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The Big Apple Bites Back

What NYC real estate experts at Savills, RxR, and Rudin Management say about COVID-19 recovery

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There has been a lot said about the exodus from NYC. But even with all the doom and gloom predictions, the long term future of the city, for many, still looks bright. Cities are the driving force behind economic growth and, even with the work from home revolution, will likely stay that way. When people group together geographically, ideas get shared, networks get connected, and entire industries get created. There are a number of reasons for this. Studies have shown that large cities have higher organizational productivity and, therefore, more than make up for their elevated cost of living with higher salaries. When it comes to the benefits of cities, density is important. One study used phone data to determine that while density doesn’t necessarily create larger personal networks, it does greatly affect their quality. With a greater supply of people, individuals are able to be more selective about those that they associate with and where they want to live and work.

In America, no city has shared more ideas, connected more networks, or created more industries than New York City. It is America’s biggest, densest city and has always had a large role to play in not only the national but also the global economy. Over centuries it has solidified itself as the center of gravity for the finance, publishing, advertising, and fashion sectors. An amazing amount of wealth has been created by the eight million or so people that are squashed onto the roughly 320 square miles that compromise its five boroughs. This wealth, and the area’s land constraints, have made New York City one of the most expensive cities in the world for decades. 

But now, maybe more than ever, New York City is struggling. The COVID-19 outbreak came early and hard to the area, fueled by the same population density that made it such an economic powerhouse. There has been headline after headline about how many of the white collar workers based in the city were moving out, empowered by remote working options and enticed by lower costs of living and advantageous tax codes of other cities and states. So, just how bad has the exodus been? 

Unacast is a location data processing company that uses mobile phone geolocation information to understand demographic changes. By analyzing data from January 1st 2019 through December 31st of 2020, they calculated that a whopping 3.59 million people have left the city. While on its own this is a staggering loss, it does not tell the whole story. During the same time as this “mass exodus” that the headlines have seemed to latch on to, 3.5 million people have actually immigrated to the area.  

Source: Unacast

For a city of over 8 million people, a loss of 90,000 should not be that consequential, right? Again, this only tells part of the story. It turns out that there is a big difference between the people moving into NYC and those moving out. Namely their income. The people moving in have significantly less income (about $264 billion) compared to those that moved out (about $298 billion of income) leaving a $34 billion gap in between the two. 

It makes a lot of sense that this would be the case. Wealthier, mostly older residents were able to relocate away from their offices. Their absence has reduced rental prices in the city by almost twenty percent, making it more affordable for new, younger and less wealthy residents to move in. The demographic shift also has a lot of implications for real estate in the area. There will likely be less demand for luxury condos and more for moderately priced ones. Office space is also being rethought as companies look to shrink their office footprint now that many of their employees will be working at least part time from home. 

Talent is the lifeblood of any innovative company and that talent is still here; there will always be value in being in a city with such a diverse selection of motivated and educated people.

David Garten, Senior Vice President at RxR Realty

With all of the changes happening to the city, it’s hard to tell what its future might look like. First, it is unknown whether these changes are temporary or permanent. Many have seen signs that some of the population that left will actually come back after the pandemic is over. “While some people may have left the city during the worst of the pandemic, there is some evidence that a large majority of those actually put their belongings in storage with every intention of coming back,” says David Garten, Senior Vice President at RxR Realty. He also sees opportunity in a number of big leases that have been signed recently by tech giants like Facebook and Google. “Talent is the lifeblood of any innovative company and that talent is still here; there will always be value in being in a city with such a diverse selection of motivated and educated people,” he said.

The change in demographics represents a shift in the office leasing market. While there has not been a lot of activity, there are plenty of companies taking a “wait and see” approach. A recent survey done by leasing brokerage Savills has revealed that office rents in the city are down around 8 percent. At the same time, subleases are way up; sublease listings now account for almost one-third of all of the available space. This shows that there are both plenty of companies trying to find ways to fill unused space and companies looking for short term leasing options in the city.

