In the spring of 2020, all eyes were on New York City as the epicenter of the U.S. pandemic. More than a year later, New York City is a bellwether for what other cities’ recovery might look like. With NYC vaccination rates rising, job growth projected to rise and a near $100 billion city budget unveiled in April, the headlines look promising.
New York is undergoing a once-in-a-lifetime transformation, and while the pandemic may not have sounded the death knell of the city, its transition to a new normal will be met with formidable challenges. One major point of friction will be making sure that $100 billion budget is possible. New York City lost more than 100,000 residents in 2020, according to location analytics company Unacast, and saw the same “suburban migration” trend as other cities — residents of the urban core opting to trade city amenities (all but lost during the pandemic) for the comparative safety, comforts, space and school systems of the suburbs. This outflux created huge holes in major-city budgets. Even before the pandemic, cities like New York were struggling with ballooning healthcare and public employee pension costs. With state laws requiring municipalities to balance their budgets, there are really only three tactics the city can consider: raising taxes, layoffs, and cutting government services and capital expenditures.
Raising taxes arguably is the path of least resistance but nevertheless is a calculated risk. According to Bloomberg, the top 1 percent of income earners in New York City account for more than 40 percent of the tax collected, so raising taxes could spur further flight of these high wage earners (or at least discourage them from returning from the vacation homes they fled to), leaving middle- to low-income wage earners with a bill for city services they cannot afford to pay.
New York City’s Independent Budget Office (IBO) has been closely monitoring tax receipts and total tax revenue and in May indicated that its outlook for 2021 tax collection has improved, though it remains $17 billion less for the 2021–2024 period than estimated in January 2020.
“The loss of such a large amount of revenue — more than 6 percent of estimated tax revenue through 2024 — could greatly hinder the ability of the city to maintain its current level of services,” the IBO reported.
But the city may have hit an inflection point in terms of population outflow. The first two months of this year saw 21,000 people flow into New York County and 2,100 into Bronx County, for an income flow of $2.59 billion, according to Unacast. Taken against continued population outflow in Kings, Queens and Richmond counties, the New York City area netted 1,900 residents for $1.2 billion in income. Though 1,900 net new residents against the loss of more than 100,000 is a drop in the bucket, it may indicate we are on a more solid recovery trajectory. Real estate firm Corcoran reports contracts signed rose 58 percent annually to more than 3,700 deals, “the strongest start to any year for signed contracts since 2007, even beating out 2013 by 6 percent.”
However, recovery from the number of jobs lost is somewhat protracted: From fourth quarter 2019 to fourth-quarter 2020, New York City lost about 615,300 jobs, more than 13 percent of local employment, according to the IBO, which said it didn’t expect the city to regain even 75 percent of the jobs lost until fourth quarter 2022.
In addition, remote work to some degree is likely here to stay, and permanent job relocations out of the city could have a major impact on the tax base. Workers traditionally have paid taxes to the jurisdictions in which they work, but now the question arises, should workers who used to commute across state lines to the office continue to pay income tax in jurisdictions that they may not set foot in?
Another consideration is tourism. Before the pandemic, New York City was experiencing an “extended renaissance” in tourism, as the IBO described it. The city has since seen a precipitous drop in tax revenues that flowed from tourism, which it will take years to recover from. Tourists spent only $13 billion in 2020, a 73% decline from 2019, which will ultimately result in $1.2 billion in lost tax revenues for the 2021 fiscal year, according to a report by the New York State Comptroller. IBO’s forecast for sales tax collections in 2021 is $2 billion, which is 23.5 percent less than the sales tax forecast it made in February 2020.
I see a different type of New York City developing — or maybe returning. When I was younger, you could walk into small retail shops, anything from hat boutiques to instrument repair shops. They disappeared in the ’80s and ’90s, but they’re slowly coming back in the form of CBD stores, health-food cafes and other specialty shops. We’re also seeing a large increase in 24-hour health clinics taking ground-floor retail. Storefront vacancies abound: The commercial real estate vacancy rate is more than 16 percent as of the end of the first quarter, a 30-year high. Landlords have different views on vacant space: Some would rather offer short-term rent concessions, which some businesses are taking advantage of, while others would be comfortable with vacant storefronts until tenants have the ability to pay the full rent.
The question at the forefront of city leaders’, landlords’ and real estate owners’ minds is how to bring people back to the city and what exactly the city — and real estate — will offer to entice them. Landlords and real estate owners are strategizing about how to make their spaces work for how people, including employees, will be using them going forward and weighing what amenities make sense to offer. These are calculations that are challenging to make amid ongoing uncertainty about the course of COVID-19 and the variants. The classic corporate office, for example, is not going away, but the expectations and needs for what the office looks and feels like may have changed for good. Its purpose has crystallized around certain functions: socializing, innovating and collaborating.
For decades, corporate America has been operating under an office model based on what made sense for the workforce and technology capabilities of the mid-20th century. Before the pandemic hit, we were four decades into having the internet, but older generations (those in leadership positions) believed employees who weren’t on site would not be productive, and therefore resisted remote work. The pandemic has turned that thesis on its head, and the balance of power has shifted to the employees, many of whom want more flexibility in their jobs and the option to work remotely, which employers are having to grant in order to stay competitive on talent.
Acknowledging all the variables in play — from the course of the pandemic, the direction public policy will take with the mayoral and gubernatorial elections, the rate of economic recovery to how populations will settle and what the demographics will be — it is safe to say New York City is in a time of transition. Storefronts may be occupied by different types of retailers than we see today, and the demographics of residents may change, but the tourism industry will return and city streets will eventually be as crowded as they were pre-pandemic. The city is always going to be here. But depending on how all these variables shake out, it may look very different.
Brian Bader is a partner and co-leader in the national real estate and construction practice at BDO. He is based in New York City.