Commercial real estate woes weigh on New York City recovery, NY Fed says

Ongoing stress in the New York City commercial real estate sector is still creating economic headwinds for the region as it nears a complete recovery from the coronavirus pandemic, and it’s unclear when or if the sector will return to its prior strength, the New York Fed said Thursday.

“While the residential rental market has bounced back, the retail and office markets have remained slack – largely due to the shift to remote work and online shopping,” the bank said in a posting on its website. Commercial rents in Manhattan are down a lot from where they were before the pandemic, and “this weakening trend may continue as more and more commercial tenants roll off leases that were negotiated when demand for office and retail space was far stronger.”

While workers are coming into the office more now, they’re not doing it in great enough number to help lift up all the companies that once supported these workers, the New York Fed noted.

“It’s very clear that the absence of office workers is continuing to put strains on the New York City economy” said Jaison Abel, Head of Urban and Regional Studies at the bank, in a press briefing. When workers don’t come into the office, that means they’re not hitting shops and leisure firms, impairing employment in those parts of the service sector.

The New York Fed noted that while areas that surround the city are largely recovered on the jobs front, the city still has about a 1% shortfall in workers relative to before the pandemic, which kicked off in March 2020.

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And it’s unclear when this situation might turn around.

“One of the challenges, or one of the things that makes it not so clear, as you know, people are coming back to the office, they’re just not coming back five days a week,” said Jason Bram, Economic Research Advisor for Urban and Regional Studies at the bank. But that does not necessarily mean that companies leasing office space can just cut back on the space they rent out.

Bram said it appears that in a number of firms, employees are coming in in large scale over a few days of the week, which suggests that when workers are in the office, the firm needs all the space it’s leased, with empty rooms on the other days.

“When the chips fall, it is probably not going to happen that office demand is going to be quite where it was before the pandemic, but you know, it’s not clear that the drop off is ultimately going to be all that severe,” Bram said.

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The New York Fed’s findings on the city’s economy come as fears are mounting over the fate of the commercial real estate sector, which is heavily dependent on borrowing to function. The Fed has raised rates aggressively which is increasing the cost of financing commercial properties at a time when there is also reduced need for them, which has hit rent levels.

Last month, a real estate executive serving on the Board of Directors of the New York Fed warned of a coming crisis for the sector and called for the industry to create a program to create “leeway and the flexibility from regulators to work with borrowers to develop responsible, constructive refinancing plans.”

The challenges faced by commercial real estate are further exacerbated by the troubles now hitting smaller banks in the wake of the failure of Silicon Valley Bank last month. These firms may be less able to lend in the current environment and may be more exposed to defaults from commercial property borrowers. (Reporting by Michael S. Derby Editing by Mark Potter)