New York City's financial district.
Source: S&P Global Market Intelligence

Amazon.com Inc. and Facebook Inc. revitalized the outlook for New York City's office market in August with major commitments to physical workspaces, but it will take more time, effort and innovation to bring it back to life, experts said.

Nearly half a year after the coronavirus shut down the U.S. economy, much of Manhattan's office real estate remains empty as landlords and their tenants work out new safety protocols and grope for a clear read on space demand and pricing. Skeptics cite reduced deal flow, rising tenant concessions and still-high numbers of remote workers as reasons to be cautious, while the market's champions point to a handful of big lease deals as a sign of an imminent return to business-as-usual.

The truth of the market's condition may lie somewhere between the two camps.

Amazon's announcement last week that it would add 3,500 jobs across six cities, including 2,000 in New York City, was widely read as a victory for landlords. The dominant e-commerce player was signaling the continued value of the physical office even as the work-from-home trend expands.

Facebook's massive lease deal at Vornado Realty Trust's The Farley Building detailed earlier this month was more fodder for the optimists.

"People were speculating, will even a great company such as Facebook commit in the middle of the pandemic crisis?" Vornado Chairman and CEO Steven Roth said at the time. "Will they commit to physical assets in light of all the work-from-home stuff? Will they continue to expand in New York, in effect doubling down? We now know the answer to these questions is 'Yes.'"

In an interview, Andrew Simon, a longtime New York City broker and executive vice president at Helmsley Spear, described New York City's office market at the end of the summer as undergoing a period of "aggressive transition" that has given even opportunistic players pause. The Amazon and Facebook deals were momentous, but they were in the works well before the pandemic hit, and so are not necessarily representative of current market dynamics, he said. The amount of sublease space in the roughly 500 million-square-foot Manhattan office market — a leading indicator for commercial real estate market fundamentals — is rising daily, pressuring landlords to lower rents and increase concession packages. It is unclear where the market will be in a few months' time.

"There may be people starting to eyeball stuff and watching the market in anticipation of taking advantage of the changes in the market to their benefit," Simon said. "But there hasn't been a lot of deals done yet to point to how much of a drop [in rents and asset pricing] there is likely to be."

That is not to say deal flow has entirely seized up, or that landlords are sitting on their hands, said Simon, who noted several prominent recent lease deals that did not involve "overly steep" discounts, including BNP Paribas' renewal at 787 7th Ave.; TikTok's lease for 230,000 square feet at 151 West 42nd St.; and AIG's headquarters relocation, which involved taking roughly 325,000 square feet at 1271 Sixth Ave. in midtown as well as 220,000 square feet at 28 Liberty Street in the financial district.

Every New York City office landlord and tenant is grappling with a unique set of circumstances at present, Simon said. "You're going to see every type of situation imaginable over the next six to 12 to 18 months."

Observers generally agree that more employees will work remotely as companies prioritize greater choice and flexibility. There is also general agreement that the densification trend of recent years, which saw employers packing more and more workers into ever-smaller spaces to promote collaboration, is over.

"The good news is that some of these trends that we've seen emerge over the course of the crisis were not necessarily new trends," Julia Georgules, director of research for JLL's New England region, said in an interview. "But they have been given more weight considering all the things that we're talking about today [related to] the health and well-being of the employees."

Moe Vela, president and CEO of the business development consulting firm The Vela Group, said working from home will be the new normal for many as long as knowledge workers and their employers continue to benefit from the model. Employees get to ditch their commutes and have more of a work-life balance, while their employers save on average $11,000 annually per person on office space costs, he said. The environment also wins via reduced carbon emissions.

The commercial real estate industry is the only real loser as remote work arrangements spread, according to Vela.

"They have to have found some hope in Amazon's announcement," Vela said of commercial landlords. "But I also think that they have to face the reality that they're going to have to come up with other ways to use that space, because I don't think we're turning back."

Vela, who has a background in real estate, said Amazon's planned expansion in Manhattan is likely an anomaly — a major player with significant financial resources testing the waters of a new hybrid model, where office workers are given the option to craft their own in-office and remote work schedules as part of their overall compensation package. Not many companies are in a position to spend large sums on real estate right now, he said.

At midyear 2020, location is no longer the No. 1 consideration in a real estate deal, Vela said. To lure tenants back to office buildings, landlords first have to offer prospective tenants peace of mind around health issues.

"Whether it's suburban or urban — or rural for that matter — the key is not where [the office] is located," he said. "The key is, what are you doing to demonstrate that it is a safe environment?"