A CEO client asked if I would present a forensic analysis of New York City for their September board meeting. I agreed as long as I could share it with our clients. Our report compares NYC to 21 other US cities with respect to post-COVID urban recovery, commercial real estate, mass transit, crime, outmigration, work-from-home trends, tax rates, economic pulse (population, labor force, payrolls, housing), fiscal health, unfunded pensions, energy prices, industry diversification and competitiveness. You can read the entire 100-page deck here.
The good news: NYC has unique advantages regarding its outright size (output, labor force, purchasing power), business sector diversification and global financial sector dominance. Some NYC measures have now reached pre-pandemic levels: total employment, airport utilization and seated restaurant diners are notable examples. NYC crime stats also compare favorably to many large other cities (which sometimes comes as a surprise), and its industrial and multifamily sectors show very high occupancy rates.
However, NYC currently faces a lot of challenges:
- Mass transit use is still 73% of 2019 levels, which is unsustainable given required capital and operating costs
- NYC office vacancy rates of 18% are the highest since the early 1990’s, leased-but-underutilized space is high and ~35% of work days at are still done from home; office to residential conversions are unlikely to materially reduce the stock of underutilized office space given cost and complexity
- Given projected operating deficits, the city must enact deep budget cuts and/or tax hikes while reinvesting in infrastructure, mass transit and public housing
- NYC is still a very difficult place to do business, and its zoning restrictions are particularly burdensome at a time when flexibility is paramount in a post-COVID world
- NYC’s household tax rates and municipal debt burdens are high, and its home affordability is very low. These factors may partially explain why NYC has had one of the highest net outmigration rates in recent years, and why New York State ranked next to last among all states from 2011-2021 regarding outmigration of both the number of taxpayers and their earned income (only Alaska was worse)
- NYC’s asylum influx threatens to substantially impair the city’s financial situation
- The city’s electricity prices are high due to low regional wind and solar capacity factors, and the city is increasingly exposed to natural gas prices with the closure of Indian Point nuclear plant
My recommendation to the board: treat NYC the way an asset manager might treat a megacap stock in a diversified portfolio: avoid being “overweight” relative to some agnostic benchmark of regionally diversified assets. In other words, the risks argue against too much concentration for corporate or real estate entities.
Don’t a lot of large cities face these problems? Yes, and that’s why we built a multi-city comparison of current conditions, a summary of which appears below. NYC ranks above median with respect to high frequency measures of urban recovery, but is dragged down by a weak economic recovery since 2019, structural problems related to its business conditions and poor fiscal health. NYC’s aggregate score ends up above only Chicago, Detroit and (of course) San Francisco. The full table with all categories by city appears in the deck linked above.
If there were an unforeseen negative change in a city, what might the catalysts be? In a city that’s already a difficult place to do business, a combination of fiscal pressures, outmigration of the tax base and high tax rates lead politicians to raise taxes further, fueling a decline in investment and more outmigration. This is the story of Detroit1, whose decline was exacerbated by high auto sector concentration of its employment and tax base. NYC is way more diversified and economically sound than Detroit in 2013, but this is a very low bar.
What might NYC do about the unfavorable trends shown above? I’m not a public policy expert and will not pretend to be. Instead, here are some recommendations from people who are.
Zoning needs an overhaul. NYC ranks second worst of 44 major US cities according to Wharton’s Residential Land Use Regulation Index, and dead last in University of Arizona’s survey of 83 US cities on zoning rules. There’s a lot to be gained by changing that. Research from USC and the Department of Transportation analyzed “upzoning”, which refers to relaxation of zoning restrictions. They found that upzoning can substantially increase output per worker, increase mean wages and decrease commuting times (particularly for people forced to live far from where the jobs are due to the cost of real estate)2. The authors also found that upzoning was a much more powerful tool than simply investing in more public transit or road infrastructure.
Some specifics: there are parts of NYC where new apartment buildings cannot be constructed in parking lots or where one-story retail establishments once existed; new apartments and new retail often require off-street parking which can be prohibitively expensive to provide; some areas benefit from limited development “special district” status in place since 1978; some areas have never been zoned for apartment buildings at all; and some streets preclude the development of new housing units even along streets adjacent to public transit3.
Residential floor-area ratios (FAR) in many locations are too low to permit apartment buildings, even in places well served by public transit and where low-intensity businesses could be located on the ground floor of new multistory mixed-use buildings. A map of NYC FAR ratios shows that the vast majority of land in boroughs outside Manhattan is zoned only for one- and two-family homes.
The best way to deal with the “office apocalypse” is to encourage development of more housing stock, which would bring down real estate prices and encourage in-migration of employees and firms that would eventually fill some of the vacant space. As explained in the deck, complex and costly office-to-residential conversions are unlikely to be implemented on a broad scale.
