The State of the New York City Commercial Market: The Impact of COVID-19

The State of the New York City Commercial Market: The Impact of COVID-19

We have all witnessed the immense changes catalyzed by the rise of COVID-19 and watched the world we once lived in rapidly adapt. It is as if we have had a decade of innovation in just one year. The commercial real estate industry has been especially impacted and Prop Tech has provided solutions for many of the issues posed by COVID-19. As it has become more difficult to execute tours in person, virtual tours and 3-D mapping have become increasingly popular and tech firms like Matterport have experienced increased user activity. Additionally, it has become more difficult to meet in person, which has led to a rise in virtual notary services like DocuSign, Adobe Sign and Notarize.

As firms navigate governmental restrictions and take efforts to ensure the safety of their employees, occupancy management software such as OpenPath has eased the transition back into the office. In addition, with the rise of the Delta variant of the virus, many states have reissued mask requirements, which may have an impact on the return of many employees to their offices.

COVID-19 has changed the entire world, but not all cities have been shaken upquite as much as New York City. At the Anton Group, we as a leading brokerage team have had front-row seats to the toll taken by the New York City commercial real estate industry. From office to hospitality to multifamily, we have seen all asset classes struggle in these uncertain times. As a group that operates within the greater Marcus & Millichap network, we have noted that this period has not only been hard on commercial real estate in New York City, it has impacted the industry throughout the entire country. I personally have over 25 years of experience in commercial real estate in New York City accounting for more than $18 billion worth of transactions, and I have never quite seen a period of uncertainty such as today. In addition, the projected increase in the Capital Gains Tax rate and the possibility of the increase being retroactive to April2021, has a further effect on market clarity.

Office

Today, there are two major trends shaping the office transaction market in New York City. First, there is a significant rise in the interest by owners in creating new ground leases. Many long-term owners would like to retire, yet do not want to pay capital gains on assets they have fully depreciated. By structuring a long-term ground lease, owners can facilitate long-term cash flow for their families, and potentially negotiate a lump sum upfront payment which can be structured in a tax efficient matter. In many ways, these transactions are similar to low-cost financing for the new developer and enable long term owners to defer taxes, relinquish management duties, and provide for the future enhancement of their office buildings.

Another interesting change is the strong technology sector leasing growth.

By structuring a long-term ground lease, owners can facilitate long-term cash flow for their families, and potentially negotiate a lump sum upfront payment which can be structured in a tax efficient matter

In 2019, New York City experienced a 148 percent increase in the number of new leases signed by tech firms from the previous year. Although it is commonly thought that the financial services industry, led by the big banks, drive office leasing in New York City. Technology tenants are quickly taking over. Looking into the future, there is much uncertainty regarding the prospects of working from home. Several industries have experienced success in shifting to a work-from-home model, while others are increasing wages and benefits to attract employees to return to the office. Although some large firms like Goldman Sachs, JPMorgan, and Apple have announced that employees must return to the office, others are fine with their workers remaining at home indefinitely such as Twitter, Zillow and DropBox.

Hospitality

Perhaps no asset class has suffered the impact of COVID-19 greater than hospitality. Tourism has declined since 2019, when New York City hosted 65 million tourists. That number plummeted in 2020 and has come nowhere close to its previous peak as of August 2021. Needless to say, tourism and more importantly, international tourism accounts for billions of dollars of revenue for the food and beverage industry and the hospitality industry.

Another radical change in the New York City hospitality market during the past year has been the closure of dozens of hotels, accounting for perhaps as many as 20,000 keys. These properties are being converted to alternate uses including rental apartments, office space, and even homeless shelters.

During that same period, 12-15,000 new keys have been introduced to the market, which has countered the closures and reduction of supply in hotel rooms. This change in supply has represented a net benefit for the industry due to the increased quality of the rooms entering the market compared to those which have been removed. 2021 has seen hotel values increasing from the depths of the 2020 shutdown. Moving forward, we at Marcus & Millichap are hopeful that the Delta variant of COVID-19 will subside and the hospitality market in New York City will rebound.

It is important to take note that Prop Tech is also affecting the hospitality industry. For example, Vivid Hospitality Solutions offers room control services that save energy as well as anti-bacterial switch panel coating which lessens the spread of COVID-19.

Multifamily

The New York City multifamily rental market was tremendously affected by COVID-19, although the outer boroughs maintained stronger rental levels than Manhattan. Currently, young people are moving back to Manhattan, Brooklyn, and Queens. The hottest neighbourhoods are Chelsea, Tribeca, Williamsburg, and Long Island City. The Financial District and Harlem have been slower to attract new leasing activity.

There are several reasons why there are very few new multifamily rental projects in the pipeline, such as increased government regulation, scarcity of land, and lack of attractive financing. Because of this lack of future supply, we project that rental rates in New York City will quickly rise over the next two to three years.

The multifamily market has also been impacted by recent advancements in Prop Tech. One firm, Flex, offers more attractive payment options for rent obligations. It allows tenants to split monthly rent payments into smaller, stress-free payments made throughout the month. There are many other companies that assist owners streamline management, billings, etc.

The massive global innovation which we have witnessed during the past year has clearly impacted commercial real estate. New Prop Tech has not only affected office, hospitality, and multifamily properties, it has changed the way that all asset classes are bought, sold, rented, leased, researched, managed, and toured, and it has been mutually beneficial. We at Marcus & Millichap are hopeful that the New York City commercial real estate market will rebound from the low point of the COVID-19 bear market and are excited about the increasing role that Prop Tech will play in our industry. We truly have seen ten years of change during the last 18 months.

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