What has been the impact of hybrid working on the market?

Many companies are still struggling to finalise their corporate strategies amid an uncertain economic environment. While some desire high-quality office spaces to accommodate employees returning to the workplace, office utilisation rates remain lower than pre-pandemic levels. With in-office mandates ranging from two to four days per week, overall visitation rates are between 65% and 70% of pre-pandemic levels, depending on the quality and location of the premises. The flexibility of hybrid work has sparked a heightened focus on wellness and technology in office environments. As a result, while space per employee may decrease, offices are becoming more efficient and attractive to top talent. We expect this trend to continue in the foreseeable future and utilisation rates to improve as a result.

What are the current office take-up trends?

Office leasing demand is down 5-10% on average levels. In 2023, 56% of take-up came from renewals, as most leasing remains expiration-driven given continued uncertainty. The market remains bifurcated, however. Well-located, highly amenitised prime assets, especially those close to transit in the central business district, are most desired, while excess sublease and commodity space are being left behind.

Deep-pocketed tenants have secured the prime spaces. Financial services companies, for example, have been the most active in regard to examining their business working models and executing leases against those plans.

Given the variation in return-to-office policies and their approach to hybrid work, there has been much talk about tenants taking on less space. However, looking at financial services transactions of 50,000 square feet (4,645 square metres) and more since Q4 2021, 57% of companies have opted to stay in place and 43% executed new leases or relocations. Of the relocations, 82% actually expanded their real estate footprint; only 18% downsized. For companies where cost is less of an issue, it is all about moving into better quality buildings. Moving into 2024, ESG and LEED certifications are becoming increasingly important to some occupiers.

How is the stock upgrading to green standards progressing?

The US as a whole is way behind Europe when it comes to environmental regulations on both existing and new office supply. For New York, however, starting this year, Local Law 97 will set limits on the greenhouse gas emissions of covered buildings. The law will help New York City reach the goal of reducing greenhouse gas emissions from buildings by 40% by 2030. This law targets some of the city’s biggest emitters – about 50,000 properties that are larger than 25,000 square feet (2,322 square metres). Although nearly 90% of these buildings are in compliance with the regulations for 2024, the new law requires them to have reduced emissions by 80% by 2050. This is a key component of the Climate Mobilization Act (CMA) 2019.

New developments, which have slowed down of late in New York City, will need to focus on the above standards. When it comes to oversupply in the office market, however, it’s the older, functionally obsolete office buildings, with chronically high availability and vacancy levels, that are of most concern. Upgrading or repurposing these buildings will be essential.

How are the demand and supply dynamics likely to evolve over the next decade?

Office-using employment has historically been a leading indicator of occupied office space, though that has not been the case, since the start of the Covid-19 pandemic and the increased prevalence of hybrid work. As of the end of 2023, New York metro office-using employment, which had fully rebounded from its pandemic-era drop at the beginning of that year, has now declined in a majority of recent quarters and ended down 1.3% annually. Meanwhile occupied office space increased in Q4 2023 over the quarter, but remains down annually by 1.2%.

More people have been returning to the office when it comes to prime properties: 72%, versus 64% for lower-quality stock. Office rents have been more stable for prime properties, with vacancy rates lower, while the opposite has held true for commodity products. The longer the commodity spaces sit empty, the greater the need for repurposing.

What are the challenges and opportunities in the repurposing process?

Although there has been some office-to-residential repurposing in Downtown Manhattan, Midtown’s larger floor plates, combined with zoning, and cost issues make repurposing more challenging. However, In August 2023, New York City mayor Eric Adams and the Department of City Planning launched a plan to convert vacant offices into housing. Dubbed “City of Yes”, this programme will fast-track office-to-housing conversions and offer streamlined permits, incentives and technical support. Additionally, the Midtown South Mixed-Use Plan aims to update zoning for a vibrant live-work community. The Manhattan Commercial Revitalization Program (M-CORE), which was launched in May 2023, offers tax benefits to renovate certain commercial buildings, making 10 million square feet (929,030 square metres) more attractive for businesses while also enticing workers back into the office.

Watch a recap of our latest Offices In Equilibrium: What Does It Take? webinar.