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Brian Lehrer: It's The Brian Lehrer Show on WNYC. Good morning again, everyone. Our next two segments will be about two aspects of the new normal after the worst of the COVID pandemic. Maybe you saw The New York Times story yesterday about the positive COVID milestone we've reached now, which is no more what they call excess deaths.

That is, no more deaths than would be expected without COVID in our lives, but that doesn't mean it's 2019 again. Later, we'll take your calls on ways that you continue to live a new normal as opposed to an old normal.

Right now, we'll talk to Andrew Rice from New York Magazine. He has the cover story of the current issue. It's called The Panic and Pivot of Manhattan's Office Mega Landlords. It's part of the conversation the city is having now about the future of New York itself because of the remote and hybrid work era. Andrew is a contributing editor at New York Magazine and author of the book The Year That Broke America: An Immigration Crisis, A Terrorist Conspiracy, The Summer of Survivor, A Ridiculous Fake Billionaire, A Fight For Florida and the 537 Votes That Changed Everything, all of that published under one title in 2022. Andrew, thanks for coming on. Welcome to WNYC today.

Andrew Rice: Nice to talk to you again, Brian.

Brian Lehrer: What do you mean by office mega landlords? Can you define the group first of all?

Andrew Rice: Primarily my story focused on the landlords who own buildings that are substantially sized, either are substantially sized in terms of their square footage, or they own a lot of smaller buildings. We really worked from-- our starting point was a list of buildings in New York in Manhattan that had more than 200,000 square feet of available space, and there are about 128 of them. In total, they had 55 million square feet of space in all.

This is just in larger size buildings. That was the group that we started off with. A lot of those buildings are owned by the same companies, big companies like Brookfield, Vornado Realty Trust, SL Green, and RXR, which is the main company that I focused on, which is a company owned by an individual named Scott Rechler, who's quite a prominent person both in civic life and politics in New York.

Brian Lehrer: You start the Scott Rechler story in 2009, which becomes relevant to today. Why 2009?

Andrew Rice: I really wanted to start off by demonstrating that-- I've covered real estate in New York for some time, going back to 2000-- 1999, 2000. I've seen a few ups and downs in the real estate market. It always does seem as if when the commercial real estate market goes down, that it's a temporary blip and that everything in New York returns to its inexorable upward climb.

The question that we started with was, I started by telling the story of 2009, which is when RXR and Scott Rechler really entered the city in a big way, buying up a lot of buildings at distressed prices, and he made a lot of money from that. Question now is, is this different? I say that every time that this happens, people say, "This time is different." It's different because of 911, people didn't want to go into tall buildings anymore. It's different after 2008 because you had this giant mortgage crisis that constrained the mortgage marketplace. This time, it's really different.

Brian Lehrer: Right. We keep going back to the late '80s, early '90s recession, and Wall Street Crash of 1987, which precipitated it. People said, "Oh, is real estate coming back? Is New York over in that respect in the late '80s, early '90s." Of course, we could even go back to the financial crisis of the 1970s in New York, and each time people asked, "Is New York over?" Some people thought it was, and then it turned out not to be. You're asking, is this time different? What are you looking at?

Andrew Rice: I think that the difference this time, and the reason why this does seem as if it's a more sustained change is that the obvious thing that you've just seen a fundamental change in the way that people work, in the way that companies work, and the way that people use offices. I point out in the story that New York's employment has basically returned to its pre-pandemic level. New York has gotten back all those jobs it lost in 2020, and yet the office vacancy in New York has continued to climb. It's now at record levels, 20% of vacancy, which is higher than in any of those previous crises.

We don't have numbers for 1977, but it's safe to assume that it is higher than during that time period as well because we have numbers going back to 1984. This is much higher than that. In 1977, the crisis in the city, although fiscal and profound for the city, was really a crisis of the neighborhoods, not of the central core of Manhattan. It was the neighborhoods that were burning. Now, this time it's really the midtown Manhattan core of the city that's been hollowed out.

Brian Lehrer: You note that there was a period a year or so ago when employers and politicians and, of course, office real estate moguls were telling people it was their civic duty to return to the office full-time. That moment has passed. Why do you think that effort failed, at least for now?

Andrew Rice: Because I think people didn't want to come back. I think that fundamentally the reason that this has failed over and over again is each time companies say, "We're going to mandate everyone to come back three days a week, or we're going to mandate everyone to come back four days a week," or landlords and politicians say, "We want everybody coming back five days a week."

