The real cost of an empty office

CThere is ITIS Often back from crisis. From epidemics and earthquakes to floods and fires, the world’s urban powerhouses have become stronger in the face of adversity. A raft of fire-safety regulations was introduced in 1666 after the Great Fire of London destroyed most of the city. Manufacturers exchanged wood for brick or stone. The walls were made thicker. The roads are wide. When cholera spread in America in the 1850s, New York and other cities introduced sewerage systems and public parks. As the disease spread to Paris, the authorities there introduced radical public health measures. Tree-lined boulevards were made, fountains were made, and slums cleared.

Listen to this story.
Enjoy more audio and podcasts iOS Or Android

Your browser

Today’s urban areas face a different kind of challenge. With massive returns to office work still uncertain, the epidemic has sharpened the debate over what the future holds for their commercial centers. Important business districts, such as Manhattan, the City of London, Marunouchi in Tokyo and La Defense in Paris, have suffered office outflows. Prior to the lockdown, the 21 largest business districts in the world had 4.5 million employees and about a fifth of the Fortune Global 500 company’s headquarters, according to EY And the Urban Land Institute. When the Covid-19 vacates offices around the world, most professional work goes to the home office or the kitchen table. The fate of the urban business districts remains unclear as the epidemic spreads in its third year. Will they continue to attract investment and talent or will the new type of work jeopardize their commercial dominance?

In the face of this, things could get even worse for the owners of the glossy City Office Tower. In contrast to the retail and hospitality sectors, office tenants continue to pay the most rent, and analysts have retracted their many bad estimates. Even in cities like London towards the end of 2021, leasing activities have started.

The reality, however, is far from rosy. Homework has hit office space demand, with vacancies growing faster than anywhere else in business districts. Worldwide, vacancies accounted for 12% of the total, up from 8% before Covid. 18% of offices are vacant across London. The share in New York is about 16%. More than one in five offices in San Francisco is vacant. In Hong Kong, where downsizing has become commonplace, net effective fares, which are adjusted for reductions or incentives, have fallen by more than 7% in 2021 after falling by more than 17% in 2020.

Instead of reducing rents, landlords are offering more freebies than ever before to retain tenants or attract new ones. In Manhattan, cash gifts for tenants — typically used to fill new office space হয়েছে have more than doubled since 2016. Across America, the average number of rent-free months has increased the most since 2013. Some property developers are optimistic, betting that demand for office space will eventually bounce back. But with each new version of the Covid-19, plans to return to the office have been delayed, again delayed. And the type of appearance change set to reduce the overall demand for space.

Financial markets reflect the dark mood. Well-functioning areas of property, such as warehouses and apartments, are rapidly losing offices, especially in business districts. After traditionally forming the core of commercial-property portfolios in the United States, offices accounted for less than one-fifth of transactions in 2021. Globally, investors are spending more on apartments for the first time Foreign investment in offices also fell below the pre-epidemic average in 2021 in countries such as the United States and Australia. In contrast, foreign investment in warehouses in this market has more than doubled.

Evaluation also mirrors uncertainty. Building prices in business districts have been hit hard by rising commercial-property prices in other parts of the city. In the San Francisco financial district, for example, property prices have fallen by almost one-fifth since the end of 2019, according to the latest figures. Across the larger metropolitan area, they grew by more than 5%. In Manhattan they have dropped by about 8% since the epidemic began. Asian cities have improved. Office prices across Seoul, for example, have risen by more than a third since the end of 2019. In Singapore, they have grown by more than a tenth.

Most investors take a long-term view, so the capital allocated to offices will be stuck year after year. But the feeling is moving away from the city towards the small market with the huge density of offices and the wide mix of buildings. By a survey of asset investors with more than bn 50bn under management CBRE, A property company, showed a preference in 2021 for markets like Phoenix and Denver over New York and Chicago. Undoubtedly, the largest business centers will continue to attract large sums of money: According to Knight Frank, London offices have predicted to attract £ 60bn ($ 81bn) of foreign capital in the next few years. But secluded office blocks in dense commercial districts will continue to cast an ominous shadow.

Landlords insist the concerns are excessive. Despite the fact that many buildings are stubbornly vacant, they maintain that the demand for the best space remains. True, some of the main features still attract lots of suitors. Tenants are switching aging office blocks to modern, green workplaces with improved air-filtration systems and high-quality amenities. But these high-end features represent 20% or less of most city buildings. (However, they make up an inconsistent portion of investment activity: in New York, only nine out of 69 office transactions accounted for 80% of the total amount invested in 2021.)

The gap between the best assets and the rest of the market will be wider. Renovations can revitalize some tired-looking buildings. For many older assets, however, inflation, labor and material shortages in the construction industry, and the high cost of upgrading buildings to meet difficult environmental standards will make it difficult to justify the cost.

The consequences for business districts can be far-reaching. The massive exodus of bankers, lawyers and other professionals also hit cafes, restaurants and other small businesses that serve them. Many were already struggling with supply chain disruptions, labor shortages and rising costs. The lockdown has cost Sydney’s economy an estimated $ 250m ($ 178m) a week and 40,000 jobs. Across New York City, more than a third of small businesses closed during the lockdown; Prior to the epidemic, the sector accounted for more than half of the city’s private sector employment.

Citizen Slide

The money of the municipality is also open. Passive office means shrinking tax revenue for cities that rely on them to finance public services. Vacant offices also put pressure on the transit system. The low number of passengers is estimated to leave 1.5 billion pounds by 2024, funded by the London Transport Authority. The Metropolitan Transportation Authority of New York, which operates the city’s subway, predicts a $ 1.4 billion deficit in 2025 as federal aid phases out.

Business districts are taking defensive measures. A common approach is to revitalize them, a trend that has been going on since before the epidemic. The City of London is offering more “overnight cultural celebrations”, traffic-free streets over the weekend and at least 1,500 new apartments by 2030, while the Canary Wharf has added bars, restaurants and fun boats to attract young crowds. The Urban Redevelopment Authority of Singapore acknowledges that it may need to revise the mix of buildings in the city center, as well as planning more cycle paths and pedestrian streets. In America, skyscrapers are opening their doors to the public, offering new observation decks and Instagram-friendly industrial installations. Al Fresco has paved the streets inside the city of Sydney for dining Paris, meanwhile, plans to turn La Defense’s car parks into “last-mile” delivery hubs. As the world of work evolves, so do the places of work. 3

For more expert analysis of the biggest stories in economics, business and markets, sign up for our weekly newsletter Money Talks.

Deep digging

All our epidemic stories can be found in our coronavirus hub. You can also find trackers showing the roll-out of vaccines worldwide, additional deaths by country, and the spread of the virus across Europe.

This article is published in the Finance and Economics section of the print edition under the heading “Actual cost of vacant office”.

Leave a Reply

Your email address will not be published.