Is this the end of expensive office space in New York??

David Goldsmith

All Powerful Moderator
Staff member
For months Real Estate executives have been giving interviews pumping up office space and how companies will actually need more of it to execute social distancing. Now we hear from the executives who will be making those decisions.
Nearly 70% of CEOs expect to downsize offices: KPMG
Corporate executives see benefit of work-from-home

The pandemic has drastically changed the way CEOs around the globe see the future of work. More than two-thirds said they may reduce their office footprint in the coming years, according to a recent survey.
Out of 315 CEOs answering the survey published in KPMG’s “2020 CEO Outlook: Covid-19 Special Edition,” 69 percent checked the “We will be downsizing office space” box.

The rapid shift to working from home might have been rocky at the outset of the pandemic, but after months of overseeing their remote workforce, 77 percent of CEOs said they will increase their use of digital collaboration and communication tools, according to the survey conducted in July and early August.

Remote working has widened their available talent pool, said 73 percent of CEOs in the survey.
Facebook CEO Mark Zuckerberg noted that benefit in May after expanding the company’s work-from-home policy.
“The biggest advantages I think are access to large pools of talent who don’t live around the big cities and aren’t willing to move there,” Zuckerberg told Andrew Ross Sorkin on CNBC’s “Squawk Box.” “And there are a lot of people in the U.S. and in Canada and ultimately around the world that I think we, and other companies that go in this direction, will be able to access.”

Work-from-home may also appeal to CEOs who have faced the same health and family challenges as their employees during the pandemic. Some 39 percent said their health, or the health of their family, had been affected by the coronavirus. As a result, 55 percent changed their corporate strategies for dealing with the pandemic, according to the survey.

The CEOs’ sentiment does not bode well for office landlords who have been waiting for the return of their tenants. Jeff Blau, CEO of Related Companies, told Bloomberg that he has been trying to persuade firms to bring people back into the office.

“I’ve been using a little bit of guilt trip and a little bit of coaxing,” Blau told Bloomberg.
KPMG did not release the names of companies whose CEOs responded to the survey, but the firm said these companies have annual revenue of more than $500 million in the sectors of asset management, automotive, banking, consumer and retail, energy, infrastructure, insurance, life sciences, manufacturing, technology, and telecommunications.

Those companies are based in Australia, Canada, China, France, Italy, Japan, the U.K. and the U.S., according to KPMG, which did not respond to requests to elaborate on the survey.

David Goldsmith

All Powerful Moderator
Staff member
Making sense of Facebook, Google, Amazon and the office bubble aftermath
Several tech giants gobbled up square footage and then pivoted to remote work during the pandemic

Facebook grew its New York footprint gradually at first, occupying 55,000 feet at 335 Madison Ave and then 100,000 square feet at 770 Broadway prior to 2014. The company had fewer than 6,500 employees then, and its stock was trading below its IPO price.
By 2017, Facebook’s share price had tripled, the company recorded $40.6 billion in revenue and Mark Zuckerberg’s online empire had 1,000 employees working in Manhattan alone — just 4 percent of its 25,000 total staff.
The social network’s real estate ambitions quickly grew from there. In the past year, Facebook has inked office lease deals for more than 1.5 million square feet at Hudson Yards and 730,000 feet at Vornado Realty Trust’s Farley Post Office redevelopment in Midtown.

The Farley deal was disclosed in early August; just a few months after Zuckerberg announced plans to move half of his company’s 48,000 employees to permanent remote work over the next five years.
But Facebook’s rapid expansion into Manhattan’s office market, its new work-from-home policy, and publicly available data all suggest the company’s demand for new office space will likely be a fraction of what it would have been without Covid-19. The same goes for its rival Google, which has been on an office expansion tear for years. And while Amazon’s future is less scripted, with the e-commerce giant’s HQ2 long behind it, a piecemeal approach to new offices is safer until the pandemic ends.

Facebook is currently worth over $750 billion. Google, which steadily purchased its vast expanse of office space, is valued at more than a $1 trillion. Amazon is up to $1.5 trillion. The market cap of each has more than doubled since 2017. IBM by comparison, which is also seeking office space in the city, has lost value since then and is valued at just over $100 billion.

The irony is that “companies which are growing fastest need office space the least,” said Dror Poleg, the author of “Rethinking Real Estate.”
“Landlords miss the office most,” he argued, because it’s the product they sell.
The pandemic has made that more true now than ever, as Facebook, Google and Amazon are allowing all of their employees to work remotely until at least July 2021.

Even after Amazon announced its purchase of the Lord & Taylor building from WeWork for $1.1 billion, with plans to use the 630,000 square feet of space for 600 new workers, Poleg questioned the deal’s significance.
“Who cares?” he asked. “We’re excited that Amazon is filling a building they already bought? It seems like landlord-fueled spin. Why aren’t they [completely] filling the building?”

So far this year, Amazon’s valuation has increased 79 percent; one of its shares costs $3,400.
The long haul
Landlords had a big reason to celebrate when 2019 marked the third straight year that tech office leasing in Manhattan surpassed 3 million square feet and the biggest year for tech leasing on record, per CBRE.

By this summer, the tech industry’s “Big Three” were committed to well over 8 million square feet in total, with Facebook reaching 3 million square feet by itself — an amount that was always going to be a stretch for the social network.

Mayor Bill de Blasio touted in August that the company will soon employ 10,000 people in the city, calling its deal with Vornado at the Farley Building “the first major new lease for the post-Covid era” despite it being negotiated in 2019.
As of last year, the social media giant employed about 3,000 people in Manhattan.

In addition to its six floors and sole roof access at 770 Broadway — Facebook’s current New York City headquarters — the company’s Hudson Yards and Farley Building office leases yield enough space for 14,000 workers, according to a Wall Street Journal analysis.

Facebook did not respond to a request for comment about its hiring timeline, or whether the company would consolidate its office space in the city, now spread across six buildings.
A spokesperson for Google told TRD that the company has no plans to sell its New York City office buildings, which now span more than 3.5 million square feet.

But the spokesperson also said Google, which employs about 10,000 people in the city, plans to take a more conservative approach to hiring across the board.
Google’s largest building purchase closed in 2010, when its share price first broke $300. The company acquired just over 2 million square feet at 111 8th Avenue. In 2018, the same year it bought the Chelsea Market building for a near-record $2.4 billion, Google’s share price was consistently above $1,000.

