What REBNY’s Doing to Help an Industry That’s Been Knocked for a Loop

Tenants used to experiencing sticker shock when shopping for apartments are encountering a housing market that bottomed out to levels not seen since the 2008 recession. Companies searching for a new headquarters can choose from enough empty office space to fill Downtown Boston. Restaurateurs can’t go more than a block or two in Manhattan without finding a fully built-out retail property available for a song.

The glut of inventory and historically low prices has started to collide with increased demand in the first half of the year. All signs point to a hot broker summer. 

“This surge in broker confidence is happening alongside encouraging signs in our city, the overall economy, and particularly the real estate market, where commercial and residential market activity is exhibiting clear signs of momentum,” said James Whelan, president of the Real Estate Board of New York, which tracks broker confidence.

Brokers across the industry rated their confidence about the market in the first quarter a 6.66 out of 10, a 53 percent increase from the previous year, according to a REBNY quarterly broker index. Brokers were even more optimistic about the future, rating its rosiness a 7.71, the highest figure in six years. 

But the most important indicator of future economic activity is New York’s vaccination rate. As of early June, 54 percent of the city’s population above the age of 18 had at least one dose, and 66 percent were fully vaccinated, state figures show. The number of new COVID cases on average has dwindled to fewer than 250 a day, with only 19 hospitalizations on average, city records show. Daily deaths have been in the single digits lately.

“The public health data is great and that’s driving a lot of renewed hope that the city’s recovery can come back in a really positive way, as we see vaccination numbers go up and case numbers go way down,” Zach Steinberg, REBNY’s senior vice president of policy, said. “We see data that supports the residential and commercial market bouncing back.”

The real estate industry will have no shortage of challenges in the coming months, but its leaders are focused on encouraging employers to bring their workers back to the office, removing regulatory barriers to reopening, curtailing hotel taxes to encourage tourism, and ensuring that the city remains a safe place to live and visit.

REBNY is focusing its energies on these efforts in different sectors. Each sector faces its own set of challenges, but the powerful trade group is confident in a turnaround.

Office

The office sector presents a particularly prickly challenge for REBNY and its members. That’s because there’s so much uncertainty still about whether, and in what volume, companies and their employees will return to the workplace. 

Workers aren’t likely to come back to the office all at once. A third of Manhattan employees don’t expect to return after Labor Day, a Partnership for New York City survey found. And local unemployment remains troublingly high, at 11.4 percent in April.

Those who come back earlier may find redesigned workspaces and hybrid schedules to accommodate the transition from work from home. Amazon, Google, and other firms are offering staff the option to come in three days a week. 

Meanwhile, the city’s vacancy rate for commercial property was 17.3 percent in May, its highest level since 1993, according to Cushman & Wakefield (CWK). In Midtown Manhattan, where workers emptied out last March and slowly trickled back this spring, the figure is even higher at 18.1 percent. The areas around Grand Central and parts of the Financial District have vacancy rates above 20 percent.

Even more office space could be available over the next six months. There’s about 5.5 million square feet of sublease space that tenants are currently hoarding for their own use. Once it becomes available, the vacancy rate could soar above 21 percent, a record for Manhattan. By then, rents could finally start to fall.

“Over the next six months, there will be pent-up demand in terms of leasing and we expect vacancy to increase even further,” said Lori Albert, Cushman & Wakefield’s director of research. “We think asking rents will come down, especially if more sublease space comes onto the market.”

On the bright side, touring activity has been up significantly, even if companies aren’t ready to pull the trigger yet. Lease activity has been particularly frenetic among Class B and C office space, older buildings in less expensive parts of the city. 

Prices have been falling about 20 percent since the beginning of last year in more desirable neighborhoods like Gramercy, Chelsea and Flatiron, commercial brokers say. That’s allowed tenants to look at setting up workplaces in areas that had been unaffordable before the pandemic. 

Brokers like Douglas Elliman’s Louis Puopolo have had to educate office property owners about how to make deals with step-ups and other concessions in order to lure commercial tenants in a buyer’s market.

“A lot of landlords in the last 20 years have been very uncomfortable extending beyond what they’re used to doing to make a deal happen,” Puopolo said. “What we’re seeing is distress on the landlord side, which provides an openness to make a deal happen that they wouldn’t normally make.”

Housing

The deals for homes and apartments have been even better than those for workplaces, spurring a record number of signings.

Tenants signed 9,491 new leases in Manhattan in May, up 333 percent from the same period a year ago, when the city was still under an extended stay-at-home advisory. That follows the 9,087 leases that tenants inked in April, a 4.4 percent rise, according to a Douglas Elliman May 2021 rental report.

Prices are ticking upward, too. The median rent in May for Manhattan apartments that include concessions was $3,037, up 8.8 percent from the previous month, when it was $2,791, the largest monthly increase in about a decade. But that’s still 11 percent below the median cost of an apartment in May 2020, when the city’s stay-at-home advisory kept people from touring homes in person.

There’s still plenty of supply for anyone looking. In May, there were 19,025 apartments available, down 26.5 percent from January, when there were 25,833 units listed. But apartments are staying on the market an average of 107 days, and Manhattan still had a vacancy rate of 7.59 percent, nearly five times as high as the rate two years ago.