More public/private partnerships to fill the skills gap and reduce structural unemployment. More NYC employers should develop apprenticeship programs in technology, finance and operations, including those geared towards those without a 4-year degree who can qualify with an Associate of Applied Science degree. Congress can help increase by reauthorizing legislation to streamline administrative barriers, such as allowing reciprocity registrations so that employers do not have to reregister the same programs in multiple states4.
The Mayor’s Office should foster more partnerships between employers and colleges that outline skills needed for specific positions, design curricula and provide internships. One example: LaGuardia Community College partnered with Master Card to create a training program in cybersecurity and hired all of its graduates. LaGuardia is planning a similar program with Wells Fargo and is also in discussions with healthcare providers. Other ways to get involved: the New York Jobs CEO Council and the Business Roundtable’s Apprenticeship Accelerator Corporate Initiative.
Negotiate PILOT payments from tax-exempt owners of NYC real estate (tax exempt hospitals, universities and their medical centers, museums, religious institutions, etc). There are two issues in play here: a property tax exemption and an income tax exemption.
- Property tax exemption. There were ~12,000 NYC properties worth at least $40 billion in 2012 (a lower bound estimate) that are exempt from property tax since they’re owned by non-profit entities, even though these entities earned revenues of $134 billion in that year5. One notable example: Columbia University is now the city’s largest landowner; its property tax savings are 50% larger than those given to Yankee Stadium, and greater than the tax incentives for Citi Field and Madison Square Garden combined6. The situation gets worse every time Columbia expands, since it takes over real estate previously subject to property taxes
- Income tax exemption. It’s not just the property that is tax-exempt; usually, so is any income earned inside buildings on those properties. Many universities now have technology transfer offices to privatize and profit from federally sponsored research (pharmaceuticals, software, defense), collecting millions in tax-exempt royalties7. And in 2019, the NYT reported that tax-exempt Trinity Church owns a commercial real estate portfolio worth $6 billion that it developed on land it owns. While these properties are subject to property tax since they’re not used for religious purposes, they’re exempt from income tax due to the Church’s tax-exempt status. Some of these sites date back to the 215 acres gifted to the Church by Queen Anne in 1705
PILOT payments are one way for cities to reduce the burden on homeowners and small businesses whose taxes have to make up for what exempt institutions aren’t paying on both property and income.
Support “second chance” legislation and support the Second Chance Business Coalition:
- One third of the adult working age population has a “criminal record” that can impair their ability to get a job, even though most have not committed a “serious crime”, and even after the rest fulfill their justice system obligations. Criminal records are retained by the Department of Justice in its Interstate Identification Index even though many people who get arrested are never charged or convicted8
- 64% of all unemployed males between the ages of 30 and 38 had been arrested at least once, with negative implications for marriage, education, net worth, employment and earnings9
- The current system of record expungement is costly, complex and time-consuming; few pursue it even though having an arrest record reduces the chances of being contacted by an employer by 50%-65%10. Among those eligible for expungement in Michigan, just 6.5% obtained it within five years of eligibility due to a limited understanding of laws and procedures, application fees and possible loss of wages11
- Examples of second-chance policies: Clean Slate legislation to automatically expunge certain criminal records if individuals remain arrest-free for a specified period; require private employers to postpone asking about an applicant’s criminal record until after the applicant has had an opportunity to interview; prevent unpaid court debts (fines, fees, costs and restitution) from being a barrier to record clearing; and standardize record clearing timetables across states; end the practice of suspending driver’s licenses for non-driving offenses and providing state-issued IDs for individuals leaving prison facilities, which helps with access to employment, housing, education and mainstream banking services
Encourage more migration to NYC by reducing state licensing requirements. Licensing requirements increase wages for those able to obtain one, but reduce job opportunities, depress wages and reduce worker mobility. Around 25% of US workers require an occupational license; a report from the Obama Administration found that in many cases, the governing entities involved are not groups of elected officials but a board of practitioners whose primary job is to provide services in the same market they regulate, resulting in higher prices without increased quality of goods or services12. Among the occupations that require licensing in New York: bail bondsmen, barbers, shorthand court reporters, nail cosmetologists, interior designers, horse trainers, jockeys, “creative arts therapists”, notary publics, librarians, road race officials and ticket resellers.
What about NYC’s relationship with the business community? In the fall of 2021, Mayor Adams said: “New York will no longer be anti-business...This is going to be a place where we welcome business and not turn into the dysfunctional city that we have been for so many years”13. Well, his Administration has a lot of work to do. As shown below, NYC ranks next to last in the city peer group regarding “ease of doing business”. Most cities that are easier places to operate have seen faster economic and demographic recoveries since 2019.