Today, one share of Google stock is worth more than $1,500.
Google is currently preparing a 1.7 million-square-foot New York campus with lease agreements at 315 and 345 Hudson Street, and a signed letter of intent at 550 Washington Street. The west side deals bring its total office space to more than 5.2 million square feet.

Supply and demand
When too much supply meets too little demand, the sublease market tends to become more active, serving as a bellwether for the real estate industry as companies look to offload their surplus space.
Heidi Learner, CBRE’s head of real assets research, said she expects a 15 to 20 percent increase in the supply of sublease space between the second and third quarter and a 10 to 15 percent rise in the availability of direct lease space in the same period.

“There is currently a structural drop in office demand not seen in past recessions,” said Learner, who added that the financial services industry, a juggernaut of the office market, may find working from home more onerous due to strict industry compliance rules.

More than six months after the pandemic began, less than 10 percent of employees in Midtown and FiDi have returned to their offices, according to a late-May survey by the Partnership for New York City, a leading business group.
“We’re in a period of price discovery now,” said Michael Soto, a research director at the Savills, who called uncertainty in the urban office market a worrying trend. “There will be landlords who might realize, wow, occupancy rates are down, and we might not cover debt service on our building.”

If prices in the urban office market soften, investors will have to cope with more modest financial returns, said Sharon Zukin, a CUNY sociology professor and author of “The Innovation Complex.”
“Even venture capitalists think the rent they pay is too damn high,” Zukin added.

Seismic shifts
At the same time, bigger changes in the country’s leasing office markets are on the horizon, Poleg noted.
“Two shifts that Covid will create in cities are that people will spend less time in the office, and they will want their offices to be closer to home,” he noted.

Providers of flexible office space from WeWork to Hana, a CBRE subsidiary, see business opportunity in partnering with tenants as well as landlords. Georgia Collins, Hana’s vice president of global client strategy, said the flex-space company will help firms manage their excess space, and team up with developers who desire flex-space providers as a pre-lease tenant.

Collins expects flex spaces to become more popular near people’s homes. “You can’t work from home forever if you have three roommates,” she said.
That may also come down to the tech industry’s remote work policies, which will heavily depend on public safety and the economics of office space.

Of course, the country’s biggest tech companies can afford to be optimistic. Facebook was sitting on more than $54 billion in cash at the end of last year, Amazon had $55 billion, and Google disclosed it had more than $119 billion.
A fire sale of Google- or Amazon-owned real estate, or an attempt by Facebook to ditch its leased office space, is unlikely.

But a handful of tech giants may only go so far for the city’s office market.
“It’s good that companies like Facebook feel confident,” Soto said, “but they can’t support the entire market. There is only so much Facebook, Amazon, and Google to go around.”

David Goldsmith

All Powerful Moderator
Staff member
Office subleases pile up throughout top metro markets
Companies shed excess space for survival, and office landlords feel the pressure

When R/GA moved its New York headquarters to Brookfield Property Partners’ 5 Manhattan West, some praised the global advertising agency for adopting state-of-the art technologies entirely controlled by apps.
The new 173,000-square-foot office was designed to attract the best talent, competing with tech firms such as Twitter and Facebook, Bob Greenberg, the company’s founder, told Forbes in 2016.
A few months after Covid-19 hit nearly every industry, however, the Interpublic Group subsidiary was forced to practice its own marketing mantra: “transformation at speed.”
In July, R/GA listed a 65 percent chunk of its office at Brookfield’s West 33rd Street building for subleasing.

“Our primary reason for subletting our office space is agility,” Wes Harris,
R/GA’s global chief operating officer, told The Real Deal by email. He also acknowledged that the agency had to make “difficult decisions” for the rest of the year.

R/GA’s New York base is among the millions of square feet of office space nationwide that began flooding sublease markets across major cities in recent months.
While Manhattan’s office market saw a 2 percent uptick in subleased space in June over March, that rate jumped to 12 percent in July — bringing the total amount of space to 12.3 million square feet, according to CBRE. In Chicago, the amount of subleased space rose from 8 percent to 24 percent in the same period. And in Los Angeles, the rates were 28 percent and 42 percent, respectively.

Many of the initial listings came from technology, advertising, media and information companies. And as the pandemic continues, other business sectors are also looking to trim their real estate footprints.
If the share of sublease space is less than 20 percent of the total available space, the market is considered to be tight.

But as that portion grows, as it has in recent months, it has a negative effect on pricing, since subleased space is often heavily discounted from what the leaseholder pays — in some cases by more than half the price. That’s especially the case when the lease term gets closer to the end, said Michael Colacino, president of the digital advisory firm SquareFoot and former president of the global commercial brokerage Savills.

A recent sublease deal at 245 Park Avenue, for example, went for $25 per square foot — about 70 percent less than the building’s average price — for the remaining two years of the lease, according to sources. The landlord, China’s HNA Group, did not return a request for comment.

“A glut of sublease space is very bad for landlords because it puts enormous price pressure on the direct space,” Colacino said.
“If you’ve got a space subleasing for half the price,” he added, “it’s very tough to go against that as a direct landlord.”

Nationwide spikes
An uptick of subleased space was initially seen in metro markets with heavy concentrations of tech companies, including parts of San Francisco, Austin, Chicago and Boston, said Ian Anderson, CBRE’s director of research and analysis.

Near Chicago’s Financial District, Toast, a cloud-based restaurant software provider, is trying to unload half of its 50,000-square-foot office at 515 North State Street. The company, headquartered in Boston, signed a lease for the space in January — just several weeks before the pandemic hit the U.S.

In April, Toast notified the state of Illinois about its plan to lay off about 120 people. It’s unclear how many staffers were left in Chicago, but according to media reports, Toast cut about 1,300 employees company-wide, half of its workforce. Toast and its landlord in Chicago, Beacon Capital Partners, did not respond to requests for comments.


And in Pasadena, California, the advertising tech company OpenX has listed its 41,000-square-foot headquarters with an outdoor terrace for subleasing, according to The company has also reportedly furloughed or laid off employees due to recent revenue losses, though no recent layoff notices were found on the state’s website. OpenX and landlord IDS Real Estate Group, which co-developed the 235,000-square-foot postmodern building, did not return requests for comment.

