Not too long ago, office was in a scary place, as remote work seemed like it would be the new normal. However, the asset class has continued to improve — leading some experts to believe that it's bottomed out — with Manhattan leading the way in the recovery.
During ULI New York: Real Estate Outlook 2025 at NYU Stern School of Business, a panel of Rohit Aggarwala, chief climate officer, City of New York, Sarah Hawkins, CEO of East Region for Hines, Lisa Pendergast, executive director for nonprofit, Commercial Real Estate Finance Council, and L.D. Salmanson, CEO of real estate software firm Cherre, discussed some emerging trends in CRE.
NEW YORK'S RESILIENT OFFICE SECTOR
Particularly, Hawkins touted the resilient recovery of office, which she believes is just at its beginning stages. Notably, New York is showing it's possible in the post-pandemic world.
"Net absorption is basically flat over the last year. And this is not just Class A, not just trophy," she said.
"The entire market is essentially flat, and [Manhattan] the first major market to hit that milestone," adding that there is even rent growth in the region.
A new hot trend in today's office market is tenants are opting for smaller but higher-quality spaces with enticing amenities.
When the pandemic first happened, tenants were lessening their footprints by a significant margin — but now the market is starting to stabilize more as we adjust to the new environment, according to Hawkins.
"We've seen it in our own portfolio, where, three years ago, we saw tenants giving back 30% of their space when they were renewing or relocating, on average," she said.
"The last 12 months, it's been 10% so we've seen that trailing off, and we've seen that stabilizing."
Plus, in Avison Young's recent fourth-quarter Manhattan property sales report, the office sector stood out with 13 transactions for sales of $1.6 billion, which surged 86 percent and 98 percent from the previous three months, respectively.
OFFICE-TO-RESIDENTIAL CONVERSIONS HEATING UP IN MANHATTAN
Another thing to keep in mind is office conversions; many of which get transformed into residential properties. Particularly this is happening in Manhattan, and it's not only lowering availability for office (in hopes of increasing demand) — but it's helping fuel the need for multifamily and housing.
"We've seen about 3 million square feet get converted [in Manhattan]," Hawkins said.
"There is 5 million square feet underway, getting converted now," ambitiously adding that there is potential for a total of 17 million square feet thanks to more space in the planning stages. Salmanson, meanwhile, believes that figure is a little "over-optimistic."
Pendergast wonders what will happen to office buildings that were originally built in the 1990s and before then. Will they get enough demand to earn a renovation or will they get converted instead to residential?
CAUTIOUS OPTIMISM OVERALL
Overall, Hawkins said she is "bullish with a seat belt," noting that capital for both equity and debt is the biggest issue.
"Certainly transaction volume is starting to pick up, and I think we'll see more this year, but it will take some real courage on the development front, for sure," she said.