In 2022, Columbia University professor Stijn Van Nieuwerburgh argued that the rise of remote work would put cities into what he called “an urban doom loop.” The value of office buildings would plummet, taxes paid by those buildings would slide and cities would be forced to cut services, sending residents and businesses fleeting.
In June of the following year, he and two colleagues wrote a paper arguing the doom loop had already begun for New York City and drawing parallels to the fiscal crisis of the 1970s.
Instead, New York City’s office buildings are in a remarkable rebound from the pandemic.
Office leasing in 2024 was the highest in five years. Financial giants like the private equity firm Blackstone and the hedge fund Citadel signed huge leases in Midtown. Vacancy rates fell sharply, including in the depressed market downtown.
And the value of commercial office buildings has not only recovered from the pandemic, the city’s property roll for next year shows an increase of 4%.
“In the second half of the year, with COVID behind us, the economy not going into a recession, the prospect of lower interest rates and people coming back to work in the office, companies realized it was time to make a commitment,” said Bill Rudin, whose family real estate owns 14 office buildings in Manhattan.
In June, Blackstone not only renewed its lease at Rudin’s 345 Park Avenue building, it took another 250,000 square feet, giving it 1 million square feet in the tower.
Problems remain for older and less desirable buildings — often referred to as Class B and Class C — many of which are being sold for much less than they were purchased for. Others have defaulted on their mortgages. But the data shows a market that is improving, not imploding.
A little more than 33 million square feet was leased last year, the highest total since 2019 and 22% more than the previous year, according to the real estate brokerage Colliers. The percentage of vacant space dropped to a little over 16%, the lowest since 2022.
Downtown saw a decline in vacancy despite very little leasing activity because conversions to residential use are reducing the amount of space, which is legally and financially easier to do in the area’s older buildings. More than 3.5 million square feet of office space was removed from the market last year for conversions, as the area’s vacancy rate dropped from 20% to 18.8%.
In Midtown, companies are focused on the best office buildings — called Class A or trophy. Colliers says that Class A buildings accounted for 80% of all the new leases despite accounting for only two-thirds of all office space.
Companies that have delayed leasing decisions and whose leases expire in the next two years could face sharply higher rents.
New buildings expected to open this year and next will add 2.5 million square feet of office space, but 79% of the space has already been leased, according to the real estate firm CBRE.
“There is going to be a crunch over the next two years,” says Mary Ann Tighe, CEO of the brokerage firm’s New York Tri-State Region.
The average annual asking rent in Manhattan is $73 a square foot, but Class A buildings get more than $100 a square foot — with 28 new leases last year commanding rents higher than $200 a square foot.
New buildings need to obtain average rents of $200 a square foot to be financially feasible, Tighe says.
The Manhattan skyline from the East River, April 25, 2023. Credit: Ben Fractenberg/THE CITY
The doom loop was probably never a serious threat to the city. Comptroller Brad Lander produced a study in 2023 that showed that even a 40% decline in the value of office buildings would cost the city only $1 billion a year or less than 1% of the budget. Office buildings pay about $8 billion in property taxes a year.
Last week, the city’s Department of Finance said that the market value of all commercial space will increase by almost 4% for the fiscal year beginning July 1, to $339 billion — more than the pre-pandemic peak of $332 billion and far above the pandemic low of $275 billion.
(Total market value will surpass $1.5 trillion for the first time, reaching $1.579 trillion, a 6% increase driven by a major rise in residential buildings).
But the city’s assessments are very aggressive, especially for buildings being sold for less than they were purchased for or in default on their mortgages, says Benjamin Williams, a specialist in real estate taxes at the law firm Rosenberg & Estis.
For example, last year the Wall Street firm Morgan Stanley sold an office building at 2 Park Avenue for $357 million, or $162 million less than it paid for it in 2007. But its assessment for next year is $260 million compared with $225 million in 2007.
“So it’s gone up in assessment but down in sale price in the real world,” Williams said, leaving it vulnerable to a challenge. Last year, about 57,000 owners of all types of property appealed their assessments and the potential bill is growing.
The Annual Certified Financial Report issued by the comptroller’s office in September showed the potential liability from assessment challenges at $1.6 billion, a record. Pending refunds of $555 million were also at a record.
Despite that risk, New York’s continued allure for financial and professional service companies suggests the city will be able to count on a strong office building tax base.
In 2022, Ken Griffin announced his hedge fund would abandon Chicago, where it was headquartered, as he fought with city and state Democrats over taxes and crime rates. He moved the headquarters to Miami but a significant part of the staff was relocated to New York.
Earlier this year, Citadel, Rudin and Vornado unveiled a plan to build a 1.8 million square foot, 62-story tower at 350 Park Avenue, which will house some 6,000 workers, most of them from Citadel.
In the meantime, Citadel leased 500,000 square feet at 66 Fifth Avenue, taking 20 of the building’s 39 floors.
The new tower represents “continued efforts to energize Midtown Manhattan as the world’s most important business address and an economic engine for working-class New Yorkers,” Mayor Eric Adams said when the new tower was announced.
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