The subleasing trend wasn’t visible in larger office markets like Manhattan and Washington, D.C., until June. But things started to change as of July, Anderson noted.
“Perhaps as places like Manhattan and Washington begin to get the virus a little bit more under control … they realized this is going to be a little bit of a longer ride,” he said, adding that he and his team are starting to see “more sublease space coming to the market now.”

In Manhattan’s office market, the total share of subleased space is likely to reach 30 percent by the year’s end, if not sooner, said Danny Mangru, Savills’ research director for the tri-state area.
He added that the increase in subleasing led by the TAMI sector is now being followed by financial services and retailers.

A chunk of sublease listings is coming from companies that had rented extra space to accommodate their future growth, said Aaron Jodka, managing director of research and client services at Colliers International in Boston. Facing the downturn, those companies are now taking steps to shed their extra square footage.

“If you think of the overall market conditions prior to the second quarter … most of these markets were at very low vacancy rates,” Jodka said. “Rents were rising, and it was really challenging to find space. So, in order to protect your growth, sometimes you had to lease ahead of schedule.”

Glassdoor is one example.
The California-based employer review website had been rapidly expanding in downtown Chicago in recent years. The company opened a 52,000-square-foot office in 2017 and then signed an additional lease last year to double its space with a goal of hiring 500 new employees, according to the Chicago Tribune.

But the pandemic forced Glassdoor to halt its expansion plans and lay off nearly 200 employees in May. Half of the company’s office space is now listed for subleasing.
“We are reevaluating our office space while our employees work from home due to Covid-19,” said Tyler Murphy, a Glassdoor spokesperson, who declined to disclose the number of employees left in Chicago after the recent layoffs.

Landlord views
A spike in subleasing is part of real estate and other business cycles, and Manhattan’s office market has always bounced back from downturns in the past, said veteran office landlord Bill Rudin, CEO and co-chair of Rudin Management.

“Throughout every business cycle, there’s always companies who have lost businesses, laying off people or giving up space,” he said, noting that landlords generally prefer direct long-term leases but are willing to work with tenants to come up with solutions.

“It all depends,” Rudin added.
RXR Realty CEO Scott Rechler echoed that sentiment.

(Click to enlarge)
Rechler said that even though RXR’s office portfolio has yet to have a major tenant list space, a spike in subleasing during an economic downturn is expected as tenants need to address their financial difficulties.

As businesses figure out their finances for 2021, more space could hit the sublease market, he said.
“I don’t think we have a good clarity as to what the long-term prospects are,” Rechler said.
The share of subleases in total office availability recently exceeded 25 percent, an inflection point where the market begins to experience a glut, said Mike Slattery, a research manager at CBRE who covers Manhattan’s office market.
Scaling back is certainly on the minds of most corporate leaders, a recent survey published in KPMG International’s “2020 CEO Outlook: Covid-19 Special Edition” shows. Out of 315 CEOs around the globe who answered the survey, nearly 70 percent checked the box labeled: “We will be downsizing office space.”
The subleasing trend in major cities is likely to continue, as many business leaders who had focused on managing the health crisis are finally looking into their space needs, said Eric Maribojoc, executive director of the George Mason University Center for Real Estate Entrepreneurship.
“Companies are making decisions about the prospects for the economy in the next year or two, and whether they need to scale back,” Maribojoc said.
“Those decisions are being made now, as people look at their budgets for the next year, 2021, and forecasting for 2022, and that’s where you’re going to see that traditional sublease decisions being made,” he added.
The big squeeze
And as more tenants pursue sublease deals, a growing number of landlords are being put in a tough position, regardless of cycles.
“Would they rather have a tenant go bankrupt and reject their lease in bankruptcy? Or would they rather help the tenant survive by subleasing and then have a new tenant that comes in and takes their place and be more financially viable?” SquareFoot’s Colacino said. “It’s a very difficult decision.”
The winner in this scenario is clear: prospective subtenants.
“Subleases are going to become much more desirable in the next go-around because of the realm of the differences in their terms,” Colacino said. “You can find a one-month sublease, a six-month sublease, a one-year sublease or a three-year sublease.”
One of the companies that recently took advantage of subleasing is BigID, a data protection and privacy startup that has outgrown its 5,000-square-foot office in Soho.
A few weeks before the lockdown, the firm signed a lease to take a 21,500-square-foot sublease at SL Green Realty’s 641 Sixth Avenue, a couple of blocks from the Flatiron Building; it plans to move in this fall. SL Green did not respond to a request for comment.
The five-year sublease for the large one-floor space was attractive to the growing firm because of its economics and the timing, said Scott Casey, BigID’s chief operating officer, who declined to disclose the rent for the space.
“We’re going to need this for a few years, and as we continue to grow, we will evaluate a new space at some point,” he said. “And it’s ready to move in, which is great.”
Pricing pressures
As of early September, the average asking rent for a Manhattan sublease was about $63.93 per square foot, about 25 percent lower than the average rent for direct space, CBRE’s Slattery said.
And there’s plenty of sublease space to go around. In August, about 1.6 million square feet hit Manhattan, while 400,000 square feet were absorbed, leaving more than 13 million square feet of available sublease space in the country’s most expensive office market, according to CBRE’s data.
With the abundance of sublease options, the price gap between the two types of space would eventually bring down the average rent for direct leasing options, said Marisha Clinton, Avison Young’s senior director of research for the tri-state area.
During the Great Recession, when the total amount of subleased space in Manhattan grew from 6.3 million square feet in 2007 to 10 million square feet in 2009, the average asking rent for direct space declined by 24 percent over the same period, Clinton noted.
“Keep in mind, it took about nine quarters for that to do so,” Clinton said. “So, things don’t happen overnight. There is at least two years or so before we see any major impact.”
Having too much sublease availability in a certain building, however, could have a significant impact on the pricing, as it may give existing tenants leverage to renegotiate their leases with their landlords, said Lonnie Hendry, a commercial real estate expert with Trepp.
The lowered rent income would affect landlords who are due for refinancing their mortgages in the next 12 months.
“It doesn’t negate their ability to refinance, but generally speaking, it would probably render the property with a lower appraised value because of the cash flow being reduced, and then that lower appraised value would lower the amount of financing that the borrower could take out,” Hendry said.
Remote control
One of the wild cards for office landlords in the current economic downturn is the impact of remote working, which gained momentum out of necessity during the lockdown.
A growing number of public and private companies, including Twitter, Facebook, Zillow Group and Shopify, have announced long-term work-from-home plans.
While Facebook is expanding its Manhattan office footprint with its recent lease at Vornado’s Farley Post Office redevelopment, Zillow recently listed nearly 80 percent of StreetEasy’s 130,000-square-foot digs at 1250 Broadway for subleasing.
The move followed a blog post in late July by Dan Spaulding, the online listing giant’s chief people officer, who noted that about 90 percent of Zillow’s employees can work from home — even after the pandemic.
Zillow signed the 10-year lease for the NoMad office in October 2018 to expand its footprint in New York. The building’s landlord, Global Holdings, did not respond to a request for comment.
“We’re informally exploring what options we have to rightsize our office space in the city,” a Zillow spokesperson told TRD. “While no decisions have been made, Zillow will continue to have a physical presence in New York City.”
R/GA, which has decided to scale back its office footprint for the time being, still values “physical space to connect, be together, work with clients and create headspace,” said Harris, the company’s global chief operating officer.
“We also plan to experiment with smaller satellite offices in New York closer to where our people live, as part of a more decentralized office model.”