One of the authors of the survey, Gabe Marans, Senior Managing Director at Savills, explained that the types of companies that are interested in being located in New York City is changing. “The objective reality is that the market in NY is weaker than it was a year ago, commercial and residential,” he said. “But, when you look at the data and find out who is moving a few things become apparent. Finance industry, asset management, those are jobs that don’t need to be tethered to the city. They were leaving before the pandemic but now the pace of that has accelerated.” Replacing these financial institutions are tech companies, particularly FinTech companies that want access to the educated, innovative people that the city attracts. In this regard, the demographic shift might help the city attract tech, often considered the new darling of the office industry, as they are usually looking for a younger workforce than finance.

Attracting tech companies isn’t the only benefit to the population shift for the city’s office buildings. From his research, Marans also learned that younger workers often are the ones that are the most interested in returning to the office. “The younger you are, the closer you are to graduating college, the more important it is for you to be in the office,” he said. “This feedback was surprising to a bunch of executives that thought that younger people would want to work from home but the truth still remains, if you want to be promoted, you need face time. That is a lot harder working remotely.”

As a young professional, I love it! I was able to find a great apartment close to where I work downtown and living close to work is such a great benefit both personally and professionally.

Benjamin Cohen, Manager at Cohen Equities

This sentiment was echoed by Benjamin Cohen, Manager at Cohen Equities: “As a young professional, I love it! I was able to find a great apartment close to where I work downtown and living close to work is such a great benefit both personally and professionally.” As a real estate professional with multigenerational ties to the city, Cohen has been studying the changes happening to the city and understands that the influx might not be equally spread throughout the five boroughs. 

“I am curious to see rent growth and stagnation in certain areas. Are people going to move to Manhattan or will they still move to Williamsburg?” Williamsburg, a hip neighborhood just across the East River from the Upper East Side, has long been a favorite of young professionals that prefer its quirky, artistic ambiance than the traditionally stuffy Midtown Manhattan.

Real estate is hyper local, what is happening to property values in one part of town might not be true for its neighboring areas. This is especially true in New York City where each neighborhood has its own look and feel and therefore attracts different demographics. Here is another instance where cell phone data can bring granularity to where people are moving to and where they are moving from. For example, Houston has also seen a change in population but mobile data has shown that it is seeing mostly a population shift within its county limits as people move from its city center to its Northern and Western Suburbs.

Besides location, the winners and losers in the office industry will be determined by who can entice workers back to the office first. “There is a new amenity that is being embedded in everyone’s mind: health and safety,” said Jonathan Schultz, co-founder of Onyx Equities. He thinks that the buildings that do a better job of both being proactive about tenant safety and best communicate it to its occupants will likely come out on top in this tough period. All in all he feels like this will force real estate to reexamine its offerings and adopt new technologies that will ultimately make office buildings better places to work; “We used to be in the dark ages but the property industry has now seen the light. I feel more like a hotelier than an office building owner now-a-days.”

John Gilbert, COO of Rudin Management Company, thinks that the change in the market will force many building owners to pivot their business plans, likely for the better. “We have always been in favor of finding a building’s highest and best use,” he said. “For a lot of buildings, that might be adding or converting to residential. This is something that we did in Lower Manhattan in the ’90s as a lot of prewar office buildings were no longer well suited for modern offices with large open floor plans.” 

As for metrics that Gilbert uses to understand when and how the city will start returning to normal, he, first and foremost, looks at his portfolio’s real time occupancy, which he says is still only around fifteen percent. He also likes to use the city’s public Metropolitan Transportation Authority data, since so many workers typically use it to commute to and from work. 

The pandemic has undoubtedly changed New York City and its buildings will be forced to adapt. Luckily, adaptation is one of New York City’s best attributes. From a small Dutch settlement to the center of the financial world to a hub for tech innovation, the city has always seemed to be able to find its place in a changing world. While many have chosen to leave, others have rushed to replace them, looking for the same human energy that the city is famous for.

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