Will office buildings ever be the same? Empire State offers clues
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[June 29, 2020]
By Imani Moise and Echo Wang
NEW YORK (Reuters) - The Empire State
Building has been a symbol of America's economic might for almost 90
years. Of late, it's also become a symbol of its struggle with the
coronavirus.
The once jam-packed 102 stories of the 1,454 ft (443m) Art Deco
skyscraper sit mostly empty in a city in shock from the country's worst
outbreak of COVID-19. Its spire has been lit up with red-and-white
flashes to honor emergency workers, a siren in Midtown Manhattan.
A week into New York's second phase of post-lockdown re-opening, dozens
of the companies with office space in one of the world's most famous
buildings are trying to figure out when, how - even whether - to come
back.
The same quandary is being played out across the United States, and the
world. Something so normal as working in a big office block has abruptly
become almost unimaginable for many.
The June 22 reopening allowed office buildings to invite tenants back,
as long as maximum occupancy stayed below 50%. But most companies based
in the Empire State Building, which range from tech firms like LinkedIn
Corp and luxury watch brand Bulova to nonprofits like the World
Monuments Fund, have opted to extend work-from-home arrangements.
Based on a tenant poll, management expected just 15% to 20% of the
building's usual 15,000 worker population to return at the second phase
of reopening.
Yet even among those who plan to maintain a presence when the time
comes, few expect to ever return to a workplace like the one they knew
before coronavirus, according to Reuters interviews with several people
who work or run companies there.
Global Brands Group <0787.HK>, which owns the likes of Calvin Klein,
signed a 15-year lease for six floors of office space in 2011 but has
already told employees based in New York that they will never be
required to come back to the office.
The allure of working in "unbelievable corporate headquarters" has been
dulled by the pandemic, Rick Darling, chief executive of the apparel and
marketing firm, told Reuters.
"I think they become less important," he said. "If your people are
dispersed, really the performance of your company becomes the prestige
point."
The company has not yet made any decisions on office space and will need
showrooms for fashion launches, Darling said.
'GO BACK TO WAY IT WAS'
Such shifting attitudes could spell trouble for Empire State Realty
Trust Inc <ESRT.N>, which owns and manages the building, as well as for
other major commercial real-estate companies across the city and beyond.
New York City office property values have likely fallen 10% during the
pandemic, said Daniel Ismail, lead analyst at real-estate research firm
Green Street Advisors.
Empire State Realty shares are down nearly 53% since the end of 2019,
versus a 25% fall this year in the FTSE Nareit Equity Office <.FTFN47U>
index which tracks office real estate investment trusts (REITs).
Ismail pointed to pressuring factors for the company, including the
COVID-19 shutdown of the Empire State Building's observatory - a tourism
magnet that last year generated more than a fifth of revenue for the
group, which also has other office and retail spaces across the city.
Even so, CEO Anthony Malkin remains optimistic.
His family has been involved with the Empire State Building since the
1960s, and he is convinced its status as a flashy piece of the New York
skyline will outlast the temporary, if painful, impact of the
coronavirus.
"Since COVID, we've only had people sign leases, we haven't had anyone
move out," Malkin said in an interview, noting that Starbucks Corp <SBUX.O>
signed a lease for three floors on March 15. "In a post-COVID treatment,
vaccine, herd-immunity world, everything's going to go back to the way
it was."
Empire State Realty drew down $550 million from a revolving credit
facility the in the first quarter to make sure it would have cash on
hand if tenants fell behind on payments, but so far it has received the
bulk of dues.
April rent collection dropped to 73% initially but rebounded to 83% by
June 1, according to an investor presentation. The company offered
deferral to a small portion of tenants which helped keep overall
occupancy stable at around 96%.
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The Empire State Building rises above Manhattan in front of the
Brooklyn and Manhattan bridges as seen from an apartment in the
Central Park Tower building as the building celebrates its topping
out in New York, U.S. September 17, 2019. REUTERS/Lucas Jackson/File
Photo
'YOU'RE REAL, HAPPENING'
Some tenants say they have no intention of leaving.
For instance, Shutterstock Inc <SSTK.N>, which signed an 11-year
lease in 2013, is following orders from authorities about when and
how to return, said Heidi Garfield, the company's general counsel
and interim chief human resources officer.
The creative content platform has 85,000 square feet, with an
open-plan layout that includes a large café, a library, a terrace,
an exercise studio and lounge areas. Before coronavirus, employees'
main gripes were when taps for cold-brew coffee or kombucha went
down, Garfield said.
Officials from smaller non-profit tenants like the Human Rights
Foundation and Human Rights Watch said the iconic building lends
credibility with donors and potential partners, regardless of where
staff work.
"Being in the Empire State Building was a solid component of our
reputation," said Human Rights Foundation President Thor Halvorssen.
"People immediately assume that you're solvent and you're real and
you're happening."
But other tenants are less confident. Unsure what the future of work
might look like, they questioned whether it makes sense to spend big
dollars for office space when remote operations have been working
just fine.
It cost an average of $65.19 per square foot to lease space in one
of Empire State Realty's Manhattan buildings pre-COVID-19, according
to the company, compared with an average of $81.64 across Manhattan
as of late May, according to U.S. real estate firm CBRE Group Inc <CBRE.N>.
Pricing has not changed much during the pandemic because of few new
listings, said CBRE Director Nicole LaRusso, adding the reopening
process might see "more revisiting on pricing."
NO MASK? YOU CAN'T COME IN
Visitors to the Empire State Building are immediately confronted
with the new reality.
Anyone entering the building must wear a mask and carry their own
hand sanitizer, Malkin said.
Management closed non-essential entrances and retrofitted retail
space downstairs as temperature-check and sanitization stations,
tenants said. The elevator lobby has stickers on the floor that
people waiting must stand on to ensure social distancing.
Similar stickers line the sidewalks outside the main entrance, in
preparation for the re-opening of its observatory next month. The
attraction, which allows visitors to take pictures on top of the
building, raked in over $125 million in revenue for the company last
year.
Some companies are reevaluating leases.
This month, for example, beauty-products company Coty Inc <COTY.N>
signed over 50,000 square feet of its Empire State Building space to
LinkedIn, owned by Microsoft Corp <MSFT.O>.
Travel site Expedia Group Inc <EXPE.O>, which occupies 9,000 square
feet on the 72nd floor, said it had deferred "several real estate
capital projects" to preserve liquidity.
Representatives for Coty, Expedia and LinkedIn did not respond to
multiple requests for comment.
Even once the pandemic is past, the office market is likely to
remain irrevocably changed, according to analyst Ismail at Green
Street Advisors.
"Major companies have found an increased level of comfort with
people working from home, which I think will likely accelerate in
the future."
(Reporting by Imani Moise and Echo Wang; Additional reporting by
Aleksandra Michalska and Barbara Goldberg; Editing by Lauren Tara
LaCapra and Pravin Char)
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