David Goldsmith

All Powerful Moderator
Staff member
Report: Office market won’t return to glory until 2025
Another 100M sf of vacancies seen in next two years, despite office landlords’ pleas

The office market won’t reach pre-Covid levels until 2025, a brokerage report has found.
The analysis by Cushman and Wakefield predicts that office vacancies across the world will continue upward, reaching 15.6 percent in 2022, Bloomberg reported. About 95.8 million square feet of space will become vacant in the next two years.

Before the coronavirus, the world’s average office vacancy rate was 10.9 percent, according to the report. After employees spent months working remotely, adjusting their living spaces to work from home, there has been limited enthusiasm for returning to the office, despite appeals from business leaders and New York City landlords to bring employees back.

The brokerage report sees U.S. office rents falling 6.5 percent next year and 2.3 percent in 2022. The vacancy rate will continue to rise, but job gains will resume in 2021.
Despite the grim outlook for the office sector, office workers will still fare better than those in the service industry, it forecasts.

In Europe, rents are predicted to fall 7.8 percent next year and 1.7 percent in 2022, but the vacancy rate is expected to top out at 10.5 percent. Office-job losses in Europe will also not be as pronounced as in the U.S.
Office rents in Greater China, where the pandemic began, will fall 8 percent this year and 5.2 percent in 2021, but will pick up after that. Office vacancy rates will linger at about 25 percent until 2024, when job growth will raise demand for office space, according to the report.

David Goldsmith

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Staff member
Facebook snagged $100M discount on Farley Post Office deal
Tech giant saved 9% on lease as office landlords offer more concessions

Facebook’s huge lease at the Farley Post Office redevelopment in Midtown came with a pretty nice perk: The tech giant got a 9 percent discount when it signed the 730,000-square-foot lease last month.
Facebook agreed to pay $109 per square foot in rent, with that rate increasing by $10 per square foot every five years over a 15-year period, according to Business Insider.
That, plus other concessions, means the company is saving about $100 million — or 9 percent — on its original deal with landlord Vornado Realty Trust.

The rent Facebook negotiated is $4 per square foot cheaper than what was originally negotiated before the pandemic, according to an anonymous source quoted by Business Insider. Vornado also agreed to pay Facebook $146 million toward the build-out cost, or $36 million more than its initial $110 million contribution.

In total, Facebook will pay a little more than $1 billion over the course of its lease; the initial deal was valued at $1.13 billion.
The Facebook deal and the various concessions Vornado was willing to give could be representative of what to expect in the office leasing market in the coming months. Office vacancies are rising, and tenants are reluctant to make long-term commitments as they face uncertainty in the era of pandemic. Landlords have been forced to give discounts and other incentives to convince companies to sign leases, experts said.

“Otherwise, they could be sitting with a vacant space for years,” said David Falk, the New York area president of the real estate services firm and brokerage Newmark Knight Frank.

David Goldsmith

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New York’s law firm leasing volume down by 45%: report
Only 2 firms have inked deals of more than 100K sf in 2020

New York City typically leads the nation in leasing demand from law firms, but as with many other things, the pandemic has upended that.
Leasing volume from law firms dropped in New York City by 45 percent in the first half of 2020 compared to the same period last year, according to the latest Savills U.S. Law Firm Activity Report.

The sharp decline is the result of the industry’s “pandemic pause”; firms have postponed leasing decisions as they face economic and business uncertainty because of Covid-19.

During the first half of this year, only two law firms in New York signed leases of more than 100,000 square feet, and both were renewals. Allen & Overy inked a deal for 143,000 square feet at Rockefeller Group’s 1221 Sixth Avenue, while McLaughlin & Stern took 112,000 square feet at 260 Madison Avenue in Midtown East.

Allen & Overy was reportedly close to signing a lease at Tishman Speyer’s 630 Fifth Avenue before the pandemic hit. The firm instead negotiated a five-year lease extension to its current space near Rockefeller Center.
The New York market, however, is still faring better than San Francisco, which saw no significant law firm leasing activity in the first half of 2020.

Compared to New York and San Francisco, the Washington D.C. and Los Angeles markets were more resilient,with law firm leasing activity increasing by 47 percent and 165 percent, respectively, during the first half of this year compared to the same period last year.

Across major markets nationwide, law firms that occupy 20,000 square feet or more leased a total of 2.7 million square feet in the first half of 2020, down 31 percent from the same period last year, according to the report. The second quarter total was 25 percent less than the first quarter total.

David Goldsmith

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Just 10% of Manhattan employees are back at the office
New York lags behind other cities when it comes to workers returning to offices

Nearly three months after New York City began allowing nonessential workers to go back to their offices, most employees are still working from home.
Only about 10 percent of Manhattan workers have returned to their offices as of Sept. 18, the Wall Street Journal reported, citing data from CBRE Group. That’s a slight uptick from the 6 to 8 percent who went back to their offices in July, a month after the city allowed nonessential workers to return.

