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Category: Josh’s Bio

Checking in on Office Space: NYC and Nationwide

Published on December 1, 2022

As concerns about Covid fade from the American consciousness, work from home (WFH) remains sticky and it’s impacting the office market. It’s been some time since we last checked in on the health of New York City’s office sector and, it turns out, all is not well.  As leases come up for renewal, companies are sometimes opting for smaller space, saddling landlords with millions of square feet in vacant space.  Attendance at office buildings in New York is less than half of pre-pandemic levels and a similar narrative is playing out in Boston, Atlanta, San Francisco, and other cities.

Worse still, more space is expected to hit the market in the coming months and years as companies like Meta, Salesforce, and Lyft lay off workers (more than 100,000 tech workers have lost their jobs this year and more layoffs are expected) and more than 100 million sq. ft. of new office product is expected to come online. Wall Street is anticipating a slump in this space as shares of large landlords are trading close to or below their pandemic lows, underperforming the broader stock market.

What options do landlords have with higher interest rates, low occupancy levels, and a pivot by tenants to smaller spaces in newer better-equipped buildings? Not many: all are hoping for better times but some are throwing in the towel, handing over the keys to their lenders while others are looking to convert office buildings into residential complexes, an expensive and time-consuming option.  Let’s look at some of the numbers:

  • The value of U.S. office buildings could plunge 39% in the coming years;
  • NYC collected $6.8 billion in property tax revenue from office towers in the year ending June 2022 (~9% of its total tax revenue) down from $7.5 billion in the previous fiscal year;
  • The market value of office buildings in NYC fell by $28.6 billion this year, the first decline since 2000; and
  • Office vacancy rates in downtown NYC are at a record high 20.2% and similarly high across the country (19.1%) with some markets like Chicago, Houston and San Francisco exceeding 20%.

With New York office space costing on average about $16,000 a year per employee, you can bet on employers continuing to downsize their space needs during the pending economic downturn. Dark clouds for office landlords are likely to persist for the foreseeable future. 

Eavis, Peter, et al. “Why Office Buildings Are Still in Trouble.” The New York Times, 17 Nov. 2022, www.nytimes.com/2022/11/17/business/office-buildings-real-estate-vacancy.html.
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NYC’s Conundrum: High Density But Still Too Few Units

Published on December 1, 2022
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News alert: there is a significant affordable housing problem in NYC and, sadly, we don’t have the brainpower to fix it.  Or perhaps the truth is more nuanced, no one capable of fixing the problem cares to join the legislative ranks to do so.  Countless development projects in high-density zoned areas in Manhattan where thousands of affordable apartments could have been created were not.  Instead, developers opted to build high-rise, low-density towers or, put more simply, big buildings with few units.  Urban planners say the developers are squandering precious few sites left while builders argue the cost of land and construction is too high for anything but luxury condominiums, without tax incentives and more favorable zoning. 

A few examples that highlight the issue include:

  • (i) 60 East 86th Street with 14 apartments (zoning allowed for 77 units)
  • (ii) 15 West 96th Street with 21 apartments (66 units possible)
  • (iii) 200 East 75th Street with 36 apartments (144 units possible)
  • (iv) 1165 Madison Avenue with 11 apartments (88 units possible)

City Councilwoman, Gale Brewer, asks “in a city that’s desperate for housing…how can you allow a builder to build fewer units” and that none of the newly built projects contain anything affordable is “boggling” to her.  The fact that she is dumbfounded and confused is telling but also disheartening that leaders like her can’t understand basic principles of capitalism. Make no mistake: for each of these projects, the developers played by the rules working within zoning regulations and in-place height restrictions. Force their hand and developers will build only what is economically viable. In this case, multi-million dollar condominiums that sell at a brisk pace to the uber wealthy where bigger units command premiums is what makes sense.  

There are proposals out there but they require legislators to work with builders (instead of demonizing them) and they include reinstating tax benefits and increasing density in exchange for affordable apartments or obligating apartments eliminated during demolition be built back.  To Ms. Brewer and others of her ilk, you can blame the developers or whomever, but your failures are entirely your own responsibility.  All NYC residents and especially those of little means deserve better from their so-called leaders. 

Chen, Stefanos. “Taller Towers, Fewer Homes.” The New York Times, 23 Sept. 2022, www.nytimes.com/2022/09/23/realestate/nyc-apartments-housing-shortage.html.
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A Sordid Little NYC Gem Hits the Market for $25 Million: The Liberty Inn

Published on December 1, 2022
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Downtown in NYC’s West Village neighborhood sits a 7,000 SF structure beside the West Side Highway.  It is the last hourly rate hotel ($95 for two hours and $155 for six hours in case you are in the area) in Manhattan’s meatpacking district—a relic with a rich history of sordid behavior. 

