New York City office leasing is in danger. With the most expensive rental rate in the country coupled with deteriorating conditions, it’s a no-brainer that companies want to pull away.
Major industry and tech powerhouses, Amazon and Meta, have halted their NYC expansion plans. This begs the question asked by more and more businesses:
Is New York City's price worth the environment? For many, the answer is no.
The cost of commercial real estate in the city is becoming increasingly expensive while, at the same time, crime levels represent an outright crisis.
While New York City has a lot to offer in terms of culture and reputation, the quality of life for employees is suffering. Moving to the suburbs will alleviate these concerns while giving more perks to employees, like shorter commutes and a safer environment. It’s a more cost-effective option for businesses that will likely benefit them in the long run.
So, while New York City was a great place to do business, the rising costs and deteriorating conditions are making it less and less appealing. Companies may want to reconsider their options and we'll walk you through everything you need to know to make the best decisions for your CRE.
The Corporate Migration Away from Cities
Why Are Companies Moving to the Suburbs
Suburban Offices Benefit Employees
Big Tech Cuts Ties with NYC
There has been a significant slowdown in the tech industry utilizing NYC for its commercial real estate. Let's start from the beginning:
During the pandemic, the tech industry scooped up a lot of prime commercial real estate in the Big Apple. In August 2020, Meta (formerly known as Facebook) signed the biggest office deal of the year, taking on 730,000 square feet. Similarly, Amazon spent a pretty penny (how does 1.15 billion dollars sound) on 630,000 square feet on Fifth Avenue.
However, since then, the face of working changed. In order to maintain workforces, companies shifted to online or hybrid schedules. Most organizations, especially tech firms, have since continued these schedules. What does this mean? Those massive deals conducted before remote work took root are losing companies millions in wasted space.
So, as Manhattan office space reaches $91 per square foot, this wasted space isn't just expensive- it's catastrophic to the EBITDA.
According to Zev Holzman, "Companies like Amazon and Meta are still figuring out the role the office will play in their businesses — and probably aren’t going to keep extra fat lying around in the meantime."
So, what did they do to stop wasted space from hemorrhaging their budget?
Meta and Amazon Halt Building Plans
Meta decided against a planned 300,000-square-foot expansion. It also stopped all plans to build new offices in Hudson Yards. While at the same time, Amazon retreated from a deal with JPMorgan to sublease the NYC space they're attempting to discard.
Amazon isn't just pulling out of NYC. It's moving away from cities all over the country. For example, it paused construction of 4 million square feet in Bellevue, Washington and Nashville, Tennessee facilities.
When these mega-giants make decisions with their CRE, it's time to listen.
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"The two companies’ more-cautious approach is a potential harbinger of future challenges across the city’s office market as businesses seek to cut costs and re-evaluate real estate strategies." |
The Corporate Migration Away from Cities
Tech pulling away from NYC is indicative of a greater phenomenon. While cost of living skyrockets in cities, the demand for commercial real estate has dwindled. In the last two years, NYC lost 5,200 private businesses. However, it doesn’t end there. According to Forbes, 1 in 5 financial firms are plotting moves out of Manhattan.
“More than a third of companies expect to reduce the size of their office space in the next five years, including 86% of accounting firms, 43% of public relations businesses, and 38% of tech companies.”
This has caused a ding in CRE prices (which, albeit still expensive- are not actively rising). Instead, there has been a silent corporate migration toward the suburbs. As a result, the demand balance is shifting, reflected in steady price growth in suburban CRE.
According to FS Investments, "Price growth among urban properties has significantly trailed that of suburban properties since the pandemic began."
This points toward a growing market that shouldn't be ignored.
Why are Companies Moving to the Suburbs?
The suburbs have been revitalized by demand from people fleeing the cities for health and safety since the pandemic.
Since companies are pausing to reassess their space needs, they're taking advantage of an evolving and more flexible workforce.
Businesses no longer need city offices. First, consumer bases have majorly shifted to suburban areas. Therefore, moving to these areas does not risk losing business. Second, the inflated costs of cities are no longer sustainable (for companies, families, and individuals).
FS Investment further explains, “The rationale behind American’s flight from density involves both cost — property values in major metro central business districts grew nearly twice as fast non-major metros for the 10-years ended 2019 — and convenience as office employees desire more space in an increasingly remote-work world.”
Rising Crime Drives Populations Away
At the same time, cities like Manhattan are witnessing unprecedented crime levels.
Fatal and unprovoked attacks across the city are on the rise. As a result, NYC natives no longer feel safe- especially on public transportation. The subway system, in particular, has been in the front of significant media attention.
According to lifelong Harlem resident Jo-Ann Jones,
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“I don’t feel safe on the trains…I’m afraid to go out after 8 o’clock.” |
Another native New Yorker, Bernadette Gay no longer takes the subway after being harassed on the train despite living in the Financial District her whole life. She explains, “People are scared…My friends and neighbors don’t come out at night here anymore.”
With story after story of shootings, stabbings, and homelessness, crime is wreaking havoc on Manhattan trains. Would you want to take the subway in NYC right now?
For the prices, the city should at least promise a safe environment. Think about how this applies to your real estate.
Do you want your employees commuting to the office in these conditions? Safety has become the number one driver of where to place an office. We’re dealing with human beings. Your people are your most critical asset- so beware of putting them in positions where their personal safety is at stake.
Not only are city commuters at more risk for violence or property crimes, but there is also more danger of contagion spread. The dense concentration of people (which used to be a dream for recruiting) now breeds disease. That is why NYC and other hubs were the sources of significant COVID panic. A similar episode could kill the demand for city real estate altogether.
Think about how vertical the layout of NYC is. The value of the land far outweighs the cost of building upwards- therefore, the city is inundated with skyscrapers. Elevators, the one place social distancing isn’t possible, dominate Manhattan CRE. As a result, this health and safety liability is inescapable in this metro area.
Suburban Offices Benefit Employees
On the other hand, the property ownership in the suburbs is far more spaced out. There is a significantly lowered risk for crime or other health concerns. Suburban offices also have:
- Lower rents
- Ample parking
- Safety
- Shorter commutes
- Revitalized talent bases
- Improved quality of life
So, during this era where the country’s strongest performing companies are reassessing their real estate needs, don’t get left behind. You have the power to make similar, hard looks at your CRE. If you’re located in NYC (or any city) you’re at a higher risk for crime and skyrocketing cost of living. It’s time to determine whether the cost is worth the environment.
For Meta, Amazon, and others, the question hangs in the air. However, for the time being, they are cutting ties with NYC.
While the city CRE sector is taking a big hit, the suburbs represent an opportunity for growth. As businesses can afford to be more flexible with the location of their real estate, suburbs are gradually replacing metro areas as the prime spot for commercial real estate.
As Tenant Reps who only represent corporate tenants, we have observed the trend towards suburban offices. So, if you want to take similar, close looks at your CRE, we can help. We know the plusses and minuses of being in an urban area versus suburban. With over 3 decades of experience solely representing Fortune 500 and top private organizations in their corporate real estate, we know how to save you potentially millions of dollars!
Click the link below to get started on saving money and time.
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