New York’s numbers are far below the national average of about 25 percent. Other cities have seen even higher numbers: In Dallas, about 40 percent of workers are back in the office; in Los Angeles, it’s 32 percent.

Among the reasons cited for New York’s slow return to offices, according to the Journal: fears of contracting the virus from commuting (even though mass transit has been found to be largely safe during the pandemic), and myriad delays with New York public schools reopening.

Manhattan’s empty office buildings have had a domino effect on the city’s budget and the local economy. The Metropolitan Transportation Authority faces a $12 billion budget deficit by the end of 2021. The low office numbers have also led to a projected $9 billion drop in sales tax and other revenue, according to the Journal.

Still, a few Wall Street banks are pushing their employees to come back to work. JPMorgan Chase told senior sales and trading employees that they had to return to work unless they had child-care issues or medical conditions, although its consumer staff has been given a reprieve, according to Crain’s. Citigroup said it would allow employees to return voluntarily.

David Goldsmith

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Worse drop than "The Great Recession" 2008.
Manhattan office leasing could hit lowest level of this century
Leasing in third quarter down 50% from last year

Manhattan’s office market continues to slump.
In the third quarter, deals were inked for 4.81 million square feet of office space, just half of what was leased during the same time last year.
That brought the year’s total to 14.81 million square feet, also down 50 percent from the same period in 2019, according to Colliers International’s quarterly market report. If the pace of leasing continues for the rest of the year, leasing volume in 2020 would be the lowest this century, according to the report.

“Leasing volumes during the recession don’t usually drop off 50 percent,” said Franklin Wallach, Colliers’ senior managing director for New York research.

To put the decline into perspective, after the dot-com bubble burst, leasing activity dropped by 14 percent between 2000 and 2001. During the Great Recession, from 2007 and 2008, it fell by 18 percent, Wallach said.
The slow year has left a lot of space unfilled. Manhattan’s office availability during the third quarter was 12.3 percent, the highest since the second quarter of 2013. Sublet space represented 23.2 percent of the total availability, the highest percentage share since 2009.

Those increases have put downward pressure on pricing, which was until recently considered stable. The average asking rent for the third quarter was $77.12 per square foot, down 2.8 percent from the previous quarter.
Office purchases in Manhattan have also slowed. There were 37 sales in the third quarter, down from 55 in the second, and the total value of sales decreased to $1.6 billion from $2.1 billion.
Still, there was a slight rebound in leasing volume from the second quarter of 2020. It was up by 1.6 million square feet, powered by Facebook’s 730,000-square-foot lease at Vornado’s Farley Post Office redevelopment and American International Group’s 217,638-square-foot deal at 28 Liberty Street.

While the pandemic is the primary culprit for the market’s softening, the election is also a factor, said Andrew Jacobs, Colliers’s managing director for capital markets.
“That uncertainty could potentially lead to another soft quarter in terms of transaction volume,” he said.

David Goldsmith

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Manhattan now has 16M sf of available office sublease space
Supply jumped in Q3, and now represents over 25% of borough’s total available office space

A flood of new sublease space began hitting office markets nationwide over the summer, and New York was no exception.
Sublease supply in Manhattan stood at 16.1 million square feet by the end of the third quarter, representing 27 percent of the borough’s total available office space, according to a new report from Savills. That’s a 47-percent increase year-over-year, far outpacing the 14-percent increase in direct space availability over the same period.

“With many organizations planning to operate remotely into 2021, sublease space will continue to drive supply-side increases as more tenants look to shed space,” Savills’ New York & tri-state region research director Danny Mangru wrote in the report. “By the end of 2020, available sublease space will likely exceed peak Global Financial Crisis levels.”

The new sublease space hitting the market includes 37 blocks with 50,000 square feet or more, according to the report. The following table details some of the largest blocks added to the sublease market in the first nine months of 2020.

While the pandemic has accelerated the trend, data shows that office sublease availability in Manhattan had already been on the rise since 2016. It surged by 4.2 million square feet between the last quarter of 2018 and the first of 2020, according to Savills. From January through March, 12 blocks of 50,000-square-foot-plus sublease space hit the market.
The largest sublease block to hit the market so far this year came in the first quarter, with Time Inc. looking to sublet 221,400 square feet at 225 Liberty Street, also known as Two Brookfield Place. Also in the first quarter, 151,400 square feet of sublease space from First Republic Bank hit the market at 410 Tenth Avenue, a property that SL Green is reportedly seeking to sell.

Since the start of the pandemic, the largest new block of sublease availability comes from Starr Insurance Companies, which is looking to sublet 190,900 square feet at Boston Properties’ 399 Park Avenue in Midtown. Emblem Health has put up 163,000 square feet for sublease at 55 Water Street in the Financial District, while WeWork is looking to sublease 156,000 square feet at its global headquarters on West 18th Street in Chelsea.
By industry, tenants within the TAMI (technology, advertising, media, and information) sector are now taking up a larger slice of the sublease pie. While TAMI tenants accounted for 32 percent of new sublease space prior to the coronavirus outbreak — followed by financial services at 26 percent — they account for 45 percent of sublease additions since Covid hit, more than twice as much as any other sector.

Both Midtown South and Downtown already have higher office sublease availability now than they did at the peak of the last financial crisis, but haven’t yet reached the levels seen after the one-two punch of the dot-com crash and 9/11 attacks. Midtown, meanwhile, is still a few million square feet short of the subleasing availability peak it reached in 2009.

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Pandemic speeds last major bank’s exit from Wall Street
Deutsche Bank will not fully reoccupy FiDi office before moving uptown

The last major bank on Wall Street is leaving the street, ending an era where working on Wall Street meant being on Wall Street.
Deutsche Bank announced in 2018 that it would exit its current headquarters at 60 Wall Street and consolidate its workforce at the Time Warner Center in 2021. However, the coronavirus pandemic has accelerated its departure, according to the Commercial Observer.

In a memo obtained by the Commercial Observer, the bank announced that employees could wait to return to the workplace until July 2021, when the Columbus Circle location opens.

“We’ve gone from Wall Street as a physical address to a label,” Bob Goodman, an executive managing director at Colliers International, told the publication.

