How nonprofits are navigating the real estate market in an almost-post-COVID-19 New York City
Before the COVID-19 pandemic, the real estate landscape had always been a challenge for New York City nonprofits, with rent-related cost often being the second-largest expense of a nonprofit’s budget and venue-dependent organizations allocating an even greater portion of their budgets to real estate. The pandemic’s unprecedented impact on companies and organizations across the world varied by sector; for nonprofits, the effects were compounded by increased uncertainty around funding, physical closures, and, for many, the inability to fully transition to remote work while continuing to serve their missions.
Some organizations could not transition to remote work because in-person services were essential to their programmatic offerings, while others continued to work in physical offices because they faced low funding or technology barriers that prevented them from switching to remote work or elected not to do so because of the impact on work culture and productivity. For example, nonprofits committed to advocacy work, many of which rely on dynamic brainstorming sessions to analyze issues and advance strategies, found Zoom meetings a poor substitute. Those organizations eagerly returned to their offices as soon as they could, implementing safety protocols while getting “back to business.” Nonprofits that work to address food insecurity also had personnel who were considered essential employees and were expected to come to work each day to package meals and deliver them to those in need.
Now, organizations that were able to transition to virtual operations are returning to varied levels of in-person work and navigating a hybrid work balance. Employees are increasingly expecting more flexibility from their employers about where — and sometimes when — they work, and employers are eager to capitalize on any benefits from this shift. Both nonprofit and for-profit organizations with fewer employees in the office on any given day are asking whether there might be a way to reduce real estate expenses. Without the obligation of coming into the office, can staff be hired in locations where the cost of living is lower and, therefore, at lower salaries?
At the same time, some organizations appear to be emerging from pandemic restrictions in better financial shape than before. Early on in the pandemic, it was predicted that many venue-dependent organizations like theaters and healthcare providers that require physical space to deliver on their missions would have to close their doors permanently. However, for many in the performing arts sector, this has not turned out to be the case. As a general rule, nonprofit performing arts groups require subsidies to support their programming in normal times; therefore, less programming requires fewer subsidies. If an organization could maintain its donor base (i.e., the source of the subsidies) while reducing expenses, there was the opportunity to build a one-time surplus.
One nonprofit client of my company, Denham Wolf Real Estate Services, that has provided social services to the community for decades, saw its revenue increase more than 10 percent over the past year, thanks to donors recognizing the increased need for the organization’s services during the pandemic. With the advent of work-from-home, this nonprofit was able to convert unused office space to program space, thereby improving efficiency and saving on expenses. Other nonprofits, however, were not so fortunate.
The pandemic compelled organizations across the sector to reevaluate their real estate and, in many cases, adapt to new modes of service delivery. Healthcare facilities, for example, have had tremendous success transitioning to using telehealth to provide necessary services to individuals and communities. To accommodate populations that lack access to technology and Internet services, some nonprofits have redesigned their sites or, in some cases, taken on additional space to provide computers and make telehealth services readily available to all.
In commercial buildings, landlords have been struggling to retain existing tenants and write leases for new ones, which has resulted in more robust incentive packages. In addition to lowering rents, landlords are offering longer free-rent periods and increasing tenant improvement allowances. Tenants looking to sublet space may also add incentives, including access to shared conference rooms, phone systems, and receptionists. For tenants looking to sign new leases, particularly for office space, there are very good opportunities in the marketplace.
Each nonprofit faces a unique situation that requires careful planning to ensure good decision making. As nonprofits reevaluate the role of real estate in support of their missions, there is also an opportunity to re-engage with the community to help determine the optimal way to connect in this altered landscape. Service organizations are using this opportunity to communicate with their clients and better understand how they can best serve them, whether that means keeping the same services or offering new ones. Needless to say, the goal is always to do what is right for the people they serve, and if budgets are constrained, taking into account community input and evaluating programs is critical. Many organizations are receiving positive feedback from those exchanges and even increased community support through fundraisers or volunteers, which fosters a deeper connection with the community. While this process can be both exciting and daunting, aligning operations and budgets with the current needs and desires of those being served can inform a more sustainable future.
Looking to recovery, nonprofits are presented with a real estate landscape that is gradually stabilizing. Indoor spaces for work and events are cautiously reopening, and some remote work adjustments remain permanent. Organizational attitudes are shifting from preemptive planning to actual decision making — a shift reflected most clearly in the rising rates of lease signings and extended lease terms, which are once again reaching five to ten years. However, as organizations plan their return to the office, they’re taking the time to fundamentally reevaluate space requirements, usage, and purpose of having a physical location. Across the board, nonprofits are reconsidering how square footage requirements and location, among other factors, will be most efficient for serving their communities.
Throughout the pandemic, it has been encouraging to see the tenacity and creativity of the nonprofit sector’s efforts to adapt and persist. The continued dedication to a mission-first approach in the sector through these incredibly challenging times reaffirms our confidence in the nonprofit community. The commitment and ingenuity of the staff and volunteers providing services to their communities, whether in a physical space or through a screen, are both inspiring and impressive.