By Herbert Lash
NEW YORK (Reuters) - The growing footprint in New York of major tech companies like Amazon.com Inc, Facebook Inc and Alphabet Inc's Google has given property owners and brokers hope that once the coronavirus has been conquered demand for office space will quickly return to pre-pandemic levels.
But the popularity of working from home and the exodus of people from expensive coastal cities will likely weigh on demand and change workspace requirements, leaving office buildings that do not adjust less valuable.
Big Tech's expanding real estate clout already hides declining values for lower-quality properties.
Prices for premier workspace in U.S. gateway cities have held or even risen during the pandemic in a flight to quality. But leasing volumes and number of buildings sold have plummeted, with valuations at the lower end falling, data shows.
The pandemic has left a massive question mark hanging over the office sector, said Joe Gorin, head of U.S. real estate management and value-added investing at Barings in New York.
"I know how people are going to use the hotel coming out of the pandemic. How are people going to use office buildings?" he asked. "There's going to be some pain because we're going to have to go through a restructuring of how people use space."
Companies need to make the office more compelling and allow busy work to be done at home, which means workspace demand might not grow, Gorin said. Buildings that cannot provide a great environment will become obsolete.
"If you can own or create the right stuff, it's going to be valuable," he said. "Office can become more important and shrink as much as it can expand."
Limited data suggests buildings classified below the top Class A industry designation already have suffered a drop in value during the pandemic and could be poised for a further slide if a decline in demand persists.
The amount of available office space has soared as tech companies have dumped excessive workspace, a sign of uncertainty among management about a company's future workspace needs.
Institutional investors have put transaction decisions on hold, with the sale of buildings in Manhattan valued at more than $100 million falling more than half to just 32 last year, research by brokerage Newmark Group Inc shows, using Real Capital Analytics data.
Leasing activity has picked up after the New Year but is still far below pre-pandemic levels.
The office sector is the hardest in commercial real estate to assess because leases generally are long-term commitments, said Sam Isaacson, president of Walker & Dunlop Investment Partners in Denver.
"Eventually the cash flow streams have to match up with the asset value appreciation and when that doesn't occur, that's when we're going to see some real pain," Isaacson said.
WAITING TO MEET THE BOSS
The number of virtual tours brokers conducted with clients fell 61% in December from a year earlier in seven U.S. gateway cities, according to data from View The Space Inc. Tours declined 74% in New York, the biggest drop outside of an 80% plunge in Seattle, the property technology firm said.
A reversal of Seattle's early recovery from the pandemic may suggest a significant embrace of more remote work in the city over the long-term, VTS said in the report.
"Our data is pointing to the fact tech companies are still really comfortable working from home and they're probably going to be the last ones to return to the office," said Ryan Masiello, co-founder and chief strategy officer at VTS.
Of the 115 people VTS has hired since March, Masiello has met none of them because they are all working remotely, he said.
Tech companies led other industries for the second straight year in Manhattan leasing activity, brokerage CBRE Group Inc said in January. A decline in the technology sector's real estate footprint would be significant for a property market looking to ride the growing digital economy.
Brokers point to Amazon's $978 million purchase of the Lord & Taylor building on Fifth Avenue last year and Facebook's leasing of the Farley Building across from Madison Square Garden, as prime examples for Manhattan's real estate prospects.
The Amazon deal was valued at $1,466 a square foot, more than 10% above last year's top-quartile average price, while Google's billion-dollar deals in Chelsea and Hudson Square have redefined swaths of the city's Far West Side.
Scott Rechler, chief executive and chairman of closely held RXR Realty, one of the largest office building owners in New York, sees a growing disparity between high- and lower-quality properties.
Companies need to re-imagine the workspace and how they engage with employees who expect properties to be well-located, energetic and have health and wellness centers, he said.
"For buildings that can't do that - they're not in the right location, they're older, they're obsolete - it could be a meaningful free-fall in value," Rechler said.
Graphic-Tenant interest in Manhattan office space by category : https://graphics.reuters.com/USA-PROPERTY/TECH/nmopazqwzva/chart.png
(Reporting by Herbert Lash in New York; Editing by Alden Bentley and Matthew Lewis)