While premium office buildings in New York City continue to perform well, it’s going to be a dark day for Class B and C buildings very soon. Since the start of the pandemic, which has accelerated a trend toward remote working and consequently lowered the need for space, forecasters have predicted disaster for the office industry. However, the sector has bucked these forecasts. But the sudden increase in interest rates might make it necessary. For owners and developers, financing has suddenly become more expensive—if it is even still accessible. Subprime buildings appear to be the most vulnerable.
Manhattan is contending with a huge glut of “zombie” office buildings—structures that are still at least partially occupied but need so many renovations that they’re not considered desirable assets in a competitive market. The typical zombie may have been bought years ago and had been supplying a steady revenue stream to owners and other beneficiaries, until the onset of the COVID-19 pandemic.
With occupiers flocking to premium buildings in order to attract and retain top talent, tenants of Class B and C office buildings are either leaving or haggling for rent reductions when their leases come to an end. Rising interest rates have pushed the cost of renovations out of reach for many owners but some are looking into converting zombie buildings into alternative uses including turning office buildings into housing or industrial space.