An Informal Poll On The State Of The Legal Office Rental Market
The shared legal office space market is starting to revive itself after a 100-day hiatus. We're seeing more traffic and in fact this week we had 3 deals executed. 1 in Santa Monica CA for 2 offices (with ocean views), and two in Manhattan, 1 office at 800 Third Avenue and 3 Offices at 9 East 40th Street.
While we had a busy week, from what we've seen so far, that doesn't guarantee activity next week. We're at a peculiar junction where it feels like the real estate market is going to fall apart - and the brokerage business is about to be trimmed considerably.
With respect to the Market, nobody really knows anything - but a lot of people are telling us different versions of what "is" going to happen as if they have a crystal ball. I've found a lot of these statements to be rather self serving - as if making over-positive statements will result in positive performance. It won't.
I don't like to be the glass half empty guy, but I think that for people 60 and older, the employment world in Manhattan has changed irrevocably. Let's look at the "Boomer" population in New York City. This encompasses all between the ages of 51 to 69. According to AARP, 64% of these Baby Boomer workers were employed before the arrival of Covid-19, and 26% of them anticipated retiring at age 70 and over.
In 2019, daily ridership on Metro North was about 360,000 trips. The subway system had about 5.7 million daily riders. This is going to be a major obstacle for baby boomers returning to work. And if they can get over that hurdle, the elevators and bathrooms in their office buildings will also prevent them from coming back. So we have 3 major obstructions - commutation, vertical transportation, sanitary surfaces.
Based on informal polling, about 15% of the baby boomer commuting attorneys we know are this week back at the office, and intend to be on site at least 3 days per week. About half of all those over age 51 told us they do not intend to return to the city with any regularity until the 3 impediments are resolved. Many added that they will not return until there is a vaccine or cure available to them.
Most people we've spoken to seem to be remaining in telce to see what happens. Among the folks in younger generations that we've polled, many intend to go back to the city as soon as their employers tell them to do so (though most of them expect modified days and a general reduction in the number of people present at the office at the same time.) There will be a tremendous under utilization of commercial real estate for the companies that were used to packing in as many seats as they could.
The optimistic brokers and landlords we've spoken to tell us that the CRE market is going to be busy because everyone will have to increase the amount of space they lease to comply with social distancing regulations. The pessimistic ones tell us the CRE market has fatally changed. We hope the truth is somewhere in between, where we all use roughly the same amount of space we were in pre Covid-19 but that the space will be have a reduced population because a certain number of employees will be working remotely each day.
We've been looking at direct deal leasing asking prices and have not seen any considerable reduction (though the vote is not yet in as far as what happens when brokers start making lowball offers. Are they entertained or rejected out of hand?
We expected sublessors of offices to immediately reduce their expectations and the coming weeks will better inform us as more and more subleases are concluded. Remember - just because the market froze in the last 90 days, lease expirations for those months did not go away. There is a certain amount of natural demand that always occurs and the other trend we are seeing is short term or month to month extensions for some of those tenants where the landlord was happy to provide a rent reduction while the space was largely unused - rather than have a total vacancy. Something is better than nothing, and we think that more and more landlords are going to figure that out and won't be holding their ground to the extent they seem to be in this first week of return to work.