DiNapoli: NYC Office Market Will Take Years to Recover from Pandemic
Real Estate In-Depth | October 14, 2021
NEW YORK—The COVID-19 pandemic wiped out years of growth in New York City’s office sector, erasing nearly $28.6 billion in market value and more than $850 million in property taxes in City Fiscal Year (FY) 2022. Timing its recovery is an open question, however, as employers continue to offer work-from-home options, according to a report released on Oct. 7 by State Comptroller Thomas P. DiNapoli.
“Midtown and the Financial District are two of the largest business districts in the world. Demand for space led citywide office sector property values to more than double in the decade before the pandemic,” DiNapoli said. “When the pandemic hit, companies shifted office workers to remote work, rents fell, and vacancies rose. I am optimistic for the sector’s recovery but it’s short-term future remains uncertain as employers assess future use of the space. The city should closely monitor trends in the sector and consider the future impact on tax revenues.”
Questions over the configuration of space and a potential uptick in per-worker square footage may take years to settle. The continuation of the pandemic, firmer changes to commuting patterns, increasing subleases and vacancies, and the return of demand for residential space are likely to influence conversations over the best use of physical space in the coming months and years.
The full market value of New York City office buildings, estimated at $172 billion in FY 2021, fell 16.6% in the FY 2022 final assessment roll, the first decline in total office property market values since at least FY 2000, reflecting decreased demand brought on by the COVID-19 pandemic. The city had 463 million square feet of inventory as of the second quarter of 2021, accounting for 11% of all office space in the nation.
Pre-Pandemic Job Growth Drove Demand for Space
New York City’s office sector reached a total of 1.6 million jobs in 2019, the highest level on record. Office sector employment makes up about a third of all jobs in the city, compared to a quarter in the rest of the state and the nation. In 2019, the sector contributed $705 billion to the city’s gross product, accounting for 66% of the city’s output.
Most office sector workers in the city were well paid, with an average annual salary of $183,900 in 2020. Even when excluding high earners in the financial securities sector, the average salary was $145,290. This is higher than the citywide average ($110,190) and much higher than the average for non-office jobs ($62,730).
In FY 2021 (assessed before the pandemic began), office property values reached $172 billion and billable values (the market value on which property tax is levied) reached $71 billion. Both had more than doubled over the prior 10 years. Office market values made up about 13% of total market values.
Office Space After the Pandemic
In 2020, office employment fell 5.7% while total employment dropped 11.1%. Many office workers shifted to remote work, with just 5% on-site in April 2020.
DiNapoli’s report found that average asking rents showed little change in the early stages of the pandemic, but began to fall significantly in the fourth quarter of 2020. By the second quarter of 2021, asking rents were down 4.2% from the prior year and vacancy rates were at 18.3%, a level not seen in over 30 years. The large volume of vacant office space has revived conversation about the conversion of some of that space into residential housing.
The office sector began experiencing measurable changes in demand in the second quarter of 2020 when Manhattan new leasing fell to 2.5 million square feet, 75% below the level one year earlier. Renewal activity fared better at 7.2 million square feet, a decrease of 15% from 2019.
Reduced demand for office space contributed to a 5.2% decline in overall billable values in FY 2022, the first decline in more than 20 years. Some of the city’s most expensive office properties dropped significantly. For example, the market price of the World Trade Center complex dropped by 23.1%.
In FY 2021, the office sector provided an estimated $6.9 billion in direct revenue in property taxes, real estate transaction taxes, mortgage taxes and commercial rent taxes. Property taxes from the office sector raise more than any other property type subcomponent (e.g., single-family homes or multifamily rental buildings). Office sector property tax collections alone surpassed the entire budgets of the city’s Sanitation, Fire, Transportation, and Parks and Recreation departments, combined.
Commercial real estate such as office and retail buildings account for an outsized share of tax collections because they are assessed at a much higher rate than residential properties. In FY 2021, office buildings accounted for 12.6% of the market value of properties on the assessment roll, but more than a fourth (26.2%) of the billable taxable values at $71 billion.
The city collected $1 billion in transfer taxes and $816 million in mortgage taxes in FY 2021, the second year of declines as a result of pandemic impacts. DiNapoli estimates that $216 million of these taxes were generated by office properties, less than half of the $461 million generated in FY 2020.
Office employment has remained steadier than overall employment and is expected to continue to grow, which is likely to support future demand for space. Multiyear leases extending into 2023 and healthier balance sheets of property owners have also provided some short-term stability in the office real estate market.
The city’s tentative assessment roll for FY 2023, to be released in January 2022, will provide further insight on the potential duration and magnitude of the impact on city finances.
DiNapoli urged the city to monitor the overall employment and real estate markets, including differences in submarkets, to deliberate carefully over its choices to influence office employment and space, and to ensure that policy decisions will mitigate negative impacts on tax revenue and the economy.