Some specific Deutsche Bank teams have been called to return to 60 Wall Street, and it remains open for employees who wish to work from the office, but the bank will never fully reoccupy its space there.
Citigroup was the first to leave Wall Street, moving its headquarters to 399 Park Avenue in the early 1960s. Since, major banks have continuously decamped from the area. Midtown has been a popular destination because it is more accessible from the suburbs north of the city.

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Cushman & Wakefield paints bleak picture for Manhattan office market
Low occupancy and surging sublease space make for “radically tenant-friendly” market

Statistics on the Manhattan office market’s dismal third quarter continue to roll in, and the situation for landlords remains grim.
Commercial brokerage Cushman & Wakefield recently summed up some of the key data points in a message to its clients, Seeking Alpha reported: Occupancy is still below 15 percent, leasing is down almost 50 percent year-over-year, and sublease space has surged to account for a quarter of all space on the market.

“As you can imagine, there have been significant changes to the real estate market,” the note stated. “We are now experiencing a radically tenant-friendly market and softening of pricing while concessions (improvement allowance and free rent) are soaring.”
The brokerage’s latest Manhattan office report, published last week, provides more analysis around these figures. Per the report, the borough’s overall vacancy rate rose to a 24-year high of 13.3 percent, in part thanks to the completion of SL Green’s One Vanderbilt, which added 625,000 square feet of vacant space to the market. Thirteen other blocks of 100,000 or more square feet also hit the market in the third quarter.

Cushman & Wakefield sees the vacancy rate rising further in the coming year, with net absorption and asking rents trending downward. Rent declines, however, have been “minimal” so far, in part thanks to One Vanderbilt’s higher-priced space boosting the overall average.

“An additional 2.8 [million square feet] of ‘shadow’ sublease space being tracked could potentially lead to a more substantial increase in vacancy as it enters the market more rapidly in 2021,” the report notes.
Meanwhile, after bottoming out in May, employment has started to recover in recent months, albeit quite slowly.
“Until there is a public health resolution to the pandemic, the recovery is likely to remain uncertain and gradual,” the report states. “Only then can households and businesses become more confident.”

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SL Green’s lament: Office comeback “always right around the corner”
On Q3 earnings call, CEO says 100% of its workers are back at office, though 85% of NYC office workers are not

As New York City progressed through the different reopening phases over the summer, office landlords pointed to Labor Day as a likely turning point to herald the return of its workers. That didn’t pan out out.
On SL Green’s third quarter earnings call Thursday, company executives acknowledged that their predictions had proven overly optimistic. At the properties of New York’s largest commercial landlord, occupancy is still only in the 15 to 20 percent range, in line with the citywide average.
“It’s hard to put a finger on it, it’s always sort of right around the corner. It feels imminent and yet the numbers don’t bear that out,” CEO Marc Holliday said during the call. “Eighty to 85 percent of the people who work in office buildings are still at home. And that’s frustrating.”

At the same time, Holliday emphasized that the numbers were trending in the right direction, and that he hoped to see occupancy in the 20 to 30 percent range come December.
In contrast, 100 percent of SL Green employees are now back in the office — “safely, smartly, and with enthusiasm for doing something positive for our families, our company and our economy,” as Holliday described it.
He added that whether the company’s tenants are back “next month, December, January, February, March, in our estimation doesn’t affect any of the long-term fundamentals of the things we look at.”
In Q3, SL Green recorded $135.5 million in funds from operations, or $1.75 per share, down from $151.4 million year-over-year. The real estate investment trust collected 97 percent of office rents due in the quarter and 70 percent of retail rents, roughly on par with collections in Q2.

The REIT’s income in the past quarter included $24.3 million from a legal settlement, which appears to correspond to its September settlement with Jacob Chetrit regarding a $35 million deposit for the scrapped sale of the Daily News Building.
Bump in new leases
Executive vice president and director of leasing Steven Durels said on the leasing front, more tenants have expressed interest in signing new leases, not just renewals. While renewals accounted for 77 percent of leasing activity in the second quarter and 56 in the third, 51 percent of deals currently in SL Green’s pipeline — totalling 825,000 square feet — are for new leases.

“They’re looking past the immediate disruption of Covid, and saying, ‘okay, we recognize there’s now light at the end of the tunnel’ — whether that’s six or 12 months out — and they’re starting to begin to plan for their offices and how they’re going to run their space,” Durels said.
“But I don’t think they have a firm point of view as to how much of that is work from home, how much of that is hoteling… It’s all over the board right now.”

For New York’s offices to fill up, Holliday said “business has to step up and give their employees some incentives,” including subsidized commuting, meals and childcare. SL Green has converted some of its unused office space at 420 Lexington Avenue into pods of classrooms, and hired tutors to keep employees’ children engaged in the remote learning process.

Holliday also maintained that concerns around public transport are somewhat overblown, noting that he and SL Green president Andrew Mathias commute using mass transit themselves.
“I’ve been doing it since March 1, along with many people I know, and we’ve made it through, fortunately,” he said. “And safely — we adhere to the protocols.”
Another way the company has sought to boost the office recovery has been insisting that vendors it works with come to the office as well.
“Broadly speaking, I know lawyers that will say they’re just as productive at home, but that’s false and wrong from the client perspective,” Holliday said. “I can tell you that, as a client that’s closed something like 30 transactions in the past seven months.”

“If we’re here, they’ve got to be here,” he continued. “We’re not going to do Zoom calls with a vendor that’s sitting on the beach”
‘Long-term plan’
SL Green’s major milestone of the third quarter was the opening of One Vanderbilt. Much of the company’s upcoming leasing pipeline is now centered around Grand Central, including One Vanderbilt and the company’s other properties in the vicinity, Durels said.
While the supply of sublease space in Manhattan’s office market has surged in recent months, SL Green has not seen much of an impact in its portfolio.“It’s alway damaged goods,” Durels said, noting various constraints on lease terms and expansion options that subtenants face.

In Lower Manhattan, the firm topped out its 34-story mixed-use development at 185 Broadway, the first project to be built in the area under the Affordable Housing New York Program. A few blocks away, SL Green commenced demolition for 126 Nassau Street, a 215,000-square-foot facility it is building for Pace University.
In September, SL Green sold a 80 percent stake in 126 Nassau Street to a real estate fund managed by South Korea’s Meritz Alternative Investment Management, and secured a $125 million construction loan from Bank of China.
Company executives also addressed media reports about their efforts to sell properties such as 410 Tenth Avenue, the landlord’s main foothold on the Far West Side.

