When the coronavirus pandemic first exploded on U.S. soil, New York City was its epicenter. And while the virus is, unfortunately, no longer concentrated in just Manhattan, the city has taken a major beating from a commercial real estate perspective.
As of mid-December, nearly 14% of office space in Midtown Manhattan sat vacant — the highest rate on record since 2009. Meanwhile, more than one-third of high-end Madison Avenue storefronts are empty, twice the vacancy rate from five years prior.
While it’s true that wealthy consumers — those most likely to frequent luxury stores — may not be hurting financially during the pandemic, the idea of ordering goods online and picking them up curbside may not hold much appeal these days. Rather, the lure of high-end stores is centered on the in-person shopping experience, which is largely off the table while the pandemic rages.
Meanwhile, the remote work trend the coronavirus outbreak has sparked has battered office buildings in a very significant way. As of late October, only 10% of Manhattan’s estimated 1 million office workers were actually reporting to a building to do their jobs. And many companies are making plans to keep their staff remote permanently, having learned to capitalize on communication tools so workers don’t need to congregate in person to get their jobs done.
Long-term remote work could result in huge savings for companies, but for Manhattan’s commercial landlords, it poses a real problem. If tenants don’t renew their leases, there will be a massive vacancy crisis. Furthermore, a lack of demand for commercial space is already hurting rents. Case in point: Commercial rents have dropped almost 13% from last year in Manhattan, and the most dramatic declines are in areas where office buildings are dominant.
All told, Manhattan’s commercial real estate landscape has taken an alarming turn for the worse. It therefore begs the question: Should hard-hit areas aim to replace some commercial space with residential space?
A potential means of mitigating a crisis
Residential buildings in Manhattan aren’t exactly thriving during the pandemic, either. In fact, landlords have resorted to giving away free rent just to attract tenants to sign leases.
But still, there may be more demand for residential space than commercial space as renters seek to secure more square footage after months of being cooped up at home. And those looking at the possibility of long-term or permanent remote work may be especially eager to upsize their living space, especially now, when rents can be had at a relative discount.
It could therefore make some for landlords to seek to convert commercial buildings to residential space. In fact, the Real Estate Board of New York, with members from nearly every major landlord and developer in Manhattan, is already proposing the city and state allow developers to more easily change Manhattan offices into residential properties. The group estimates that converting even 10% of unused office space to residential units would create as many as 10,000 new rentals in Manhattan. And given the city’s current lack of affordable housing, that could also help solve a very real crisis.
Of course, there will be zoning hurdles to jump over even if the city eases certain regulations and restrictions to allow more conversions. And many buildings will surely need to be adapted for this type of changeover. But going this route could benefit not only commercial landlords who are starved for revenue but city dwellers who need access to more housing options.
Converting commercial buildings in business districts to apartments could help small businesses survive, too. Restaurants, cafes, delis, and other mom-and-pop shops have seen their revenues decline substantially in the wake of the pandemic, as they typically rely on office workers to stay afloat. Putting residential tenants in those buildings could increase foot traffic to these businesses, thereby preventing even more closures.
The Millionacres bottom line
Turning commercial buildings into apartments clearly won’t happen overnight, but it’s an option worth pursuing, especially given the somewhat bleak outlook for offices. Though Manhattan nightlife may open back up quickly once the pandemic comes to an end, remote work may be here to stay. And if that happens, office buildings may never return to their previous occupancy levels. Going residential may be the only way to keep tenants in that space at the capacity landlords want.