The COVID-19 transformed the landscape of entire cities, including the city that never sleeps. Offices shut down en masse in early 2020, and after an initial adjustment period, many employees found that they enjoyed working from home. So much so that bringing them back into the office has proved difficult.
Some companies, like Disney and Starbucks, have insisted that workers return to the office. But others like Meta and Amazon, dropped plans to move into their Manhattan offices. Now, one of New York City’s real estate tycoons says he recognizes the rise in remote work, and is considering alternate uses for some of the office properties on his portfolio.
“There’s going to be some buildings that aren’t going to be competitive as office buildings, and we need to be disciplined about developing an alternative plan and being able to execute them,” he told Fortune.
Rechler says that one option for properties which couldn’t adapt to the realities of remote work was to convert them into residential or commercial buildings while working with their lenders. And if that didn’t work, RXR would consider relinquishing ownership of such buildings.
The Financial Times first reported that Rechler was considering a property shakeup.
“With some of those [offices], I don’t think there’s anything we can do with them,” Scott Rechler, chairman and CEO of property developer RXR Realty, told the outlet.
Last month, Rechler told the FT that his team reevaluated their office properties, bearing in mind the new work culture. He referred to this process as “Project Kodak,” the film company whose business was disrupted by digital technologies. Rechler likened some of RXR’s offices to “film,” or outdated for the current realities of work, while others were “digital” and more in keeping with the times.
Rechler told Fortune that no firm decisions had been made on any of the office holdings yet. It is unclear which offices RXR would plan to relinquish from its portfolio or what the exact metrics are to make that decision. He added that an office space in the post-COVID world needs to be balanced and experiential which can foster collaboration.
“Those are the buildings that we think will thrive on the other side of this transition,” he said. “Fortunately, most of our buildings are ‘digital.’”
Beyond remote work, Rechler also thinks that recent layoffs may be a key reason why offices are emptying out or not being used to their full potential.
“When companies are laying off people, they don’t usually take more space,” he told the FT.
Tech companies have carried out a slew of layoffs since late 2022, which reduced the headcount for these companies while adding to the problem of underutilized offices they owned. In just 2023, over 85,000 tech employees have been laid off, according to data aggregator, Layoffs.fyi. However, the job market overall remains strong. Around 11 million new jobs were created last December, up from 10.4 million the previous month. Through 2022, employers created an average of 375,000 jobs a month–the second highest average since 1940.
Rechler also sits on the board of the New York Federal Reserve, and thinks that the series of interest rate hikes that the Fed has made over the last year have ended the supply of cheap capital for businesses that counted on it, and that has affected real estate.
“The amount of development projects that we’re hearing about around the country that are stopping is mind-blowing,” he told FT.
But although Rechler might be giving up some of the office buildings in his portfolio, office buildings are not obsolete just yet. In recent months, more people have been leaving their remote posts and returning to the office.
In September of last year, that average number of office-returnees in Manhattan was about 49%, and that number is expected to have hit 54% by January 2023, according to Partnerships for New York City, a non-profit organization. And Kastle Systems, a security company, recently found that office occupancy across 10 major US cities, including Chicago, Austin and San Francisco, has continued to climb, and recently reached 50.4%, a new record since the pandemic first shut down many buildings.
Feb. 2: This headline has been updated for clarity, and this story has been updated with additional quotes from Rechler.
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