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.”