“We’ve been selling, fairly robustly, our mature and non-core assets since 2015, and 2020 is no different,” Holliday said. “This is all part of a long-term plan.”
Mathis provided more detail on 410 Tenth in particular. “It’s an asset that’s drawn a lot of interest, given where interest rates sit today,” he said. “We don’t have to sell it… but we did get some interesting offers and we decided to test the market.”
Investor interest in SL Green’s properties may also serve to validate the company’s expressed optimism about the New York market after the pandemic.

“These investors who are bidding for these buildings, they’re smart, they have a point of view,” Holliday said. “I don’t think they’re buying it based on whether people come back six, 12, 18 months from now, but their view is that the city will be back. And if you don’t think that, you’re not going to invest in this city.”

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Boston Properties’ Q3 income drops 17%
REIT executives eye late 2021 for tenants to return to offices

Boston Properties’ income declined about 17 percent in the third quarter, and executives don’t expect tenants to return to their offices in large numbers until late next year.
Net income for the quarter totaled $89.9 million, down from $108.7 million the same time last year, the company reported Tuesday. Growth declined due to income drops in the real estate investment trust’s hotel and office sectors. Office occupancy dropped the most in New York City and San Francisco.
Company CEO Owen Thomas said on the firm’s earnings call Wednesday morning that Boston Properties collected 99 percent of office rents in the third quarter.
He said that in New York City, about 16 percent of the company’s tenants were back working in their offices, and the landlord expects companies to return in more meaningful ways in the second half of 2021, depending on when a vaccine for the coronavirus becomes available.
But he added, the vaccine is “unlikely to be a silver bullet.”
Aside from a 110,000-square-foot renewal at the General Motors Building and another deal at 399 Park Avenue, discussion of the Manhattan market remained relatively light.
Boston Properties executives discussed demand for life sciences properties around Boston, leases at their Virginia properties and the spectre of sublease space hitting San Francisco.

“There’s absolutely more sublet space in October 2020 then there was in March 2020,” said company president Doug Linde.
Linde added that the company had “made some progress” with Ann Taylor parent company Ascena Group, which owes millions of dollars in rent for its office space at 7 Times Square.

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Manhattan office leasing decline is double that of Great Recession
But change in availability, asking rent was much worse in 2001, 2008

At the onset of the pandemic in March, few anticipated that Manhattan offices would remain mostly unoccupied deep into the fall.
New data show just how bad: At this pace, leasing volume in 2020 will be 52 percent lower than the year before, according to Franklin Wallach, Colliers International’s senior managing director for New York research.

That compares to a 26.9 percent plunge from 2007 to 2009 and a 14.1 percent decline after the 2001 crash, the report noted.
“The scale of the decrease in demand is on track to double the scale of decrease during the Great Recession,” Wallach said.

The dramatic falloff this year was attributable to horrific second and third quarters that have cost some of the city’s top commercial real estate brokers their jobs. Layoffs have rocked JLL, CBRE, Avison Young, B6 Real Estate Advisors, Marcus & Millichap and others.

However, office availability spiked much more in the prior downturns. The rate went up by 42 percent in the six-month period following the 2001 crash, and by 52 percent in the third and fourth quarters of 2008. From April through September this year, availability went up by about 20 percent.
The 3.12 million square feet of sublease space that came on the market from April to September boosted sublets’ share of total availability up only slightly, to 23.2 percent from 22.1 percent. The sublet share gain was much bigger in 2001, when it went from 6.8 percent to 25.9 percent in the six months following the dot-com crash.

A decline in Manhattan’s asking rent average was relatively small in the second and third quarters this year — 3 percent — partly because landlords took a “wait and see” approach during the second-quarter lockdown, Wallach said. In the third and fourth quarters of 2008, the average asking price dropped by 15.3 percent.
Although the current downturn has largely been marked by a lack of leasing, downward pressure on pricing could still intensify if more businesses downsize.
Among Manhattan’s 18 submarkets, the Plaza District’s average asking rent was mostly unchanged from April to September, but the other 17 submarkets experienced declines. (See chart.)


A 16.5 percent drop in the Penn Plaza/Garment district was mostly caused by the removal of the high-priced space at the Farley Post Office development leased to Facebook in August. The 13.7 percent dip in Hudson Square was primarily driven by low-priced sublet space listed at 1 Hudson Square, according to the report.

One of the reasons for a steeper price decline in Midtown South was because the area was booming — and the price was rising — before the pandemic, creating room for the price to come down. But the Midtown market, whose older inventory was losing tenants even before the pandemic, didn’t have as much to lose from asking prices, Wallach said.
But Midtown also has new construction, such as One Vanderbilt and 390 Madison Avenue, along with 1271 Avenue of Americas, which is undergoing a major renovation.
“There is still plenty of demand in the Midtown market, especially for the newer products,” Wallach said.

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If investment banks are relocating to downsize and save on rent what's going to happen to the rest of the market?

Greenhill & Co. relocates and downsizes for cheaper rent
Investment bank moving from Tishman Speyer's 300 Park to Rockefeller's 1271 Sixth

As companies clamor to sublease their locations and negotiate lower rents with their landlords, investment bank Greenhill & Co. managed to get a reduction in a different way: by downsizing its office space.
The firm plans to relocate its headquarters from Tishman Speyer’s 300 Park Avenue to a smaller office in the former Time Inc. building at Rockefeller Group’s 1271 Sixth Avenue, according to Crain’s.

Although it’s unknown how much the firm paid in rent at its Park Avenue location, it negotiated an annual rent of $7.1 million for the new office. It’s taking 78,000 square feet, or $91 per square foot. It was leasing 105,000 square feet in its old space.
“The rent cost of our New York headquarters will be materially lower,” CEO Scott Bok said on a conference call Monday.
The savings are much needed: Greenhill saw a net loss of $9.4 million in the third quarter, down from a $14.9 million profit a year earlier. Revenues fell by 35 percent to $56 million.
The move comes as just 10 percent of Manhattan workers have returned to the office. Some companies, including big tech firms like Facebook and Dropbox, have even made working from home a permanent option.