In each case people vote with their feet or their lack of use of their feet, and until companies start actually firing people or taking other draconian action, which I'm not endorsing. I'm just saying that it's very difficult to mandate that people come back to the office when they've proven that they're able to do their jobs or fulfill their jobs at some level of productivity-- comparable level of productivity without coming into the office.

Then people who use offices, companies, after two, three years of saying, "Hey, we're going to come back to the office and this time we're really serious about it," are starting to say, "Hold on a second, maybe we can economize. Maybe we don't need to use this office in the same way that we did before. Maybe some people need to come and some people don't, in which case we can save some money by taking a smaller space, or we can spend the same amount of money on a smaller space and upgrade to something really nice that the people who do want to work can use and enjoy."

Brian Lehrer: That would work against the interest of the office mega landlords, as you call them. because if all the companies that have these offices or if many of them are deciding, "Oh, we can not only accommodate our employees who can work from home productively enough, but we can also save money on rent by downsizing our space," who loses there? It's the office real estate companies, right?

Andrew Rice: That's right. I think first of all, yes, the office real estate companies are hurting. The numbers on foreclosures, on distressed sales, are going up. Scott Rechler, who I talked to, the CEO of RXR, took me through in very great detail, all the ways in which the people who own these buildings are now under great pressure. A lot of the pressure actually comes not just on the demand side of the equation, but also from interest rates.

They have to refinance their buildings at higher interest rates now and the numbers are just really staggeringly difficult to reach if you're an office landlord, which means leads to people making decisions like we've seen recently where Scott Rechler and others have decided just to give buildings back to the banks. That has a lot of knock-on consequences, both for the rest of the economy, for the banks themselves, but also for New York City.

This is where if it were just a bunch of billionaires losing their formerly valuable office buildings, I don't think anyone would be too broken up about that. Where it really starts to impact the city is on tax collections, on the tax base of the city. Ultimately you see these numbers where it could potentially take billions of dollars out of the city's budget on an annual basis if these buildings become devalued.

Brian Lehrer: Listeners, any stories or questions or comments about the fate of office buildings in Manhattan and the fate of the city as a whole in that context, 212-433-WNYC, 212-433-9692. Give us a call or write a text message to 212-433- WNYC, for Andrew Rice from New York Magazine, who has the cover story now called The Panic and Pivot of Manhattan's Office Mega Landlords. Let's talk more about that larger doom cycle that you just referred to and that some people believe in.

I think some people don't as much, with hybrid or work-from-home employees at the current rate, the city's tax base shrinks, the city therefore can't provide the social services people depend on at current levels. The MTA can't afford to run quality mass transit because the tax base declines, and there aren't as many fair payers, and the city goes into a cultural decline as a result of all of that. Do you report on who believes in that and who doesn't? Have you reported it out that way at all?

Andrew Rice: Well, there's an extensive portion of my story, actually, I spent some time with the academics that coined the term urban doom loop. They're a group of academics at Columbia University and NYU specialists in real estate finance who have run extremely complex and sophisticated and frankly, to me, somewhat mind-boggling equations that have sought to predict the unpredictable outcome of what happens if people continue to work from home at the current rate. They've come up with some really staggering numbers, numbers that are for some classes of New York real estate 50% or even 60% to declines in value.

They've extrapolated that out to look at, what are the long-term consequences on the city's tax base and come up with a number around $6 billion a year in annual revenues reductions. The doom loop thesis is somewhat predicated on a lot of assumptions about what happens to the city and how the damage from the decreasing tax revenues, which I think everyone agrees that commercial real estate tax revenues are going down at least in the short term. The question is how those cuts are implemented and how it affects the city is something remains to be seen.

We've already seen stress in the city budget on things like universal pre-K and other things where services that the taxpayers have come to accept as part of the entitlements of living in New York City have come under some threat because of constrained resources. I think that there remains to be seen whether it will actually happen but nonetheless, the numbers are the numbers and I don't think anyone who looks at the numbers or is following this is, is discounting the possibility that there could be real fiscal consequences.

Brian Lehrer: Right. One scenario though, I want to ask you about regarding this is, if people aren't spending money at downtown lunch places and they're still buying food and buying coffee and everything somewhere, maybe in another borough, maybe on Long Island or in Westchester, Rockland, maybe in nearby New Jersey, one theory is the regional economy doesn't necessarily decline, and New York can still remain a professional hub in what we consider the major New York industries. No?