The hotel is billed as the “most sexiest” in the city (sophomoric and clunky to say nothing of the grammar) providing a sanctuary for bouts of afternoon passion, clandestine affairs and lunchtime quickies.  All activities that remain elusive to this humble author suggesting I may have picked the wrong profession. This kinky little spot was once known as the Strand Hotel, a boardinghouse for sailors. Reporters even once rented rooms to file reports about survivors of the Titanic when they arrived at Pier 54.  In the 1960s, it was known as the Hide-a-Way Motel (who names these things), which later shared space with a gay nightclub, the Anvil (where drag performances by the likes of Ruby Rims, Candy Stevens and The Famous Yuba entertained patrons). 

The Liberty is designed with a narrow purpose as evidenced by room designs and certain unique fixtures.  Certain rooms are bathed in red light, filled with erotic wall art, have hot tubs and ceiling mirrors presumably reflecting back at you all of your physical shortcomings and life’s missteps. You can even find “The Liberator” at the Liberty Inn, a black stump-like apparatus used for lovers to contort themselves into imaginative and physically challenging positions. 

The owner, Edward Raboy, who uses the alias Robert Boyd—and, why not, when in this line of business—is the son of the owner of the Hide-a-Way (it’s true apples stay close to the tree when they fall).  Raboy acknowledges the West Village has changed dramatically from its wilder days where ample drugs and meatpacking of all kinds was considered groovy.  In his view, the Liberty Inn no longer fits within the current context of the gentrified West Village (or does it) and, as Raboy explains “it’s been a fabulous run” but its time for him to run along and let the next chapter of the storied hotel be told.  

Vadukul, Alex. “For Sale: The ‘sexiest’ Hourly Rate Hotel in Manhattan.” The New York Times, 10 Aug. 2022, www.nytimes.com/2022/08/10/style/hourly-rate-hotel-manhattan.html.
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Enough Apartments in NYC To Go Around But NY State Legislators Can’t Seem to Get It Right

Published on September 1, 2022
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Good intentions can often produce bad outcomes and, in NYC, we are beginning to see the unwanted ill effects of the June 2019 Housing Stability and Tenant Protection Act (HSTPA).  The law—noble enough in its pursuit to preserve affordable housing—has proven to be an unmitigated disaster.  In June 2019, we at Invictus Property Advisors wrote an article setting out ten (10) key takeaways from what was then newly enacted legislation.  Two items of concern flagged by us were units falling into disrepair and landlords keeping rent stabilized units vacant after tenants departed, describing the latter as a “perverse and unintended consequence of the new rent laws.”  Three years on, many of our gloomy prognostications came to pass, much of it detailed in the Real Deal article.

Of note:

  • The cost to gut renovate an apartment vs. allowable rent increases: $60,000-$120,000 vs. $89 increases per month
  • The monthly operating costs per unit vs. median monthly rent for a stabilized apartment: $1,548 vs. $1,422
  • The number of homeless New Yorkers vs. number of vacant apartments: 60,000 homeless (of which 15,000 are children) vs. 43,000 vacant stabilized units
  • The percentage of affordable units (i.e., under $1,500 per month): less than 1% of the housing stock, the lowest in three decades
  • The percentage of NY state legislators voluntarily accepting lower pay to share in the pain: zero  

The numbers don’t lie: this law has resulted in disincentives to renovate and rent up very much needed affordable apartments.  A shameful reality is that there are even enough vacant units to house two thirds of NYC’s homeless.  But rather than embrace widely understood market forces and basic economics, legislators blame landlords for creating artificial scarcity (i.e., keeping stabilized units off the market to drive free market rents higher) or painting apartment walls with “gold” paint presumably to inflate renovation costs.  The response from state assembly member Linda Rosenthal (who holds a B.A. in history) was to introduce a bill charging a “warehousing fee” or a penalty on landlords for failing to place tenants in rent stabilized apartments starting three months after a unit becomes vacant.  Unlikely to pass and arguably unconstitutional but demonizing landlords plays well in liberal circles and masks the lack of a real plan.  Ms. Rosenthal and legislators of her ilk are outside their core competence on this issue and should bring experts into the mix—history will treat her well if she does.   

Suzannah Cavanaugh, Sasha Jones. “Vacant, Rent-Stabilized and Locked up: NYC’s Ghost Apartments.” The Real Deal, 1 Sept. 2022, therealdeal.com/magazine/national-july-2022/that-empty-feeling/.
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The Saudis Look to Make an Addition to the Wonders of the World the Line

Published on September 1, 2022
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By NEOM. (n.m.). https://www.neom.com/. https://theconversation.com/what-is-the-line-the-170km-long-mirrored-metropolis-saudi-arabia-is-building-in-the-desert-188639

The world has a handful of wonderful structures that reflect the glorious capability of mankind.  A few that come to mind include the Great Wall of China intended to fend off invasions and raids.  Though it failed miserably with its stated objective, today it serves as an impressive 5,500-mile tourist attraction and a tangible piece of political propaganda.  Let us not forget the Incan site high in the Andes Mountains in Peru known as Machu Picchu and the Colosseum in Rome where gladiators dueled each other and animals were pitted against man in death matches. There are certainly others (i.e., the Taj Mahal and the Khaznah to name a couple) but the Saudis are looking to put their own signature project on the list with The Line.

