“Is New York okay?”
That was the refrain I heard repeatedly on a recent trip back to London. Perceptions of New York have become profoundly negative in the wake of COVID-19; tales of urban decay and prophecies of an office market apocalypse now dominate any discussion of the city.
But how accurate are these doom-laden narratives? As someone immersed in New York’s supposedly crumbling urban landscape, I can attest there is a noticeable gap between external perceptions and lived reality.
Without a doubt, New York faces challenges. Crime has risen, albeit from historically low levels. Homelessness is more visible. Shoplifting means heightened security at Duane Reade.
But let’s apply some perspective; grocery inconveniences are a small price to pay for the magic of Manhattan. Because, despite the gleeful schadenfreude of New York’s critics, people still want to be here. Don’t believe me? Just look at the data: average residential rents in the city have never been higher, with average monthly rents in Manhattan now well above pre-pandemic levels at more than $5,500.
Record rents are no short-term aberration either but reflect strong underlying demand. Yes, New York’s population declined during the pandemic. However, increased working-from-home also caused a surge in household formation; people ditched their roommates. So, the overall impact of more remote work has been increased housing demand. Far from abandoning New York, people are paying more than ever to live here, and most market experts expect continued robust growth in apartment rents.
Yet dire narratives die hard. Within real estate circles, a belief persists that New York is locked into an “urban doom loop.” The logic flows like this: WFH reduces office demand, leading to lower rents and property values. Falling values then shrink the tax base, imperilling city revenues and services. Transit and amenities deteriorate, crime rises, and companies and workers flee, further accelerating the doom loop.
It’s a compelling, if dramatic, vision. Reality is cloudier. High levels of WFH are here to stay. Data on office occupancy and the percentage of days in the office show remarkable stability in US markets. This means lower office demand than pre-pandemic trends predicted.
But it will take time for the full effects to feed through. With the typical NYC office lease around 10 years, most occupiers are yet to have the option to downsize. According to CBRE, Manhattan office availability sits at 20% but has scope to rise as leases expire. Rents are now falling.
For investors, there is enormous uncertainty over where rents and occupancy will settle. With unclear cashflow trajectories, buyers and sellers fail to transact. Trading volumes are low, and values move slowly.
Further declines in values are likely. The REIT market suggests equity owners are in for a tough time. Some likely will find their equity wiped out as loan-to-value covenants are breached. But not all underwater borrowers drown. Banks are reluctant owners and may find a way to extend and pretend for a time.
There is time, therefore, for things to change; and New York never stands still.
Firstly, companies can become more sophisticated in utilizing office space, focusing on purposeful and intelligent design that helps people do their work well. Reinvented offices could offer enhanced productivity benefits for many firms.
But more importantly, alternative uses will emerge for office space, especially where rents rebase substantially. When quality real estate can be secured cheaply in a place people want to be, prospects tend to turn out just fine.
Cities are uniquely regenerative places. New York has reimagined itself before as the economy evolved. There is some scope for residential conversions and potential for new concepts in education, personal services, and experiences.
Many downtowns in the USA have been dominated exclusively by offices. They now need to adapt significantly to become places where people want to live and play as well as work. New York is in a much better position. It shines as a city of consumption. Unparalleled density facilitates an extraordinary array of niche offerings and specializations. From restaurants to retailers, clubs to cultural events, nowhere else comes close to the diversity on offer to attract people looking for vibrant urban living. The consumption and experience economy will grow.
Critically, that will attract more talent to the city. The economic development model for cities has changed. From now on, it will revolve around attracting people, not companies. New York possesses unique advantages in this regard. Not least, it provides access to diverse people. Many young people want that.
New York’s reinvention will involve multiple challenges. Housing supply must increase to limit accommodation costs. Concerns over crime and safety need addressing as neighbourhoods will only thrive if people want to be there. Reliable transit and good schools remain vital too.
These challenges may feel epic at the moment. But those writing the city off once again may come to rue their prognostications. Real estate investors should remember that opportunity lies where excessive pessimism has taken hold.