Andrew Rice: Look, personally my view on this is that I'm not wholehearted. I describe the urban doom loop, but I'm not a wholehearted believer in it. I think you're exactly right that I think that some economic benefits will probably be redistributed regionally. Where I think that the real significant damage to New York will come is more on the fiscal end of things and more on the identity of the city as the central fulcrum of not just the regional economy, but the world economy. If you have fewer and fewer people working in New York, I believe it will begin to feel a little less vital and central and lose a little of that centrality and vitality.

Now, that doesn't mean that the cultural side of it will necessarily decline. I think everybody can agree that the city of New York has come back in an extremely vibrant and oftentimes unpredictable way from COVID. The remarkable thing is that office usage is the only thing I think in New York life that really hasn't gone back to its pre-pandemic normal, or at least to something resembling it. That's what really makes it an outlier. That's why it's interesting to write about and hopefully to read about.

Brian Lehrer: Jason in Westchester has a story for us, I think. Hi Jason, you're on WNYC.

Jason: Hey, thanks for taking my call. I own a small business that I started back in 2007. I used to be on 39th Street between 8th and 9th Avenue. The building we were in was sold, everyone in the entire building. This was a classic New York garment district building. Everyone had to move out. We moved first to Yonkers, then to Peekskill, and we just didn't have the space for the money to pay for those prices. Truthfully, I really wish that we were still in the city. The workforce that's in the city, the willingness and the ability of people to work there was incredible. It's been harder for us in some way since we moved out here.

What I said to the screener was, there's a bit of a mismatch, it seems to me, between the types of businesses where people can and can't work at home because our business, you have to be there. It's a thing that has to be shipped, made and people have to come to work. There's lots of people who don't have to go to work to do their work but it's a shame that so many of them have been pushed out for these office workers who are now at home.

Brian Lehrer: Interesting, Jason. Thank you. Andrew, what are you thinking?

Andrew Rice: I'm thinking that if you want to come back to New York and reopen your office in New York, the world is your oyster at the moment. Office rents are really probably going to start to fall. I think you're going to start to see office rents, especially in the-- I used to work actually on 39th Street between 8th and 9th Avenue and so I know that block and that area. I think those are the buildings that are profoundly troubled right now. I think that those, what are called class B and class C buildings, which are the mid-block buildings that don't have a lot of charm necessarily but definitely are more affordable options for smaller businesses. That is the stuff that is really troubled in today's marketplace.

What does that mean? It could mean that the rents really start to go down. You start to see landlords adjust their rents downward, but a couple of things have to happen. One is that their debts have to be worked out. They borrowed money maybe at 3% a decade ago and now they got to refinance at today's interest rates. They're now looking at a situation where they've got no rental income coming in and they're saying, "Should I just give this building back to the bank?"

If they give the building back to the bank, it's probably not good for anybody. The building will probably be vacant for some period of time. Services will not be great in the building. That said, there will be some survivors. There will be some companies that will come in and buy up distressed assets and try to refurbish them. I do think that probably there will be some cost corrections on rent for smaller tenants.

Brian Lehrer: Jason, thank you for launching that part of the conversation. Lori-Ann [unintelligible 00:18:30] be alert, you're going to be the next caller. We're going to get to you in a minute. You're asking a question that is the most common question that our callers and texters are asking right now, and we're going to let you represent. I want to follow up on the exchange you just had with Jason in Westchester by reading this text that came in and I'll tell you, Andrew, it's one of a number of texts supporting the new normal.

One person writes, "Remote work is the largest improvement in personal quality of life in my entire career," and it goes on from there. This other person writes, "This conversation feels very similar to the rationale for why we had to save the banks in 2008. I call BS on this," right, says listener, "a 20% vacancy rate means they still have an 80% occupancy rate. They have made exorbitant profits for a century. They can afford a decline in value. This is their fault for not predicting advances in technology and they should feel the pain."

What do you say to any of that, including the premise in the context that you were just describing of banks foreclosing on some Manhattan office buildings and the owners letting them do it? That an 80% vacancy rate is actually still pretty good for a business owner.

Andrew Rice: Well, that 80% [crosstalk]

Brian Lehrer: I said vacancy rate-- 80% occupancy rate. Go ahead.

