office buildings and remote work

Office buildings in urban areas are facing two issues.

One is cyclical. It may take half a decade from architectural drawings to planning commission permission to steel girders emerging from a big hole in the ground. Conventional wisdom is that no matter what the economic circumstances at a given time, it’s always better financially to complete the building–even if oversupply is brewing–once girders are visible.

If the New York Times article I referenced yesterday is correct (I have no reason to believe it isn’t) Albany is aiming to encourage the creation of even more office space on the west side of Manhattan as part of a renovation project around Penn Station. Apparently with large subsidies. Pre-pandemic, this might have made some sense. New capacity wouldn’t be available until late in the decade. And the overarching idea–to attract ever more businesses into NYC–makes more people and firms subject to state and local taxes, and boosts local shopping, eating and entertainment venues.

As I wrote yesterday, in this process older buildings with fewer amenities are the big losers. The new office buildings need a critical mass of tenants so people will feel safe working there and so local service firms will open up in the neighborhood. They get this result in part by offering low initial rents, low enough to lure tenants away from older buildings.

The second is secular, at least potentially. At issue is whether, after three years of remote work, to what degree will businesses revert to the pre-pandemic status quo, with all employees coming back to work in person, five days a week, in the old office. This isn’t 100% clear.

I think the most striking vote against a return to past practice is coming from large, sophisticated real estate investment companies’ They’ve begun to default on workplace mortgages, in effect returning the collateral (an older office building) to the lender. In other words, these savvy real estate people have concluded that rental income won’t ever be high enough again to pay off the mortgage. To my mind, defaulting implies that the decision isn’t a close call, either. It may be that new capacity is the culprit, but I can’t recall having seen what’s happening now in the US before, either here or abroad.

My guess, and that is all it is, is that office workers who have, say, followed the artist community away from NYC to the Hudson Valley or eastern Pennsylvania now own property, and have an easier lifestyle and a much lower cost of living. They’re not eager to go back.

A first thought is that, if I’m correct, older buildings will be converted into residences. Experiments are happening right now. The more recent the building vintage and the bigger the structure, however, the harder, and more expansive, this will likely be. The issues: windows that don’t open; lack of windows in the center; insufficient water, sewage, electricity infrastructure.

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