What Doom Loop? Healthy Office Rentals and Tax Assessments Show Manhattan’s Strength

A Rebound from the Pandemic

In 2022, Columbia University professor Stijn Van Nieuwerburgh argued that the rise of remote work would put cities into what he called “an urban doom loop.” The value of office buildings would plummet, taxes paid by those buildings would slide, and cities would be forced to cut services, sending residents and businesses fleeing.

Instead, New York City’s office buildings are in a remarkable rebound from the pandemic. Office leasing in 2024 was the highest in five years. Financial giants like the private equity firm Blackstone and the hedge fund Citadel signed huge leases in Midtown. Vacancy rates fell sharply, including in the depressed market downtown.

A Strong Office Market

The value of commercial office buildings has not only recovered from the pandemic, the city’s property roll for next year shows an increase of 4%. “In the second half of the year, with COVID behind us, the economy not going into a recession, the prospect of lower interest rates and people coming back to work in the office, companies realized it was time to make a commitment,” said Bill Rudin, whose family real estate owns 14 office buildings in Manhattan.

In June, Blackstone not only renewed its lease at Rudin’s 345 Park Avenue building, it took another 250,000 square feet, giving it 1 million square feet in the tower. Problems remain for older and less desirable buildings — often referred to as Class B and Class C — many of which are being sold for much less than they were purchased for. Others have defaulted on their mortgages. But the data shows a market that is improving, not imploding.

Leasing Activity

A little more than 33 million square feet was leased last year, the highest total since 2019 and 22% more than the previous year, according to the real estate brokerage Colliers. The percentage of vacant space dropped to a little over 16%, the lowest since 2022.

Downtown saw a decline in vacancy despite very little leasing activity because conversions to residential use are reducing the amount of space, which is legally and financially easier to do in the area’s older buildings. More than 3.5 million square feet of office space was removed from the market last year for conversions, as the area’s vacancy rate dropped from 20% to 18.8%.

New Developments

In Midtown, companies are focused on the best office buildings — called Class A or trophy. Colliers says that Class A buildings accounted for 80% of all the new leases despite accounting for only two-thirds of all office space.

Companies that have delayed leasing decisions and whose leases expire in the next two years could face sharply higher rents. New buildings expected to open this year and next will add 2.5 million square feet of office space, but 79% of the space has already been leased, according to the real estate firm CBRE.

Tax Assessments

The city’s assessments are very aggressive, especially for buildings being sold for less than they were purchased for or in default on their mortgages, says Benjamin Williams, a specialist in real estate taxes at the law firm Rosenberg & Estis.

For example, last year the Wall Street firm Morgan Stanley sold an office building at 2 Park Avenue for $357 million, or $162 million less than it paid for it in 2007. But its assessment for next year is $260 million compared with $225 million in 2007.

Conclusion

The doom loop was probably never a serious threat to the city. Comptroller Brad Lander produced a study in 2023 that showed that even a 40% decline in the value of office buildings would cost the city only $1 billion a year or less than 1% of the budget. Office buildings pay about $8 billion in property taxes a year.

The city’s continued allure for financial and professional service companies suggests the city will be able to count on a strong office building tax base.

FAQs

Q: What is the doom loop?
A: The doom loop is a hypothetical scenario where the decline in office building values leads to a decrease in property taxes, which in turn forces cities to cut services, causing residents and businesses to flee.

Q: Is the doom loop a real threat to New York City?
A: No, the data shows that the city’s office building market is improving, not imploding.

Q: What is the current state of the office leasing market in Manhattan?
A: The office leasing market in Manhattan is strong, with the highest total since 2019 and a vacancy rate of less than 16%.

Q: What is the average annual asking rent in Manhattan?
A: The average annual asking rent in Manhattan is $73 a square foot, but Class A buildings get more than $100 a square foot.