Andre Rice: I think the point is that the occupancy rate isn't evenly distributed. First of all, one thing to keep in mind is that because office leases tend to be long-term, tend to be 10 years, somewhere in that 5, 10-year timeframe, we're not even seeing -- The vacancy rates that we're seeing now are not reflective of the decline post-COVID. In fact, there will be continued lease renewals, lease expirations coming up for years, and tenants who have been reassessing their space or trying to put space on the sublet market, will be walking away from leases. We can expect that record 20% is probably not the floor. There's probably further down to go.

To the point on, well, they've done fine for years and years, I hear that and understand that office landlords aren't necessarily a group of people that anyone's going to be like, your Sally Struthers is going to be making any commercials for anytime soon. The thing is that we all lose in the city if the commercial vitality of the city declines. This isn't exactly the same as bailing out the banks. The moral hazard questions are a little bit different.

These landlords were not, by and large, speculating irresponsibly and borrowing money in a crazy willy-nilly fashion. That's not true for all of them. For the most part, they were borrowing money at the prevailing interest rate, buying buildings that have been leased for decades at a certain rate, and taking into account that there could be economic downturns that were cyclical. Then they were hit with first the pandemic, and then with a giant cultural overnight shift.

Brian Lehrer: An epical shift really in the way people used space and how people work.

Andrew Rice: I'm not saying that [crosstalk] just yet.

Brian Lehrer: Let me go on to this. I hear you, and I think you've responded to the caller. I want to go on because we're going to run out of time to this last caller, who we're going to take. I said she will represent the most prevalent question that we're getting. You have a guess as to what that might be?

Andrew Rice: I would suspect they're asking why can't these all be turned into affordable apartments.

Brian Lehrer: Boom. Lori-Ann [unintelligible 00:22:46] you get to ask that question anyway. Hi.

Lori-Ann: Hi. Thanks so much for taking my call, Brian. A big fan, longtime listener. Yes, I live on Long Island. We're having similar issues with office buildings out here as well. I have adult children who are finding it very difficult to find affordable housing and to start careers because what they deem to be affordable is affordable if you're in the 1%. My question is, why can't some of these buildings be converted to affordable housing where multi-use facilities?

Brian Lehrer: Lori-Ann, thank you. I'm going to leave it there because we're just about out of time, but thank you, please. Thank you for the nice words, please call us again. Yes. This is the most prevalent comment and question that we're getting. I know some efforts are underway along these lines. I know they're things that make it feasible, things that make it not so easy in various circumstances. How do you report on the potential, let's say, for large-scale office to affordable housing conversions?

Andrew Rice: The same academics that did the doom loop research have also researched this subject. They found that really to make it work, you have to have about a 70% reduction in the value of the office building, basically, just because to convert to residential is inherently less lucrative, and so, therefore, banks and landlords have to accept boom, 70% loss in value. We're getting towards that. Maybe there's a possibility there. Then you run into some other issues, one of which is, can you make it affordable? Well, that makes it much, much more difficult for any of these projects to pencil out as a private sector conversion if you include affordability or prices to the mark below the current prevailing rental marketplace.

Then the question is can We get government subsidies for this? A very small modest first step towards that was contained in Governor Hochul's housing plan that she proposed. Basically, the initial step just swept away some zoning requirements and created an optional subsidy program for landlords who wanted to include affordable housing. That died in the legislature, largely over opposition from Democrats over issues that were unrelated to this directly. Really, a lot of it had to do with not wanting to be perceived as giving giveaways to the real estate industry.

There's a lot of work to be done with that. The last point I just want to make is that even if you clear away all the financial issues, you're really only talking about maybe 20%, 30% of the buildings in Manhattan, or even convertible in any cost-effective way, because of some practical fundamental things involving the size of their floor plates. All those buildings built in the 1970s, 1980s, 1990s, they were built for big financial firms. On 3rd Avenue, those are really distressed right now.

They're not convertible to residential because there's just too big. The floor plates are just too big. You have too much interior space. You can't create apartments with windows. A lot of those buildings are probably-- I've heard predictions that a lot of those buildings are going to end up being torn down and turned into either larger office buildings or market-rate residential, which of course I know is not what a lot of people are looking for.

Brian Lehrer: There we leave it with Andrew Rice, contributing editor at New York Magazine. He's also author of the book, The Year That Broke America, but was here today in the context of a new cover story in New York Magazine, The Panic and Pivot of Manhattan's Office Mega Landlords. Andrew, thank you so much.

Andrew Rice: Thanks for having me again.

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