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Manhattan office availability hits highest rate since 2004
The sharpest rise in availability is seen in Midtown South

Manhattan’s office availability rate hit a high not seen in more than a decade.
In October, the amount of available office space in the borough rose to 12.9 percent, the highest since 2004, according to Colliers International’s monthly Manhattan office market report.

The glut of available space persisted even as leasing volume rose: It was up by 57.1 percent to 1.76 million square feet, compared to September. But that’s still less than a half of what it was a year ago.
“The demand has not yet recovered,” said Franklin Wallach, Colliers International’s senior managing director for New York research. “It improved in October, but definitely has not recovered to pre-pandemic levels.”

The largest deal inked in October was at One Park Avenue, where New York University renewed its 633,000-square-foot lease for the Langone Medical Center. It’s the second-largest lease signed this year, after Facebook’s deal for 730,000 square feet at the Farley Post Office redevelopment.

The second-largest deal was at the Empire State Building, where Centric Brands signed a 212,000-square-foot lease for 7.9 years. The company previously subleased 300,000 square feet from Global Brands Group, but Empire State Realty Trust recaptured the space and leased it to Centric directly. Li & Fung, a Hong Kong-based supply chain manager, took the remaining 103,500 square feet on an 8.3-year lease.
Rounding out the top three was a 113,000-square-foot sublease at 5 Manhattan West by Noom, a rapidly-growing weight-loss startup that’s relocating its headquarters from Chelsea.

One thing that all three deals have in common is location: They’re in the Midtown South market, which accounted for more than half of Manhattan’s overall lease activity in October. But even in that submarket, the availability rate rose to a record high of 12.1 percent, up by nearly 49 percent from a year ago. The average asking price is down to $72.26 per square foot, a nearly 10 percent decline from last year.
The sharp decline in price was partly because Midtown South has become a popular office location, which has led to a spike in pricing, Wallach said.

“There are tenants that, for the last several years, have been squeezed out of Midtown South because of lack of options, or priced out because some of the most expensive portions of the market are in Midtown South,” he said. “If there are now more options, and at a discounted asking rent to what it was a year ago, then that’s an opportunity for tenants that wanted to be in Midtown South, but couldn’t be, to now get into that market.”

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Boies Schiller seeks to shed Hudson Yards office space
Law firm may explore sublease at 55 Hudson Yards

A little over a year and a half after moving into its new office at Hudson Yards, Boies Schiller Flexner may scale down its presence at the megaproject.
The law firm spent millions of dollars moving from its previous HQ at 575 Lexington Avenue in Midtown Manhattan to a new tri-level space at 55 Hudson Yards. But now, amid a larger restructuring, the firm is looking to change its plan and possibly sublease the space, Business Insider reported.
“We are giving careful thought to where we want our offices to be, what size we want our offices to be, and how our offices will be staffed,” Natasha Harrison, co-managing partner of Boies Schiller, told Business Insider in a statement.
Boies Schiller initially agreed to lease four floors at 55 Hudson Yards, encompassing 83,000 square feet, in 2015. It moved into three of the floors, subleasing the fourth, according to Business Insider.

The firm has been making other cuts, including closing offices across the country and reducing its headcount.
With only 10 percent of Manhattan workers back in their offices, companies are rethinking their footprint, leading to a surge in spaces available for sublease in the borough. As of October, more than 16 million square feet of office space was available for sublease, according to an analysis by The Real Deal.
And big companies are hopping on the bandwagon: Uber is one of the firms exploring subleasing part of its office at 3 World Trade Center.

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WeWork and Co’s woes add to rising shadow office inventory
CBRE report analyzed how strains on flex-office providers could impact overall availability rate

Manhattan’s office availability rate climbed to 14.3 percent at the end of October, but the figure could be several points higher when factoring in shadow inventory in the flex-office market.
That’s according to a new report from CBRE, which found that flex-office firms like WeWork, Knotel, IWG Convene and others take 13.4 million square feet of space in Manhattan, but have been strained during the pandemic.

Firms across Manhattan have been slow to bring workers back, contributing to the larger so-called shadow inventory, which is essentially leased office space that stands empty. Flex-office space members have likely been reticent to return.

A CBRE research and analysis team focused on what impact remote work was having on those flex-office providers. As of November, the firms comprised 4 percent of Manhattan’s 414 million square feet of overall office space.
The team’s director, Nicole LaRusso, said the report focused on “unutilized flex space” to see whether in the larger office market “there was actually more available space than our regular metrics would show.”

Since the pandemic emptied out office buildings in Manhattan, flex-office providers have closed numerous locations but the ones that remain open are also suffering.
CBRE estimated that if a quarter of that existing flex-office space is now unoccupied, Manhattan’s overall availability rate would rise to 15.1 percent. It would climb to 15.9 percent if half of that space was empty and would jump to 17.5 percent if 100 percent of the flex-office space was unoccupied, according to CBRE’s analysis.

As it stands now, Manhattan’s 14.3 percent office availability rate is about where it was at the peak of the Great Recession.
CBRE estimated that in the Manhattan office buildings it manages, physical occupancy has plunged to roughly 12 percent, LaRusso said.
The report found that the diminished flex-office space presented both an opportunity and a challenge for the Manhattan market. Tenants looking to preserve cash and test out post-pandemic workplace strategies likely have more options to consider. “But landlords could see increasing levels of flex space returned to the market, adding to the inventory of available space at a time when overall demand remains low.” The report found that the keeping track of unused flex space is “important to gauging the overall health of the Manhattan market.

David Goldsmith

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A New Setback for Big Cities as Return to the Office Fades
The low level of employees back at their workplaces is intensifying pain for cities geared toward office life
San Francisco’s financial district is part of a region lagging behind all other U.S. regions with a 13.4% return-to-the-office rate as of Nov. 18.

San Francisco’s financial district is part of a region lagging behind all other U.S. regions with a 13.4% return-to-the-office rate as of Nov. 18.
U.S. employees started heading back to the office in greater numbers after Labor Day but that pace is stalling now, delivering another blow to economic-recovery hopes in many cities.
The recent surge in Covid-19 cases across the country has led to an uptick in Americans resuming work at home after some momentum had been building for returning to the workplace, property analysts said. Floor after floor of empty office space is a source of great frustration for landlords and companies, which have invested millions of dollars...