NYC Office Recovery Will be Subdued, Below Average: Fitch Ratings

The recovery of New York City office space recovery from the Covid-19 pandemic will be subdued, below average, Fitch Ratings is predicting.

The poor recovery could see a cumulative double-digit net cash flow decline from pre-pandemic 2019 levels, Fitch warns in a report.

The study sees mid-single digit net cumulative demand growth in the next upcycle versus mid-teens, with limited rent growth and with rated NYC office REITs likely to not see positive same-store NOI growth until 2022.

Fitch’s downside scenario, which assumes a cumulative 15% decline in property-level net cash flow, is attributed to higher number of employees working from home, larger space reductions, a lower level of office-using employment, and reductions in rent levels.

Out migration of tenants will also be a factor, according to Fitch. “The pandemic underscored the expensive, often cramped living conditions for many (younger) workers, while also stressing revenues for key infrastructure and amenities, such as mass transit systems, entertainment, retail and restaurants.”

For tenants, quality will be key with Fitch expecting modern Class A space outperforming Class B office, in regard to occupancy and rent growth.

The flight to quality will be so pronounced, the ratings service expects Class B properties with weaker locations, infrastructure, amenities, and energy efficiency, will need to be upgraded or converted to alternative uses.

Fitch said it expects density to be flat to slightly down, i.e. less dense, post-pandemic, primarily as tenants effectively reduce density through maintaining existing or smaller footprints, in the context of more hybrid workforces that include partial work from home.

The report noted the NYC office saw some de-densification in 2019, following a decades-long stretch of less square feet per worker.

Looking at the city generally, Fitch is high on its good growth in the city’s economic and revenue base pointing out before the pandemic, growth was slowing but still solid after participating in the 10-year period of national economic expansion.

Tourism should be part of that growth, but Fitch warns the Delta variant could put a damper on the increase.

In the report, Fitch said banks have tightened credit to the NYC office market, but it added banks have shown willingness to work with relationship clients during the pandemic.