Fears of the coronavirus pandemic and the sharp shifts by companies to allow employees to work from home could devastate the nation’s office skyscrapers, some economists say. But real estate moguls say the office as we know it isn't dead yet. Economics correspondent Paul Solman explores how uncertainty is affecting the market.
There are fears that COVID-19 cases might spike again, and it's not clear how long many of us will be working from home.
Paul Solman looks at the consequences for commercial real estate. It's a second of two reports for Making Sense.
I could easily see downtown skyscrapers in the center of big cities falling in value by 60, 70 percent.
Economist Nick Bloom says three factors are about to devastate the office skyscrapers of the world's mega-cities, one, of course, the COVID economy.
This is really looking like being, you know, a long and incredibly painful recession, the likes of which I don't think anyone alive currently has seen before.
Well, maybe, maybe not. But there's a second factor, says Bob Edelstein, who teaches real estate economics: a sharp shift to working from home.
Just recently, we saw a Facebook saying they're going to have employees work remotely forever. Other companies are considering that.
Bad news for, among others, shared workspace giant WeWork. The largest private renter of New York office space was already hemorrhaging money before the pandemic.
Do you want to go into an office space where three people have used it this day and share some facilities?
Now, WeWork says they are stepping up sanitization, but there's still a third factor, anxiety about working at close quarters.
You will see people worrying about social distance distancing within the office market, and, therefore, there's going to be more space per employee.
One glimpse of this future comes via a new video from office space services giant Cushman & Wakefield:
Imagine you now need twice as much space per person, probably three times as much space per person in a large skyscraper because they were packed in like sardines before. For the next three or four years, people are going to be really uncomfortable about being in close offices, tightly packed elevators.
Anything that requires an elevator is going to be very hard.
Dave Kenny, CEO of the Nielsen Company, a global market research firm, has done the math on how long it would take his employees in Lower Manhattan to get to their desks under the new CDC office guidelines, one person at a time in any elevator less than six feet across.
I calculated to, to refill our, you know, floors in New York, people would be in line for over four hours to use the elevator up and use the elevator down.
Bottom line, then, predicts Nick Boom succinctly:
Catastrophic drops in value.
Obviously, as an owner of commercial office space, I think he's wrong.
Douglas Durst's family business owns or manages 8.5 million square feet of New York office space, including One World Trade Center and the former Conde Nast building in Times Square, where TikTok, the wildly popular Chinese-owned video sharing app, just leased seven floors.
We are actively leasing space even now. The demand is not going away, so we don't think there'll be any need to reduce rents.
Mary Ann Tighe:
I'm not declaring the death knell of offices.
Superbroker Mary Ann Tighe is New York CEO of the world's largest real estate services firm.
Yay, we can all get each other on the screen. But it doesn't tell us a darn thing about real-life work from home.
Have there been no fire sales of office buildings from landlords who need the cash?
There have been no fire sales to date. This is not a moment where you want to place a valuation on an asset, simply because you may get an answer you're not going to like. And the answer may be different a month from now or six months from now.
Take BlackRock, CBS' iconic Manhattan headquarters, which Tighe's firm had been preparing to sell for over a billion dollars. It's now off the market. Why?
I think people are on pause waiting to see what the market reveals.
Bob Edelstein, however, has evidence that uncertainty is actually killing real estate deals at the moment.
I'm privy to 10 recent potential transactions. Six have stopped negotiating. I don't know if they will ever negotiate again. Three of them were negotiated and had gone hard, which means the deposit was accepted and would not be returnable if the deal was not consummated.
So they put down millions of dollars as a deposit and then just walked away?
Yes, because they would have required many more millions to consummate the transaction. And they felt, as most people do, uncertain about the future, and they weren't willing to risk these extra dollars.
For dramatic evidence of price drops, though, look at the stocks of companies that invest solely in office buildings, down six times more than the S&P 500 this year. But current rents have been unaffected, Doug Durst insists, for at least one very good reason.
In the large office buildings, the tenants have signed long-term leases at least 10 years or longer.
Yes, agrees Bob Edelstein.
It's better to have 10-year leases, but they may not be as good as the paper they're written on.
In fact, some office tenants have already tried to renege, says Mary Ann Tighe.
Discussion number one was, I'm not using my space. Why am I paying rent?
Show us your 2019 financials and your 2020 budget. Show us where you are in terms of revenue. Show us that you don't have business interruption insurance, and show us that you have applied for every kind of government help.
Once we get all that information, we're happy to sit with you. We're not — happy is an overstatement. We will sit with you and review the situation.
Any tenant who has difficulty, we are talking with and trying to make sure that they're able to get through this period.
If the return to normal is measured in years, and not months, there may be an opportunity in all of this.
Los Angeles developer Matt Jacobs' latest project, lofts to live and work in, favored by artists types, selling just fine, despite the pandemic.
We have visual artists. We have people editing television programs. We have YouTube stars.
We have had one broker ask for a coronavirus discount, but we have sold a number of live-work lofts over the past month at original market prices, no discounts.
So Jacobs has reframed the office space crisis.
I'm in California, where we have a tremendous and sustained housing crisis. And housing is expensive and it's scarce.
A lot of those office buildings that we considered class A buildings are not going to have tremendous utility right now, but they have perfect opportunity to be converted to housing. A well-built steel or concrete building is a perfect environment for housing.
Including in cities like New York, says Mary Ann Tighe.
The downtown Manhattan market before 9/11 had 15,000 residents. Today, it's approaching 70,000 residents.
Many of those residents are residing in office buildings that have been converted to residential rentals. So, I do envision that older stock will go in that direction.
What price that older stock will fetch any time soon, however, is enough to worry anyone who owns commercial office space.
This is Paul Solman.
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Paul Solman has been a business, economics and occasional art correspondent for the PBS NewsHour since 1985.
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