Natalie Sherman, New York business reporter
March 10, 2024
Image caption: New York deli owner Jimmy Yabrody says his store wouldn't survive without office workers
New York City deli owner Jimmy Yabrody looks grim from the shop he opened 27 years ago in one of the city's main business districts.
“Everything is empty,” he says. “I can't understand it.”
The 61-year-old sent two kids to college, employed 12 people and handed out sandwiches and salads to the office workers streaming in from nearby buildings from his shop on a hilltop on Park Avenue South.
More recently, it has offered a window into what some have called “the apocalypse” in the American office.
The nearby, iconic triangular Flatiron Building has been vacant since 2019. Last fall, its owners announced they would turn it into apartments.
Around the corner, construction is underway on new offices fronting Madison Square Park, but its anchor tenant, IBM, is consolidating from other space in the city.
His neighbour, 360 Park Avenue South, has been vacant since 2021 due to redevelopment. Sold that year for $300m (£233m), the 20-storey building made headlines recently when one of the owners transferred his 29% stake to one of his partners in exchange for $1 cash, abandoning a promise to spend a further $45m on renovations.
Image source: Boston Properties
Image caption: A computer-generated image of 360 Park Avenue South, although the building has been vacant since 2021.
The area still has a stable of tenants, including a Michelin-starred restaurant and part of the state court system.
On the streets, residents will tell you that life is returning to normal after COVID-19.
But sales at Yavrodi's Taza Cafe & Deli are down 70% since 2020, telling a different story — highlighting the huge challenges facing office building owners across the country and the risks those issues are creating for the broader economy.
“We rely on office employees, and office employees aren't here. It's a very simple calculation,” he says. “If they don't come to work, a place like ours can't survive.”
Four years after the pandemic revolutionized work-from-home practices, especially in the United States, the changes have proven difficult to reverse and the consequences can no longer be ignored.
About 20% of office space across the U.S. was vacant at the end of last year, the highest vacancy rate in more than 40 years, according to Moody's Analytics.
This figure is expected to grow over the next 12 to 18 months, as declining demand transforms urban neighborhoods and hits property values, which have already fallen an estimated 25% nationwide.
One recent paper estimated that more than $660 billion in value could be lost in the United States between the end of 2019 and the end of 2022.
The declines have come at the same time as borrowing costs have soared, creating an incentive for even deep-pocketed companies to exit real estate as buildings become worth less than they can afford to repay loans.
Image credit: Getty Images
Image caption: New York City's office vacancy rate is over 20%, more than double that of central London.
An estimated 44% of the country's office mortgages are in that situation, raising widespread concerns about how banks, and the wider economy, will absorb the fallout if loans start to go bad.
Lenders in countries as far away as Germany and Japan have set aside hundreds of millions of dollars in anticipation of loans going bad.
The problem is especially acute at local and regional banks, some of which, such as Community Bank of New York, have already seen their stock prices plummet dangerously as investors flee potential trouble.
The situation would be made worse if banks collapsed or cut lending, making it harder for individuals and businesses to get credit and potentially leading to a deeper economic slowdown, analysts say.
In Washington this week, politicians pressed the head of America's central bank about what officials are doing to avert the worst-case scenario.
“There will be losses,” Federal Reserve Chairman Jerome Powell told Congress, adding that officials were in touch with companies to provide them with more financial space. “We believe this is a manageable problem, and we will say so if the situation changes.”
Thomas LaSalvia, head of commercial real estate economics at Moody's Analytics, said many of the defaults so far have been strategic, reflecting changing investment priorities rather than financial distress.
He is one of those predicting local pain rather than global economic catastrophe.
But the coming months will be a test as many mortgages taken out before the U.S. central bank raised interest rates will need to be refinanced.
“That's the final part of the story that will unfold over the next six to nine months – it's a question of when and how much suffering we will actually experience,” LaSalvia said.
“The office market needs to right-size, and that's not done yet.”
If interest rates are cut later this year, as many expect, the risks to the banking sector will be “much smaller in magnitude,” said Erica Jiang, a professor at the University of Southern California and co-author of a paper on bank failures.
But even without economic collapse, U.S. cities, which often rely heavily on taxes from office buildings, are feeling the effects as plummeting values and declining activity threaten the revenue they rely on to fund libraries, parks and other essential services.
Image credit: Getty Images
Image caption: San Francisco, where office vacancy rates exceeded 30% last year, is considering budget cuts
In New York, taxes from office buildings account for about 10 percent of the city's tax revenue, but the comptroller warned last summer that the city could face a funding shortfall of more than $1 billion over the next few years under a catastrophe scenario.
This represents less than 2% of tax revenue, and the city says it can probably adapt to the challenge.
But in other areas the situation appears to be more serious.
In San Francisco, where the transition to remote work is furthest along, the mayor has paused hiring and ordered city employees to prepare to cut spending by 10%.
In Boston, where more than a third of tax revenue comes from commercial property taxes, analysts are predicting a looming budget shortfall and urging the city to find new ways to raise funds.
Warnings have also been issued in cities including Atlanta and Dallas.
Moody's LaSalvia said the pandemic has accelerated a decades-old shift away from downtown's 9-to-5 business district toward more mixed-use areas.
While vacancies could pose a problem over the next few years, reduced supply and falling values also create opportunities for new businesses to move in and redevelop the area, he says.
“This is a moment when the centre of gravity, the centre of power in each city is shifting,” he says.
Yabrody's neighborhood, with many businesses putting money into renovations, is perhaps one of the best placed to weather the transition.
Image credit: Getty Images
Image caption: Yavrodi says office lifestyle isn't coming back
Across the street, a building recently renovated with the help of city tax abatements is nearly full with a small health care business.
Next door, at 360 Park Avenue South, a restaurant and one business have committed to leasing space, and owner Boston Properties said it expects the building to be nearly full by the end of next year.
The tech companies that once drove demand for the area have moved away, but Peter Turchin, vice chairman at real estate firm CBRE and leasing agent for the building, said there is still interest from finance and law firms, who are ready to bring staff back to offices and pay for prime space.
“I don't think it means much,” he said of the $1 deal. “We're very busy.”
The company, which sold the shares, has the money invested in a Canadian pension fund and declined to comment.
Yabrody remains skeptical.
Even if space were leased, it's estimated that only 12% of Manhattan office workers are in the office five days a week.
He says that won't be enough to sustain retail businesses like his, given that many businesses are offering free or heavily subsidized meals to make it easier to order when offices reopen.
He's cut staff from 12 to five, changed the menu and expanded delivery, but he believes there's little anyone can do to fix the problem.
“Everyone has a different perspective, but they're trying to put a bandage on a big cut that needs strong stitches,” he said.
“The way we lived in the office before the pandemic will never come back.”