Are Downtown Offices Too Expensive?
When the pandemic comes to an end, the office market probably won’t be the same. We’ve seen so many changes in behavior over the last couple of years that the idea that we’re going back to 2019 seems out of the question. For one thing, workers don’t look like they’ll accept it.
Office vacancy rates are climbing to their highest point in decades. Despite overall rising retail prices, owners are struggling to find high-quality tenant firms to inhabit them.
Partly, the problem here is remote work. Since the various COVID-19 shutdowns, employees and bosses have gotten a taste for staying at home during the week. Having to get on the train or subway every morning and commute to work just isn’t fun. And now it’s gone, they realize what a load it is off their minds.
Of course, when there’s excess supply and not enough demand, what happens? Prices fall, of course. And that’s precisely what we’ve been seeing all over the country.
In Manhattan, for instance, the value of office rental spaces has fallen by more than 25 percent. Property owners are struggling to find tenants for their buildings because of the profound changes we’re seeing in working practices. In turn, estimates suggest that this has led to a fall of around $1 billion per year in tax revenues, something that is hitting the city’s coffers hard.
What’s more, it’s not just the small fry who are changing their policies. Many of the largest companies in the world seem to be moving towards a permanent remote model, one they hope will allow them to access talent from the wider global labor market. The Ford Motor company, Salesforce, Target and even JPMorgan Chase all say that they’re going to give up their expensive office rentals because of the impact of technology. All that downtown real estate seems like it might be obsolete. Incredible when you think about it.
Of course, many players in the industry are still optimistic. Yes, they say, office rentals are down right now, but that’s because of the impact of the pandemic. There’s no fundamental reason, they say, that demand should remain depressed long-term. It’ll bounce back, just as it always does.
But, of course, things have changed. Over the last couple of years, the world fell in love with the cloud. What’s more, firms such as Physical Address, are negating the need for expensive downtown office space. Firms can now get their mail delivered to a third-party address in the middle of town but only pay the mail forwarding fees.
Across the country as a whole, the office vacancy rate is approaching 17 percent. Even as vaccinations are allowing millions to return to work, that doesn’t seem to be happening. Companies are either going fully remote or hybrid, both of which imply radically reduced requirements for office space.
What’s more, if these company policies work, the glory days of skyscraper-studded city skylines could be behind us. America may start looking more like Europe, not because of stagnation, but because of technological progress and social change.