It is a one-building megacity structure stretching more than 106 miles, house up to 9 million residents, extend 650 feet wide and reach 500 meters above sea level.  The project will cost hundreds of billions of dollars, feature a high speed train running end to end in 20 minutes and re-invent the way people live with vertically layered communities. Words can’t capture the scope of this project but this video link can, check it out.

The Saudi government may have a spotty record on a whole host of things but who am I to judge and despots are known to get stuff done.  The Line is sure to disrupt the 500 million birds that migrate across Saudi Arabia each year and be a decades long punishing slog for migrant workers (a.k.a. construction artists) who are likely to suffer ignominious living conditions and paltry wages building this giga project. That said, sacrifices need to be made and one must suffer for their art so, in the end, I am chomping at the bit to see The Line come online. 

Allan, A. (n.d.). What is The Line, the 170km-long mirrored metropolis Saudi Arabia is building in the desert? The Conversation. https://theconversation.com/what-is-the-line-the-170km-long-mirrored-metropolis-saudi-arabia-is-building-in-the-desert-188639
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Are NYC Properties Falling in Protected Tax Classes 2A/2B on The Chopping Block

Published on September 1, 2022
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Like many things, it starts with a whisper before morphing into a collective roar and this author fears that protected tax class 2A and 2B buildings in New York City may become Albany’s next target. The evidence of a legislative backlash involving the cancellation of protected tax classes is anecdotal at this point but the private equity behemoth, Carlyle Group’s, recent moves into this “mom and pop” space may have put the issue front and center for legislators. Over the past year, Carlyle has spent more than $500 million buying smaller apartment buildings in bite-sized $2 and $3 million checks.

Small potatoes for a group like Carlyle so what’s going on? Protected 2A/2B buildings enjoy the benefit of limited tax increases to no more than 8% annually and 30% over a five year period. And in a city with ever growing expenses, the 2A/2B  properties provide predictability to an owner’s net income and serve as an inflationary hedge against other operating expenses. The end game is to amass a portfolio of these properties and sell them at a premium. Take Highpoint Property Group, led by Drew Popkin, who caught on to the 2A/2B game early and recently put 20 such buildings on the market at an asking price of nearly $300 million. 

In 2018, Michael Shah of Delshah Capital purchased 28 2A/2B properties from Silvershore Properties that had done the heavy lifting of assembling the properties. To be clear, there isn’t anything illegal about this (nor should there be); in fact, it is quite savvy and, put simply, just an example of capitalism at work. But in current times, City Council members and NY senators are bound to start asking whether multi-million and multi-billion dollar owner/investors like the Carlyle Group should be benefitting from the 2A/2B tax class designations.  In a nation of laws, the rules that benefit the “little guy” should and must also benefit the larger players as well.    

Rebong, Kevin. “Carlyle Group Builds Empire of Small Brooklyn Apartment Buildings.” The Real Deal, 28 July 2022, therealdeal.com/new-york/2022/07/28/carlyle-goes-big-on-small-brooklyn-buildings/. Accessed 24 May 2023.
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Manhattan Office Numbers are In and… It’s a Mixed Bag

Published on September 1, 2022
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Maria Gotsch is Partnership Fund for New York City. (n.i.). https://pfnyc.org/. https://web.sichamber.com/Associations/Partnership-for-New-York-City-430

Will they or won’t they…return to the office?  It’s the question employers, office landlords and just about every small and medium sized business reliant on Manhattan workers is asking.  More than 160 employers (mostly located in Midtown and the Financial District) were surveyed between April and May 2022 to gauge the work from home (WFH) trend and how permanent we can expect it to be.  The findings are as follows:

  • A mere 8% of Manhattan office workers report to duty five days a week;
  • On any given workday, you can expect 38% of Manhattan office workers at their office desks (expected to grow to 49% in September 2022);
  • By industry, it is the real estate folks returning in droves with an average daily attendance of 82% with law, tech, media, consulting and financial services firms far behind, all falling in the low to mid 40% range;
  • Larger firms (greater than 5,000 employees) are returning to the office more slowly than smaller firms (fewer than 500) with 53% of employees in the office on an average weekday for smaller firms vs. 31% for the larger companies.

The good news is that the trend suggests Manhattan office workers across all industries and company sizes are expected to return to the office in greater numbers.  In addition, 58% of the companies surveyed expect their headcount in NYC to increase or stay the same over the next five years.  The more troubling metric for all the stakeholders who depend on office worker dollars every day is that 78% of employers envision a hybrid office/work from home model post pandemic.  The bottom line: WFH is an acronym we will all be adopting and we ought to start adapting to this new reality, including the executives in C-suites at REITS like Vornado and SL Green as well as the homeless person living off the kindness of NYC strangers.

Gotsch, Maria. “Partnership for New York City.” The Staten Island Chamber of Commerce, web.sichamber.com/Associations/Partnership-for-New-York-City-430. Accessed 24 May 2023.
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