Why It Matters: Office buildings tell the story of New York City’s economy.
Before the pandemic, office buildings drove a significant share of the city’s economy. More than 1.5 million employees worked out of New York City offices, often commuting into the city from the boroughs outside Manhattan, New Jersey and Connecticut, and spent money on food, at retail shops and on entertainment like Broadway shows. It is the largest office market by area in the world.
Private-sector workers in office buildings make about double the average annual salary than everyone else, according to the New York State Comptroller, underscoring their significance to the city’s economy.
That entire ecosystem collapsed during the early months of the pandemic as office workers shifted to remote work. Three years later, it has been slow to recover as remote work remains popular, causing companies to reduce their office footprints. That retreat has led to high vacancy rates.
Background: This vacancy crisis is worse than the previous era of decline.
The current commercial real estate downturn shares similarities with previous declines, including in the early 1990s, after the Sept. 11 attacks and during the 2008 financial crisis. But this current drop has a new twist: The lower demand for office space appears permanent, analysts say.
This is terrible news for the city. Office buildings are vital to New York’s economy for another reason: Their property taxes supply a chunk of New York City’s annual revenue. In the city’s budget, about a third of its revenue, or $31 billion, comes from property taxes, according to the city; commercial buildings, including offices, account for about 40 percent of total property-tax revenue.
As office use has decreased, so has the value of the buildings, resulting in New York City collecting smaller tax revenues since the start of the pandemic. A continued decline in office use could put more strain on the city’s budget.
What’s Next? One idea is to cover offices into homes, but it will be hard.
Like everyone else, office landlords are facing rising interest rates, which significantly drive up costs in an industry largely financed by debt. Some economists have expressed concern that commercial real estate, walloped by vacancies and now higher interest rates, is in a precarious position.
As vacancies linger, New York City, as well as other municipalities, have floated the idea of converting some buildings into residences. But, while it may sound simple and appealing, developers say that the cost is significant to convert an office building into apartments or condominiums.
Developers say that residential conversions are not impossible but that the city would need to amend zoning laws and the state would need to provide tax incentives.