3 Trends Shaping the Commercial Real Estate Sector in NYC

The commercial real estate sector in New York City has come up against immense challenges in recent years. From the global pandemic to climate change, several threats have tested the industry’s resiliency unlike ever before.

Here’s a look at three of the most visible trends that are affecting the industry right now, and their implications for the future:

Demand for office space is dwindling.

The COVID-19 pandemic ushered in a new era of remote work in the U.S., forcing the closure of offices everywhere as employers shifted to fully remote or hybrid work schedules. Almost three years later, many people are still working from home. In a world where fewer people are working in traditional offices than ever, the commercial real estate sector is facing a crisis. Nowhere is this crisis more evident than in New York City, where entire floors of previously bustling office buildings now sit empty.

According to a 2022 study, remote work will only continue to exacerbate the “office real estate apocalypse” as tenant demand continues to shrink. Altogether, office space across the U.S. could lose $454 billion in value — a decline of 39 percent. New York City, the largest market for office real estate in the U.S., would see major losses. This dip in valuation will also have a ripple effect on other commercial properties such as retail and business real estate across the city.

Despite these projections, there are some positive signs for New York City’s office real estate. In 2022, the percentage of NYC office workers who had returned to a physical office rose from 38 percent in April to 49 percent in September. Subway ridership in the city has also increased, though that same month it stood at just 63 percent of the pre-pandemic level. Meanwhile, office vacancies are slowing beginning to fall. Again, however, the sector has clearly not fully recovered.

Should the demand for office space fail to further improve, owners of commercial real estate — especially older buildings — will need to make renovations and add amenities to make properties more attractive to tenants. Some developers are starting to consider how Class B and Class C office buildings can either undergo renovations to become Class A space, or even be converted to residential units.

Major companies are scaling back on commercial leases.

The falling demand for office space in New York City became particularly visible when several large companies decided to scale back their building leases. AECOM, a multinational construction consulting firm headquartered in Dallas, Texas, recently renewed its lease at 100 Park Avenue for the next decade, but decided to slash its square footage from more than 108,000 to just 45,000 square feet. Media giant BuzzFeed recently made a similar change by subletting the entirety of its 110,000-square-foot Park Avenue South office while setting up shop in a much smaller space elsewhere in the city.

Perhaps the biggest company to shed some of its space is Meta (parent company of Facebook), which leased more than 1.5 million square feet at three buildings in Hudson Yards in 2019. Bloomberg reported in late November that the company has decided not to renew its lease at two of the buildings, which represent a combined 250,000 square feet. Previously, Meta ended its lease at 225 Park Avenue South and nixed expansion plans for its 770 Broadway office.

Climate change is forcing changes across the sector.

According to the Impact By Design 2020 report from Gensler, almost 40 percent of all carbon emissions worldwide come from buildings. Cutting down on these greenhouse gas emissions is an important part of the fight against climate change, and New York City has begun taking steps to do just that.

The city contains around a million buildings that generate 70 percent of its carbon emissions, primarily via the use of fossil fuels to heat, cool, and light them. In 2019, the New York City Council took steps to minimize these emissions by instituting Local Law 97, which limits emissions from the city’s largest commercial buildings. The New York Times reported in August that “nearly all” of these buildings will be in compliance with the law by the January 1, 2024, deadline. However, as this date approaches, some owners are having to prioritize renovations so their buildings meet the new standards.

Buildings that fail to reduce their emissions to within the set limit will face substantial fines until they reach that goal. Any property exceeding 25,000 gross square feet will have to pay $268 per metric ton of carbon emissions they create beyond the new limit. To comply with the law, they may have to replace windows, install energy-efficient lighting, and modern their HVAC systems.

The law has a second deadline in 2030 that will likely force more commercial properties across the city to make significant changes to their building systems if they want to avoid fines, which will become more onerous on that deadline. By 2050, Local Law 97 will require large buildings to cut their emissions by 80 percent from their 2005 levels.

These new requirements are already creating challenges for some of the city’s property owners who need to pay for sustainability overhauls that they did not anticipate. Newer builds are generally having an easier time complying with the law and are finding that sustainability is an advantage when it comes to asset value. In the following years, carbon-cutting practices will likely become the norm across New York City’s entire commercial real estate sector as property owners work to meet Local Law 97 standards.