Among Long Island’s commercial real estate sectors, there’s no doubt that the office market has been the most impacted by the COVID-19 pandemic and its fallout on businesses.

With thousands of employees either forced or choosing to work from home over the last 20 months due to safety concerns, the lingering health crisis has delayed a full-time return to the workplace, causing firms to reassess their office space needs.

As a result, many office tenants have been downsizing, offering big chunks of their office space—even whole buildings—for sublease. In addition, brokers report tenants are signing shorter-term leases, hesitant to commit amid a still uncertain future.

However, the situation has also created opportunity and prompted a flight to quality, brokers say. As companies struggle to attract and retain talent in an increasingly challenging hiring landscape, many are moving towards bigger and better space to provide a more inviting environment and a reason to return to the office.

Indeed, the news is both good and bad. First, the bad news. Overall office vacancy rates on Long Island climbed again last quarter, rising from 12.8 percent in Q2 to 13.1 percent in Q3, according to a report from Cushman & Wakefield. The amount of available office sublease space in Nassau and Suffolk counties rose to more than 911,000 square feet in the third quarter, a year-over-year increase of nearly 73 percent.

Now for the silver lining. Though year-to-date overall net absorption of Long Island office space remains in the red by some 230,000 square feet, office leasing activity accelerated in the third quarter, rising nearly 17 percent from the first half of the year. Rents are holding steady or slightly increasing, with the overall average asking rent in Nassau up from $33.79 in Q2 to $34.04 in Q3 and down in Suffolk from $29.06 in Q2 to $28.86 in Q3.

Brokers who specialize in selling and leasing office properties here maintain the sector is doing better than what some of the numbers say and that the perception of a sector on the ropes just isn’t true.

DAVID PENNETTA: ‘If you’re looking for 5,000 or 10,000 square feet in a Class B or C office building, you can find it all over the place. But the Class A sector is crazy tight.’

BRIAN LEE: ‘Long Island is well-positioned when it comes to supply and demand for office space.’

ADAM ROCHLIN: ‘We’re expecting an increase in activity in the new year when corporate America is expecting everyone to return to the workplace.’

“If you look at Class A office buildings that are 50,000 square feet and larger, the vacancy rate is 1.42 percent for vacancies 50,000 square feet and greater. That’s not weak,” said David Pennetta, executive managing director for Cushman & Wakefield on Long Island. “The office market is following what’s been happening with the industrial market. If you look at the industrial market there’s a big difference between availabilities of buildings with 14-foot ceilings and those with 30-foot ceilings and in the office market it’s stratified the same way. If you’re looking for 5,000 or 10,000 square feet in a Class B or C office building, you can find it all over the place. But the Class A sector is crazy tight.”

A rare large Class A office vacancy is currently being marketed by Pennetta at 263 Old Country Road in Melville, which was formerly occupied by security company ADI. The broker has seen a lot of interest from several prospective tenants for the 80,000-square-foot building with an asking rent of $28.50 a foot.

Pennetta says that the flight to quality for office tenants isn’t just a knee-jerk reaction, but rather it is tied to the extremely competitive employment market, which is another reason that many firms are actually looking to increase their office footprints.

“What do you do to try and cajole employees to come to the office? You try to create a good environment and make it more palatable to come to work,” Pennetta said.

It’s also a matter of dollars and cents. Office rents account for 5 to 7 percent of a company’s total expenses, while employees usually account for about 65 percent of its expenses. Pennetta said there’s a calculation that the cost of employee turnover is about $70 per square foot, figuring in recruiting and training new hires.

“So, if you can create office space that lessens turnover, you’re saving $70 per square foot,” Pennetta said. “That’s why there’s a flight to quality. It makes financial sense to do it. That’s what companies are looking to do and that’s why they’re looking for larger spaces.”

Brian Lee, executive managing director at Newmark, says that although some companies are allowing staff to work from home part of the time, it doesn’t mean those firms will want to downsize.

“I have clients whose employees work three days a week in the office and you’re not giving up space with that situation,” he said.

Lee also agrees that the current tight hiring landscape is a motivation for larger offices with more amenities.

“The employers’ challenge is to attract and retain employees and get them to return to the office,” Lee said. “They will need to make improvements to the office to create a new environment.”

Adam Rochlin, principal of The Rochlin Organization brokerage firm, says after removing the available sublease space, the overall office vacancy rate is still in the single digits. Rochlin also points out that the office vacancy rates in the other New York City-area suburbs, such as those in Connecticut, Westchester County and New Jersey are significantly higher than here on Long Island.

“Just because a company is subleasing, the landlord is still getting paid and isn’t in any financial stress,” he said. “Landlords are not desperate here.”

Lee maintains that there is not as much sublease space as you might think.

“Long Island is well-positioned when it comes to supply and demand for office space,” he said. “There haven’t been massive layoffs. Companies are still profitable and most businesses are doing well, so there’s not a financial squeeze for them to get out of space.”

Many office tenants, however, remain uncertain about the future, especially after the last 20 months. That’s why several companies have been opting for shorter-term deals.

“There is a premium on flexibility, particularly with short-term renewals,” said Hal Rechler, a principal with The We’re Group, which has a portfolio of about 3 million square feet of office space on Long Island. “For an in-place tenant it could be as short as a year.”

Rechler also confirms that many of his office tenants are improving their spaces.

“We’re seeing some very nice build outs,” he said. “With leases we’ve signed recently, the requests have been to make a very employee-friendly environment. So, the companies that have been leasing space have been really spending on their finishes and on their environments to make it inviting for their employees.”

And while many companies still have portions of their staff working remotely, the pandemic has also prompted some New York City-based firms to establish satellite offices closer to where their employees or executives live.

“I think there’s going to be increased activity in companies from New York City taking space on Long Island,” Lee said. “I’m working on a couple of deals like that.”

Rochlin said his firm is working with a Manhattan company that currently allows employees to come into the office on a voluntary basis, but plans to mandate a full-time return to its office after January 1.

“However, the company plans to open smaller satellite offices in the suburbs of Long Island, Connecticut, Westchester, and New Jersey if employees want to work closer to home,” he said.

Meanwhile, many involved in the Long Island office market are bullish about the post-pandemic future, though it’s still a cautious optimism.

“We saw an influx of activity in March and April, but with the Delta variant, things slowed down,” Rochlin says. “We’re expecting an increase in activity in the new year when corporate America is expecting everyone to return to the workplace.”

Although Lee acknowledges there’s still uncertainty in the future of office space/workplace strategy and how employees are going to work in the future, the market is sure to see improvement.

“Activity in the office market will increase over the next 12 to 24 months,” Lee said. “There will be some opportunities and some tenants in the market are looking to go long. That shift is starting to occur. We don’t know exactly what’s going to happen, but as the pandemic ends, the reality of the future will start to present itself.”

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