New York Nonprofits’ Office Footprints Could Shrink Amid Federal Cuts

The federal government’s determination to cancel contracts and slash funding wherever possible is likely to have a devastating effect on nonprofit organizations in New York.

Exact figures are difficult to calculate due to how much is changing in such a short time. But prominent examples are easy to find in just the two months since the so-called Department of Government Efficiency began a severe cutting spree.

New York State recently lost over $400 million in federal funding from the U.S. Department of Health and Human Services that was designated for various health agencies and programs. New York City lost $80 million that the Federal Emergency Management Agency took back. And The Guardian recently reported that Farm School NYC, which trains New York City residents in urban agriculture and depended on the U.S. Department of Agriculture for a significant portion of its funding, had a $300,000 grant terminated, killing numerous programs.

With losses on this level across the nonprofit ecosystem, it’s virtually impossible to imagine that commercial real estate won’t be affected in the form of lost tenants, as some nonprofits simply won’t be able to continue, all or in part, without crucial federal funding.

“Federal funding cuts to nonprofits could disrupt parts of the city’s commercial market,” James Whelan, president of the Real Estate Board of New York, an industry lobby, said in a statement provided to Commercial Observer. “We have seen steady leasing activity from this sector through the post-pandemic recovery, and it would be unfortunate if that upward trajectory was interrupted.”

Jeffrey Gural, chairman of GFP Real Estate, provides numerous nonprofits with below-market-rate  rent in some of his buildings. Gural is already seeing the effect of the federal government’s cuts firsthand.

“We had one tenant that went out of business that occupied 12,000 square feet and had a contract with the federal government to do research on pandemics,” said Gural. “When I leased the space to them, I figured they would be a growth tenant because I thought people would prefer not to go through another pandemic. We signed a 10-year lease to build the space and paid the broker, and they only lasted two years.”

The tenant went out of business after the federal government canceled vital contracts, and the tenant handed the keys on its space back to Gural.

With so many funding cuts hitting organizations so quickly, many nonprofits are still scrambling to figure out how and if they can survive, and what changes need to be made if they do.

But early indications have shown that, over time, experiences like Gural’s have the potential to become far more common, dealing New York office owners another blow. And that blow is being felt just as much of the sector seemed to be turning things around from the dark days of the pandemic and the widespread embrace of work from home.

The consequences could be stark. According to figures provided by Cushman & Wakefield (CWK), there are approximately 27,000 nonprofit organizations in the New York City metropolitan area, and one in eight jobs in the city are in the nonprofit sector. Exact figures have been hard to come by, but Cushman estimates that roughly 11 to 13 percent of commercial space in New York City is occupied by nonprofit organizations.

Carri Lyon, a real estate attorney, executive managing director at Cushman & Wakefield and co-chair of the company’s national not-for-profit practice group, notes that a landlord allowing a struggling nonprofit to simply walk away from a lease is not the norm, no matter how much funding it loses.

“You can’t just toss the keys back and walk off unless you want to end up in court. That’s something that’s been a big source of confusion,” said Lyon. “This came up a lot during COVID where tenants thought, ‘I’m not going into the office, so here are my keys.’ You’ve got a binding lease. They’ll come after you if you have money left, and they can tell, because your tax returns as a nonprofit are public.”

Lyon advises nonprofits she works with that, in the event of funding cuts, they should have an honest talk with their landlord about their situation.

“If they’re having trouble, they should talk to the landlord or have us go with them,” said Lyon. “During COVID, landlords got really good at, ‘Let me see your books. Show me how you’re hurting and what you’re doing about it.’ ”

Lyon said that while landlords are not obligated to help the nonprofit even then, signs of genuine hardship and well-thought-out efforts to deal with them head-on increase the likelihood that the landlord might give the organization a break.

“Landlords aren’t obligated to do anything,” said Lyon. “But some will give a rent break and tack it on to the end of the term. And others will say, ‘I’m sorry, but it looks to me like you’ve got plenty of money, and we’re all taking a hit.’ The worst thing a nonprofit can do is to just walk off and say, ‘Let my lawyer deal with this.’ ”

That said, while the situation for nonprofits seems to range from concerning to fatal, not all have been similarly affected … yet.

“One of our clients provides support services for migrant youth, including housing, and none of those contracts have been terminated,” said Stephen Powers, co-founder of Open Impact Real Estate, a commercial real estate services company that specializes in mission-driven organizations. “And they’ve actually extended some of those contracts because they’re not ready to recast them.”

Powers also noted that the funding sources for many of these types of organizations provide hope that some organizations will be just minimally affected.

“Most New York City nonprofits are being funded from a combination of city and state sources, and then some federal, but the majority is state and city,” said Powers. “I’d say over 90 percent of funding is coming from those state and city sources.”

But, according to Gural, even a heavy reliance on state and city funding might not be the safe haven it sounds like for nonprofits.

“There’s a ripple effect,” said Gural. “The first thing I ask when I call a big nonprofit is, ‘Do you get any federal money?’ And I pray that they’re going to say no. And a lot of them don’t get any federal money. But, if they’re getting state and city money, and then the state and the city have their funding cut, then they will have to cut their budgets.

“So we’re in a period right now where no one knows what to expect. People who have federal contracts are the first group to tell me they’re in trouble, but it’s possible that the next group will be those who rely on state and city money, who may find out that the state and the city are cutting back because they’re getting less money from the federal government.”

Gural also notes that nonprofits with New York City office space are likely to work out of Class B and other commodity buildings, which have not enjoyed the return to high demand that Class A buildings have in the flight to quality of the past few years.

“Most nonprofits are in B buildings because it looks bad if I’m a potential donor to a nonprofit and I go to meet them in their office, and it’s a building on Park Avenue or in Hudson Yards,” said Gural.

So if the time comes when funding cuts lead to a nonprofit exodus of sorts, commodity buildings will, in an eerie reminder of pandemic times, bear the brunt, leaving them once again with an overstock of empty office space.

That said, with so many cuts happening so quickly, we are still in the beginning stages of seeing how this all plays out — for nonprofits and for the office sector alike.

Demonstrating that not all nonprofits see their future as having been compromised, Open Impact’s Powers mentions an educational organization he works with that has been planning to purchase a 40,000-square-foot building.

“Their board doubled down,” Powers said. “They said, ‘This is a very long-term plan, and these short-term changes are not going to have an impact on our long-term plans.’ ”

But, overall, the forecast for nonprofits seems potentially bleak in the months and years to come, as many have already experienced cuts, and others wait to see if and when the hammer will drop.

“There are a lot of nonprofits that are on hold right now,” said Gural. “Anyone who is thinking of getting a job in the nonprofit world is in trouble. I’ve talked to some of the hospitals and colleges, and no one is hiring. Everybody’s on pause and waiting to see what happens, because nobody knows what the real bottom line is going to be.”