A Different World – Jan. 22, 2024
CBS-TV’s 60 Minutes ran a segment earlier this month on the impact that working from home has had on post-pandemic office occupancy, and on cities more broadly. Although it may be a latecomer to media coverage that has been going on for at least the past couple of years, the segment does illuminate the dimensions of the problem, along with possible solutions.
The segment opens with correspondent L. John Wertheim telling his audience, “Looking for signs the U.S. economy can stave off a recession? Avert your gaze from commercial real estate.” Leaving aside the fact that “commercial real estate” as we know it extends far beyond the office sector, the scenario he illustrates in the ensuing description can be disheartening: $1.5 trillion of CRE debt coming due against a backdrop of (currently) higher interest rates.
A little more context would have been helpful, though. Wertheim mentions that 95 million square feet of Manhattan office space is currently empty. The sum seems enormous—”the equivalent of 30 Empire State Buildings”—but the report omits the fact that 95 million square feet of vacant space still leaves nearly four times that amount that is occupied.
However, that occupancy rate may be in flux. The report quotes Stijn Van Nieuwerburgh, professor of real estate at Columbia University, describing the hybrid work model’s impact on office pricing as a train wreck in slow motion.
‘And this is just the beginning,” he says. “The reason it’s just the beginning is that there’s a lot of office tenants that have not had to make an active space decision yet.”
Van Nieuwerburgh, who gave us the term “urban doom loop,” nonetheless is optimistic about the long-term viability of office properties per se, albeit not necessarily in their original configurations or purpose.
“There’s lots of different uses for these buildings, especially when you can buy them at a depressed price,” he tells Wertheim. After charting the evolving history of society’s relationship to its workplaces, he says, “We no longer have to live where we work. And I believe society is only at the beginning of realizing the full potential of that idea.”
In the meantime, there are the day-to-day realities of the present. The segment shows a tour of empty floors at RXR Realty’s 61 Broadway in Lower Manhattan, with CEO Scott Rechler characterizing the current situation as “an existential moment. I call it ‘crossing the chasm’.” He elaborates that the chasm represents higher interest rates and the changing nature of how people work and live.
“We’re not going back to where we were,” Rechler says. “It’s a different world. And it’s going to be turbulent.”