, ideas are now bubbling up to create desperately new housing via demolition, as well as conversion of outdated office buildings which have outlived their shelf life.
As previously noted, we remain in a long-term bear market for office rents, except for the trophy properties. So the good news is that our clients can be moving and grooving in new office space at tremendous bargains, particularly for sublets which generally trade at 25 to 50% off the price of direct space.
Below is a listing of NYC’s best deals. Please feel free to tap the expertise of Wharton Property Advisors if you are looking for new space, need to dispose of excess space, want to renegotiate your lease or just have questions. We always represent our clients with creativity, integrity, diligence, and independence.
