Fifty years ago, Richard Nixon famously recognized the universal acceptance of the economic theories of John Maynard Keynes when he pronounced that “we are all Keynesians now“. In honor of my late father, who was a physician and Darwin scholar, I would like to modify that correct statement slightly to reflect the reality that we are all Darwinians now. Let me explain, with a particular focus on New York City.
Approximately a year and a half ago, we were plunged into the abyss of the pandemic. Did the economy fall apart? Did the stock market lose half its value? Of course not – just the opposite occurred. Unemployment is back to normal pre-Covid levels below 5% and stock market indices are at record highs.
But that is not the purpose of this column. Notwithstanding those that are freaked out over inflation (admittedly, gas prices are stubbornly high and food prices have outpaced the rate of inflation as well), all I am saying is that it is worth celebrating that the economy has roared back to life at 4.6% unemployment – despite the tragedy of the pandemic. There can be no question that we are a lot better off on the growth side than anyone could have reasonably expected a year ago. Indeed, the Bureau of Labor Statistics just reported that an additional 626,000 jobs were created from June to September and Goldman Sachs is forecasting that the jobless rate will fall to 3.5% by the end of 2022, matching a 50-year low.
Why is American business in such an enviable position today? Because in true Darwinian fashion, business has been able to adapt to its new reality with breathtaking speed by the use of technology and progressive labor practices which enabled it to conduct business remotely when it was not safe to gather together in person. This was an amazing feat which cannot be understated or underplayed.
Unfortunately, while technology and other areas of the economy actually benefited from the Covid crisis which accelerated demand for their products, our little corner of the real estate world was decimated and continues to feel the seismic effects of the virus. Some aspects of real estate have done reasonably well such as industrial and the multi–family residential sector. However, as anyone who works in an office is well aware, the office sector has seen a dramatic reduction in transactions in major cities such as New York and San Francisco from which it is only beginning to recover in the last few months.
Let’s focus on New York City. We now have a new mayor who has some major decisions to make. He inherits midtown and downtown business districts which are significantly less vibrant than before the pandemic. Major employers are starting to come back to the office part time, which is terrific, and the return of foreign tourists will help as well. In addition, according to Kastle Systems in the last two weeks New York City offices have seen employee attendance increase by 5.2% to 35.3%, the highest percentage since the pandemic began. This is essential to the ecosystem of remaining businesses that serve the millions of workers that used to flood into those districts every day.
However, it is also necessary to face the reality of remote work. Now that companies have seen that they do not need workers in the office 100% of the time, many companies are adopting a policy of hybrid work with some time in the office and some time at home for the majority of their employees. Further, it is not lost on the management of those companies that substantial savings are available with a reduced real estate footprint.
Accordingly, New York’s real estate stakeholders are going to need to adopt a Darwinian mindset as well. That most certainly is not putting their head in the sand and saying that everything is going to be go back to normal. In prior columns, I have discussed how the trophy class A and newer buildings will fare well in the new reality. But that still leaves 50,000,000 to 100,000,000 square feet of class B and C and older office space for which there is significantly diminished demand. Landlords are also trying to spiff up the class B & C office space with amenities such as renovated lobbies, fitness facilities and improved environmental features, as are the class A landlords. That is a Herculean task. They would be better off repurposing some of that space as apartments, health care facilities and schools.
Just as office properties were repurposed to residential in Tribeca and the financial district, the trend will begin soon in other neighborhoods as both apartment rents and sale prices have snapped back to pre-Covid levels. That will begin the necessary process of right-sizing the mix between commercial and residential buildings. Anecdotally, we were recently asked by a hedge fund client to look for office space in Soho because it was closer to where their employees live. This is effectively the definition of the “15 minute city” where people can live and work within a short walking distance, which has the knock-on effect of raising office rents as well.
As a further tailwind at the city’s back, the newly passed infrastructure bill will provide billions of dollars in new investment supporting inter alia mass transit and other areas which will bolster the city’s economy as well as protect against a climate disaster which would cut off rail access from New Jersey by funding the long overdue Gateway Tunnel project. By virtue of this infusion of cash, Governor Hochul has already announced that the Metropolitan Transit Authority will not have to raise the transit fares, next year which is very important to continuing the trend of increased ridership, thus hopefully creating a virtuous circle.
Another major problem has been the rise of crime on the streets and the subways in New York during the pandemic. Everyone recognizes this problem must be addressed as part of the revitalization of NYC. Fortunately, there is good news on that front as well. Regardless of what anyone thinks about our new mayor Eric Adams, there can be no doubt that his prior experience as a police officer for over two decades rising to the rank of captain makes him ideally suited to tackle the critical safety issue.
Based upon all the above, I am a bull on New York City in the long term while remaining a bear on office leasing prices in the short term.
The bottom line is this. All species must change and evolve in order to survive. This fundamental precept applies to cities and businesses as well. The good news is that both New York City and American business are both headed in the right direction as concrete positive steps have been taken figuratively and literally. The best is yet to come if we are steadfast and patient to beat the virus. Stay tuned for next season’s episodes – they will be better than Ted Lasso, and that is a high bar. And to overuse the football/soccer metaphor, don’t be surprised if New York is back at its customary place at the top of the league table sooner rather than later.