New York City’s weak rental market is a warning sign for the city’s tax base. With some of the city’s wealthiest residents and neighborhoods emptying out in the face of pandemic and civil unrest — and many staying out — New York risks an urban crisis echoing the 1970s, a moment when the city could no longer take growth for granted.
In Lower Manhattan, housing vacancies are at a record 4%, while across Manhattan the housing vacancy rate is at a 14-year high. And while the New York metro area’s rising 2.7% vacancy rate may seem low, it does not account for those who left the city amidst the lockdown and have yet to terminate their lease, according to RealPage.
Vacancies were already running north of 6% in the city’s non-rent regulated apartments before the crisis. What is increasingly clear is the largest discounts on housing in New York City are now found closest to jobs and entertainment, a dramatic reversal from the recent norm.
New leasing activity is down across all five boroughs (by up to 70% year-on-year in Manhattan and Brooklyn), even as rental concessions are up and growing in value. The going rate for rents, while still high, represent a much smaller share of apartments and does not capture how landlords are cutting rent for existing tenants. Even still, it appears that fewer tenants are renewing their leases. As a result, many landlords are waiting to see how markets will shake out; short-term leasing is up 70% year-on-year, mostly in Manhattan. If there is no summer rebound, expect the top-line rent numbers to start reflecting the lackluster demand for the city’s housing.
All indicators suggest New York City’s rental market is likely to remain weak for some time. A quarter of rent-stabilized tenants, whose rents are now frozen, have not paid rent at some point in the past three months, and the coming end to crisis-driven government aid, such as the CARES Act, promises to further squeeze the rest of the city’s tenants and landlords.
Meanwhile, the city’s wealthiest neighborhoods lost between a third and half their population since the pandemic hit, and recent unrest has not helped to draw them or the rest of the estimated 420,000 departees back. House hunters are reportedly “swarming” New York City’s outskirts. Roadway Moving reports“insane” demand from residents moving out of New York City, consisting “largely of higher net-worth individuals.”
The city’s budget is overwhelmingly dependent on the 5% of New York’s wealthiest who left the city starting this March, and the danger is that many will stay away. Their incomes account for the great majority of the city’s income tax revenue, their shopping stabilizes its sales taxes, and their housing in well-to-do parts of the city help pay its property taxes.
The typical high-earning New Yorker pays as much in income tax as 196 median-earning New Yorkers combined. The city’s tax revenue depends on a critical mass of people wanting to live, work, and play in the Big Apple — a prospect that is not so clear today.
Vacancies, it must be said, are also coming for commercial spaces. While it is still too soon to tell how the city’s offices will shake out — for every Twitter announcing a permanent work-from-home policy there’s a TikTok snapping up a Midtown lease — Moody’s Analytics is forecasting a record 19.4% office vacancy rate nationwide along with a 10.5% drop in rents.
Savills, a real estate firm, suggests asking rents could drop by 26% in Manhattan. And New York’s retail space is clearly on life support; foot traffic may disappear, but rent and property taxes don’t. Too many of the Big Apple’s restaurants and shops will close for good over the next year. Empty commercial spaces won’t hit the city’s tax rolls immediately, but the long-term fiscal impact on New York could be devastating.
It does not take that many moving trucks to erode the city’s tax base. New York City’s been shrinking for three straight years going into 2020, and that’s before the city was beset by a 1918-type pandemic and 1960s-style protests compounding 1930s-era economic depression and 1970s-era fiscal ruin in Gotham (and the year’s only halfway through). While some of the departed likely already intended to leave for good, and New York City has experienced momentary crises before, Gotham’s history shows that short-term shocks become long-term disasters when the city’s economic base erodes along with its tax revenues.
Between 1969 and 1975, New York City lost over 500,000 jobs; on average, more than 1,000 businesses a year closed their doors during this period. Roughly 10% of the city fled in the ensuing years to 1980; some neighborhoods in New York City have yet to recover their mid-century population levels. With tax rolls plummeting and residents fleeing, President Ford vowed in 1975 to “veto any bail-out” for a near-bankrupt New York. (He told the city to “drop dead,” blared the Daily News.)
That same year, a middle-aged Alan Greenspan’s report on the “New York City Financial Crisis” laid blame on years of “business as usual.” He pointed a finger at high taxes, cushy union contracts and “fringe benefits,” and called for rolling back “the City’s archaic rent control law.” New York City in 1975 was being outcompeted by its suburbs for jobs and people, and no amount of insider deals could shore up its eroding tax base.
Today, New York City’s recovery depends on a similar end to complacency and bloat in government to better compete for a mobile population. Otherwise, deteriorating quality of life and job markets will be compounded by higher taxes to pay for poorer public services. Consider that New York City has already lost a greater share of jobs this year than in the entire period of 1969 to 1977.
New York City’s government has spent the past few decades returning to business as usual, a trend that has only accelerated under Mayor de Blasio. Since 2000, New York City government spending has increased by 142%, while the city’s population has grown by 6.8%. During de Blasio’s tenure alone, the city’s payroll ballooned by an incredible 36,510 employees while the average full-time city government salary rose by nearly 20% (not including benefits). Pay for the city’s six-figure salaried employees now accounts for the entirety of its annual income tax revenue (and more).
Avoiding a vicious fiscal cycle of swinging budget cuts or enormous tax hikes means making tough budget choices now as well as longer-term fixes to entrenched spending.
De Blasio can start by negotiating pay freezes and deferrals or offering buyouts for early retirement. Pension and health-care reforms should also be on the table; the city’s retirement systems are racking up unfunded liabilities, while its retiree healthcare debt (known as OPEB) now totals an astonishing $30,000 per household. So far, the mayor’s instead floated 22,000 layoffs based on seniority over quality, cut amenities that help make the city livable, and still found $1.5 billion in back-pay for work done up to 11 years ago. Hizzoner should promise better public service even with fewer public servants.
Fiscal necessity should also spur innovation in City Hall: tying public procurement to results, turning the city’s Small Business Services office into a regulatory concierge navigating (and cutting) red tape, and simply pushing for better, data-driven management of the city’s sprawling bureaucracy are just some of the ideas New York could adopt.
New York City’s government can lower its future debt burdens by reconsidering its enormous capital expenditures, such as the $8.7 billion for four new borough-based jails, and can put its immensely valuable real estate assets to better use. Last, but not least, New York City should permit more housing near jobs, such that vacancies become signs of growing supply rather than weakening demand.
Every new rental agreement signed or house bought in Gotham is a commitment to another year or more of the city’s future. New York City’s outlook depends on keeping most if not all of the hundreds of thousands of New Yorkers who have already left the city — and attracting more talent and firms that were never here in the first place, turning the city once again into a place of opportunity. We should not accept a hollowing out the Big Apple.
“Certain critical political decisions of the last decade have to be reversed,” said Greenspan in 1975. He may well be right once again.
This piece originally appeared at the New York Daily News
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Michael Hendrix is the director of state & local policy at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in New York Daily News