The cloud over commercial real estate lingers
While landlords juggle, corporate leaders world over wonder how much real estate they really need after the pandemic.
When Facebook committed to lease 67,800sq metres (730,000sq feet) of real estate at a former post office building in midtown Manhattan in 2020, New Yorkers from the mayor’s office to street vendors to the city’s real estate magnates cited the deal as evidence that office culture was not going to be another casualty of the COVID-19 pandemic.
But the deal Facebook (which calls itself Meta Platforms now) got was hardly the windfall that the building owner, Vornado Realty Trust, described in its marketing. In fact, it was later revealed that Vornado agreed to pay $150m to Facebook as an incentive to close the deal.
Despite bullish global commercial real estate outlooks from Big 4 accounting firms, the pandemic’s effect on the office subsector – in many ways the marquee slice of the global real estate industry – has been profound. Incentives like the one Facebook got, rent holidays, government stimulus and the long (often seven-to-ten year) leases typical in the office market have hidden the pain that the owners of this expensive real estate are feeling.
“All over the world, CEOs are wondering how to explain to their shareholders why 50-to-60 percent of their corporate real estate is basically vacant,” says Nicholas White, co-founder of Smart Buildings Certification, an Amsterdam-based consultancy. “They’re asking their CFOs for all sorts of data on which of these expensive properties to get rid of and which to keep. But it’s almost impossible to imagine that this won’t eventually affect what they can ask for rent, their vacancy rates and ultimately the values of the properties.”
Despite the realization that COVID variants like Delta and Omicron might continue to stalk the planet, the annual forecasts that global players like Deloitte, PwC, Cushman & Wakefield and others released at the start of the year were cautiously optimistic, a turnaround from the early days of the pandemic, when empty offices had people speaking of “the death of the office”. Views have moderated since COVID’s first year, and the consensus view now holds that the “new normal” will still include plenty of offices.
But how many? And what about the value of investments made before the pandemic. Commercial real estate is a hold-and-grow game in most regions, and many wonder if assumptions of 8-10 percent or even higher annual returns, often driving participation in such deals, can survive the COVID storm.