From emptying out to filling back up, New York City is changing.

New York’s real estate market has moved from epicentre to bellwether. In early 2020, the city was regarded as at the centre of the Covid pandemic sweeping America. About 18 months later, New York City is a case study for how the real estate recovery across US cities might unfold. 

Are we seeing the emergence of a Big Apple V2.0? Perhaps this is an overstatement, but there can be little doubt that New York is going through once-in-a-lifetime transformations.

“The New York City area netted 1,900 new residents in January and February”

The pandemic and increased work-from-home opportunities have led many urban residents to trade city life and perks for the suburbs’ comparative safety, comforts and space. As a result, the city lost more than 100,000 inhabitants during 2020, according to location analytics company Unacast. Since the start of 2021, that trend has somewhat reversed. The first two months saw 21,000 people flow into New York County and 2,100 into Bronx County. Factoring in the continued population outflow in Kings, Queens and Richmond counties, the New York City area netted 1,900 new residents in January and February. 

Long-term projections on demographic developments are still surrounded by much uncertainty. However, the 1,900 net new citizens may indicate that we are on a recovery trajectory, which can also be tracked in real estate market developments. Real estate firm Corcoran reports contracts signed rose 58% annually to more than 3,700 deals, “the strongest start to any year for signed contracts since 2007”.

New York’s job market looks very different from pre-pandemic times. Figures from New York City’s Independent Budget Office (IBO) show that around 615,300 jobs disappeared between 2019 Q4 and 2020 Q4. That equals more than 13% of local employment. Moreover, the IBO does not expect the city to regain even 75% of the jobs lost until 2022 Q4.

One major reason is remote work, which is evolving from work-from-home into something closer to work-from-not-the-office. The difference is not simply semantics. Permanent job relocations out of the city, the emergence of remote offices and ‘home office’ areas becoming a must in new residential constructions are heralds of permanent changes to how – and how often – we spend time in the office. 

This, in turn, can have a significant impact on a city’s tax base. Workers have traditionally paid taxes to the jurisdictions in which they work. The question becomes if workers who used to commute across state lines to the office remain income tax liable in the same areas.

The issue remains unresolved and any coming tax law changes can have huge impacts on cities as they seek to rebuild and attract residents.

One of the major points where tax liability influences the direction of major cities in a post-Covid world is city budgets. 

New York City has unveiled an ambitious $100b budget to counteract the effects of Covid and attract residents and jobs. However, state laws require municipalities to balance their budgets.

In this context, the outflux of population may lead to huge holes in major-city budgets, as challenges like expanding healthcare and public employee pension costs continue to grow. 

The situation leaves three viable tactics open to cities: raising taxes, making layoffs, and cutting government services and capital expenditures.

“Bloomberg figures show that the top 1% of income earners in New York City account for more than 40% of the tax collected”

Each avenue is painful, with raising taxes arguably the path of least resistance. Nevertheless, it is a calculated risk. Bloomberg figures show that the top 1% of income earners in New York City account for more than 40% of the tax collected. Raising taxes could spur further flight of these high-wage earners, leaving middle- to low-income wage earners with a bill for city services they cannot afford to pay.

The question at the forefront of both city leaders’, landlords’ and real estate owners’ minds is how to bring people back to the city. And leading on from that, what exactly the city – and real estate – will offer to entice them. 

What amenities make sense is dependent on real estate use cases, which remain in a state of flux amid ongoing uncertainty about the course of Covid-19 and its variants. 

The classic corporate office, for example, is not going away, but the expectations and needs for it may have changed for good. Its purpose has crystallised around certain functions: socialising, innovation and collaboration. This kind of change may have been inevitable across many real estate sectors. 

“The balance of power has shifted to employees, many of whom want more flexibility and the option to work remotely” 

Considering expanded technology capabilities, offices were in many ways stuck in a mid-20th century mindset. Four decades of the internet changed relatively little about workplaces. Now, the balance of power has shifted to employees, many of whom want more flexibility and the option to work remotely.

With so much still undecided, the exact details of New York City’s future remain uncertain. That said, I see a different type of New York City developing, driven by the impetus for increased flexibility and digitisation across real estate, business and public organisations who all face a need to upgrade and streamline operations. This ‘new New York’ mixes V2.0 dynamics with a return of something older. 

When I was younger, you could walk into small retail shops like hat boutiques or instrument repair shops. They disappeared in the 80s and 90s. Now small stores are making a comeback in the form of CBD stores, health-food cafes and other speciality shops. 

There are still plenty of store-front vacancies, with commercial real estate vacancy rates at more than 16% as of 2021 Q1, a 30-year high. As a result, some landlords are more open to short-term rent concessions and leases, perhaps opening the door for a mini-store and pop-up store renaissance. Store fronts may be occupied by new types of retailers and office floor plans will change. Both may help attract new residents. 

Whether it is the pandemic, the direction of public policy, the rate of economic recovery or the city’s demographics, it is safe to say New York City is in a time of transition. 

What looks to be certain is that the city streets will eventually be as crowded with residents, workers and tourists as they were pre-pandemic. The beating heart of New York City is always going to be here. But, depending on how all these variables shake out, it may look very different.