That could change this summer, now that Gotham is almost fully reopened and people are returning to the city. REBNY has helped speed that reopening along through advising its member firms on how to safely do so themselves and lobbying government officials to move things along. The sooner that some form of normalcy returns to New York, the sooner the housing market will pick back up from the perspective of landlords and developers, a key REBNY constituency. 

“It seems like we’re hitting the bottom of the rent fall and the reverse of that fall is an indication of a healthier market,” REBNY’s Steinberg said. “Younger renters are looking to sign leases and there’s quite a bit of optimism in the industry [that] we’re heading in the right direction.”

The downward pressure on rents is leading to more leasing activity. Residential broker confidence rose 82 percent to its highest mark since 2016, REBNY officials said. 

Robert Knakal, chairman of investment sales at JLL (JLL), has noticed that young people are taking advantage of lower rents to move from the suburbs or the outer boroughs into Manhattan, or within their neighborhoods to find a better deal. As rents rebound, though, the deals will largely disappear and the number of multifamily building sales could increase to boot — another advantage for landlords.

“We’ve seen a lot of leasing activities, and my clients are reporting they are renting a lot of apartments because values have been down,” Knakal said. “We think that the volume of sales will pick up as we go through the year.”

Retail

The housing market might be heating up, but retail is still lagging far behind.

Rents fell in each of Manhattan’s 17 major commercial corridors last year, with the average asking price per square foot down 25 percent from the previous year, according to a REBNY fall 2020 Manhattan retail report. Eight areas, including SoHo, Flatiron, Madison Avenue and Fifth Avenue, reported lows not seen in a decade.

But the decline in prices has allowed some tenants to enter Manhattan’s luxury corridors for the first time ever. This is a trend that REBNY supports, even as it tries to stem the impact of pandemic-related retail closures.

“While falling rents are an ongoing sign of the challenges facing the industry, the current environment also presents opportunities for new retailers to enter the Manhattan market or for existing tenants to lock in low rates and pursue flexible rent agreements,” Whelan said.

That’s especially true for restaurant groups and chefs, who hadn’t contemplated opening a flagship in Manhattan because of its exorbitant prices before the pandemic. But landlords of shuttered bars and restaurant spaces have been dangling concessions and lowered rent for months. In areas like the Upper East Side, owners have been deluged with multiple offers.

“You have veteran restaurateurs looking to open new spaces and first-timers looking to get into the market, because there are so many fully vacant restaurants and landlords looking to make deals,” said Andrew Rigie, executive director of the New York City Hospitality Alliance, which represents restaurants and nightlife venues. “You have opportunities for every walk of life to open a bar in a way they didn’t have opportunity to do before the pandemic.”

But Rigie doesn’t want policymakers to forget about business owners, who went into debt over the past year or who were forced to close. He’s called for the replenishment of the federal Restaurant Revitalization Fund to help small business owners pay back rent and other debts, so they can enjoy the city’s restaurant renaissance.

The Real Estate Board of New York is lobbying for other measures to help some small businesses reopen more easily. One proposal would eliminate a special permit for gyms, health clubs, yoga studios and other spaces where physical activity is taking place that would otherwise force them through a lengthy approval process to submit their financial statements and a detailed floor plan.

“What has been frustrating about that is that these types of businesses are often e-commerce and represent a large share of growth of retail establishments in the city,” a REBNY spokesman said.

The zoning amendment is under review at the Department of City Planning through July 26.

Hospitality

Hotels and entertainment venues were among the first businesses that closed at the start of the pandemic and could be the last to recover completely.

Hotel occupancy throughout the city remains well-below pre-pandemic levels at 59 percent (a hotel industry rep said the mayor’s figure of 72 percent was incorrect), due to the lack of business travel and international tourism. Corporate travel may not come back for years, and city tourism officials don’t believe international tourism will rebound until 2025.

More alarmingly, the average rate for hotel rooms in the city is down $125, from $219 in 2019 to $94 through May of this year. Hotels have lowered prices to entice tourists eager to leave their homes and visit the city, but revenue loss has piled up, and the city’s hospitality industry shed an estimated 257,000 jobs during the pandemic›s first 10 months. 

Mayor de Blasio has called for suspending the hotel occupancy tax rate through the summer to spur tourism. Hotel industry leaders, including REBNY, want the city to extend the tax reprieve through the fall, when tourists are more comfortable traveling and will be more likely to visit.

“Our industry is subject to immediate changes, like lifting barrier-to-entry for foreigners,” said Vijay Dandapani, CEO of the Hotel Association of New York City. “We’re in a cash flow situation that’s still negative, and domestic tourists are still coming back.”

Major events that draw tourists are starting to be scheduled over the next six months. The U.S. Open, which lasts for two weeks in Queens in early September, is a go. Broadway will welcome fans back to their air-conditioned theaters on Sept. 14. And officials at the United Nations are discussing holding their fall session in person, Dandapani said. 

Those who can’t wait to sip a frozen cocktail and chow down on some volcano nachos can head to Jimmy Buffett’s Margaritaville in Times Square, which opened on June 10. The hotel and resort even has a synagogue on the ground floor.

“One of the main promoters said, ‘As soon as you get out of a religious space of worship, you want to go celebrate, so all you need to do is get on the elevator,’” Dandapani said.