More Turbulence Expected for NYC’s Real Estate Market in 2023

Commercial real estate sales are anticipated to decline 12.8 percent in that time, while residential sales will likely decrease 18 percent, according to the report.

While the IBO expected commercial and residential sales to rise to a combined value of $112.5 billion by the 2025 fiscal year, the cooling real estate market will hurt city tax coffers and will dash hopes of an office recovery in fiscal year 2023, which runs from July 2022 to June 2023. 

Office demand could face “no growth or negative growth for a considerable period into the future,” even if employees worked from home only part of the time — which could further shrink office property values, said George Sweeting, IBO’s acting director.

“If hybrid becomes the new normal … the value of those buildings will go down, because people are not going to pay the rents that they were paying when they needed the space five days a week,” Sweeting said. “If you need less space, or you don’t need it all the time, there will be adjustments. I don’t think we’re quite there yet, to be certain that that’s what’s going to happen, but that’s a big risk.”

The IBO forecasts Manhattan office rents to increase slightly in the next three fiscal years, from an average of $76.4 per square foot in 2023 to $79.1 per square foot in 2026, but high availability will continue to keep office rents below the 2019 level of $89 per square foot, according to a separate analysis from New York City Comptroller Brad Lander. 

Roughly 124 million square feet of office space was available to lease in the city as of the second quarter of 2022, an improvement from the 127 million square feet available in the same period last year but a 46 percent increase from the amount available in 2019, according to Lander’s report. 

Younger tech firms, which helped buoy Manhattan’s office market in the first 18 months of the pandemic, won’t save the market this time as job losses and hiring freezes likely to continue next year are anticipated to curtail leasing in the sector, according to the comptroller’s report. And a wave of large firms — including Amazon, Meta, Twitter, Lyft and Yelp — have already cut back on space or begun to reevaluate their real estate footprints.

In a glimmer of good news, the IBO found that it was unlikely that medium  to large commercial tenants had ended their leases early, because commercial rent tax revenue remained strong through the pandemic and is expected to increase by 2.7 percent, to $900 million, from fiscal year 2022 to 2023. And even if they’re not in the office, tenants are still likely paying their rent, Sweeting said — despite all those suits for unpaid bills.

“We have not seen a significant increase in delinquency in commercial properties,” Sweeting said. “That’s an indication to us that the primary tenant may have put the space on the sublease market. They may not be using the space, but they are at least making their rent payments to their landlord, and presumably that’s making it possible for the landlord to go in and continue paying their property taxes.”

Unlike the office market, the hotel sector is expected to thrive in the next three years thanks to a surge in tourism brought on by pent-up demand for travel, according to IBO forecasts. 

The IBO predicted hotel occupancy tax revenue to reach $514 million for the 2023 fiscal year, a 49 percent increase over the 2022 fiscal year’s revenue. More than 3.1 million travelers booked hotel rooms in the city between September and October, compared to just 1 million visitors in any given month in 2020, according to the comptroller’s report.

Celia Young can be reached at cyoung@commercialobserver.com.