2023 will see continued focus on office leases, a replacement for 421-a and building retrofits to comply with Local Law 97

A 421-a sequel could be on the way

The 421-a affordable housing tax break has been off the books for about six months, but many in the real estate industry are optimistic that it will return in some form in 2023.

The contentious program provided a tax break for developers in exchange for designating 30% of the units in their projects as affordable. Although the real estate industry argued it was vital to making the economics of affordable housing work, opponents said it was an unnecessary and unproductive giveaway to the industry.

Gov. Kathy Hochul's push to replace it with a comparable program dubbed 485-w in last year's budget fizzled, and a rumored trade to extend some version of the tax break in exchange for passing good-cause eviction during the legislative session fell through as well.

Given the relatively strong performance by New York Republicans in November's elections, however, real estate leaders say there will be a stronger appetite for moderation in Albany, which could improve the chances of the state passing a 421-a replacement. — Eddie Small

Retail vacancies predicted to fall

Despite the numerous "for lease" signs that have dotted major shopping corridors along Madison Avenue and in Lower Manhattan, the situation is looking up for retail. Rents for retail spaces in Manhattan, one of the hardest-hit sectors in the city, in October saw their first uptick in six years, reaching $607 per square foot.

"We are seeing more leases signed now as compared with the past several years. Tenants and landlords are extremely motivated to sign new deals, so we remain optimistic," said James Famularo, Meridian Capital Group's president of retail leasing.

Famularo predicts fewer vacancies in 2023, and he anticipates rents won't fall below the 29% drop seen in the Financial District in 2021, when rents were at their lowest.— Natalie Sachmechi

Housing will normalize, slowly

Last year the housing market came off its 2021 high, as elevated interest rates forced some to reconsider buying, sending prices lower.

Costly loans are also expected to have a sobering effect in 2023, although there are signs of stability. In November there were slightly more condo deals in Manhattan than in previous months, according to the brokerage Douglas Elliman, even if they were still down a hefty 57% from November 2021.

Rents in much of 2022 moved in the opposite direction, soaring to new heights as some chose to lease rather than buy. But rents began cooling as summer turned to fall. November's net-effective median was below $4,000 in the city, Douglas Elliman said, down from $4,150 a month in July, a trend that should continue into the new year.

For their part, brokers ended the year in a foul mood. The Real Estate Board of New York's confidence index tumbled to -17 in the third quarter, after being at +60 in mid-2021. The index was at -26 during the depth of the pandemic in 2020.

But brokers say the economic gloom will lift in 2023. REBNY's expectations index improved in the third quarter to -5.5, from -10 in the months before, in what constitutes a silver lining in this market. — C. J. Hughes

Building owners will need to comply with Local Law 97

As the city continues to flesh out details for Local Law 97, which requires landlords to reduce carbon emissions, building owners are scrambling to implement environmentally-friendly retrofits to reduce their risk of racking up steep fines for not complying with the rules.

"The penalties for failing to comply with the law's emission limits are significant," Stroock environmental lawyer Rusty Pomeroy said. "The preamble to the proposed rules notes that Local Law 97 allows for penalty reduction where owners have made a good-faith effort to comply with the law or are facing other mitigating circumstances."

But several City Council members have expressed strong opposition to any type of penalty forgiveness or mitigation, with Councilman Lincoln Restler of District 33 suggesting that building owners who failed to comply with the greenhouse gas emissions limits should "pay through the nose."

Building owners are allowed to purchase renewable energy credits to offset their carbon footprint, although City Council members are seeking to restrict this practice and force landlords to actually reduce their emissions by implementing retrofits. — N.S.

More firms could cut back on office leases

Work got a little less remote in 2022, thanks in part to dictates from bosses at Goldman Sachs, JPMorgan Chase and Morgan Stanley.

But despite a post-Labor Day bump, the average office headcount never really made it above 50%, a ceiling that's expected to extend into 2023. Layoffs are now taking a bite out of workforces as well, notably at tech giants such as Meta and Amazon, which previously seemed impervious to market cycles.

Reduced payrolls mean smaller footprints, brokers say.

"Almost everyone I know is planning to cut back when their leases are up by 25% to 40%," said Eric Anton, a senior managing director at the brokerage Marcus & Millichap. "But that smaller space may be in a much nicer building and cost about the same."

As offices shrink, Manhattan's steep office availability rate of 17% could soar even higher, prompting struggling landlords to sell. But expect some obsolete mid-20th-century towers to convert to housing, if developers can persuade officials to open their purses. — C.H.

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Published on Jan. 9, 2023