The vacancy rate of Midtown office buildings was recently reported to be approximately 20%, as concerns in the market continue to linger around the future of office space.
More than the "WFH movement", a significant and direct driver of the high vacancy rates today is the financial predicament faced by landlords. In a typical market, high supply typically leads to reduced pricing to meet equilibrium with the demand.
However, a significant number of property owners are grappling with substantial debt that cannot be easily refinanced, leading to a host of challenges in the real estate market; among them, the inability to price their space to market.
With values taking a considerable hit, landlords are left questioning whether they should continue investing in these properties and sign leases at rental rates that imply a significant erosion of the building value from their previous levels. A classic “do we throw good money after bad?” kind of dilemma.
Leasing office space is a capital-intensive endeavor and the lack of liquidity in the market can make it difficult, if not impossible, for many landlords to lease space at market rents while allocating new funds for concession packages and buildouts.
While we have certainly seen some buildings rise to the occasion and transact competitively to attract and retain tenants, other buildings are struggling with an adverse financial profile and capital stack with no relief in sight.
As the WFH movement reaches its equilibrium, the next phase of the Midtown office markets evolution is going to be characterized by the financial strain on buildings burdened by debt, reduced values, and the lack of liquidity in the market - all of which creating exceptional opportunities for Midtown office tenants!
Until next month,
Principal Broker | Noah & Co.
For the rest of our July 2023 Newsletter, click here.