Michael Cembalest
JP Morgan Asset Management
The y-axis measures changes in population, the labor force, payrolls, housing permits, personal income, business spending, consumer spending and outmigration since the end of 2019
Ease of doing business scores include the cost and time required to start a business and employ workers, the cost of energy, tax rates, the cost and complexity of transferring title on real property, zoning requirements and the efficiency and time for resolving business insolvencies
1See “How Different is Detroit”, Eye on the Market, Michael Cembalest, August 6, 2013
2“Zoning and the Density of Urban Development”, Delventhal (Claremont), Kwon (USC) and Parkhomenko (USC), Pacific Southwest Region University Transportation Center, August 2020
3“How to Solve NYC’s Housing Crisis”, Eric Kober, Manhattan Institute, June 2022
4“Harnessing the power of apprenticeships to build a strong workforce for the future”, Heather Higginbottom, JP Morgan Corporate Responsibility (head of policy research), October 2023, TheHill.com
5“Three policy questions for non-profit property tax exemptions”, Charles Brecher (NYU and Research Co-Director of the Citizens Budget Commission) and Thad Calabrese (NYU), 2015
6“The Untouchables: How Columbia and NYU Benefit From Huge Tax Breaks”, NYT, September 23, 2023
7“Higher education has a tax problem and it’s hurting local communities, Time, Davarian Baldwin, April 2021
8Brennan Center for Justice, Matthew Friedman, November 2015
9“Barred from employment: More than half of unemployed men in their 30s had a criminal history of arrest”, Bushway et al, Science Advances, 2022
10Colorado Law & Policy Center, “Ban the box legislation boosts employment and reduces recidivism”, Nov 2015
11“Expungement of Criminal Convictions: An Empirical Study”, Prescott and Starr, Univ. of Michigan, 2020
12“Occupational Licensing: a Framework for Policymakers”, Department of the Treasury, 2015
13New York Times, October 13, 2021
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FEMALE VOICE: This podcast has been prepared exclusively for institutional, wholesale professional clients and qualified investors only as defined by local laws and regulations. Please read other important information, which can be found on the link at the end of the podcast episode.
MR. MICHAEL CEMBALEST: Good morning, everybody. This is Michael Cembalest with the October 2023 Eye on the Market podcast. This one’s called New York: Just like I Pictured It. A couple months ago, a client of the firm, which is one of the largest apartment owners in the United States, asked me if I would prepare a forensic study of New York City, specifically, to present at their board meeting at the end of September for purposes of a discussion about the rationale for continued long-term capital investments in the city.
And I agreed to do it, under the condition that I would be able to share it with our clients after I was finished with the project because I knew it would be a lot of work. And they said yes, and so here we are. There’s a four-page Eye on the Market Word doc HTML that you can read, and then there’s an attached deck that’s got over 100 slides. I’m just going to walk through some of the main points here, but you should look to those two other resources if you want to see what we did.
And here’s the summary. New York City has a lot of advantages related to its outright size. It dwarfs every other city, including Los Angeles and Chicago, just in terms of its overall economic output, size of its labor force, its purchasing power. New York City has a lot of business sector diversification, which is surprising, ‘cause a lot of people think it’s just about finance and it’s not. Within the financial sector, New York City still has global financial sector dominance versus other competitive cities.
And then in terms of the post-COVID recovery, a lot of measures have now reached pre-pandemic levels, like the labor force, people going out to dinner, airport utilization. The residential and industrial sectors within commercial real estate are in pretty good shape in terms of low vacancy rates.
And the thing that would surprise you is that New York City crimes statistics, at least the way they’re reported by the FBI and by the city itself, compare favorably to a lot of other cities, and sometimes that comes as a surprise. But mass transit utilization is still only around three-quarters of 2019 levels, and that’s pretty much unsustainable given all the capital operating costs, even at 100% utilization rates.
New York City office vacancy rates are the highest as they’ve been since the early ‘90s. There’s a lot of leased but underutilized space. Around 35% of New York City workdays are still done from home, according to the work that Nick Bloom at Stanford does, where he compares different cities. And as we explain in the deck, office-to-residential conversions are in principle possible, but once you filter through all of the regulatory and economic costs, there unlikely to make that much of a dent.
The city has some very daunting operating deficits in front of it and will have to enact some very deep budget cuts or tax likes, while at the same time trying to figure out how to reinvest in aging infrastructure, in public housing. New York City is still a really difficult place to do business, and the zoning restrictions in particular are burdensome at a time when flexibility is paramount.
And the city’s tax rates are very high, the municipal debt burdens are high, home affordability is low, and that may explain when New York City has had one of the highest net outmigration rates of all the cities we looked at, and why New York State actually ranked next-to-last, other than Alaska, over the last decade regarding outmigration of both the number of taxpayers and their adjusted gross income.
As things stand now, the asylum situation threatens to substantially impair the city’s financial situation; I think the mayor has been clear about that as well. And to top it all off, the electricity prices are very high. New York State has among the lowest wind and solar capacity factors, which is a measure of raw material, solar and wind power. And then on top of that, the city is increasingly exposed to national gas prices with the closure of Indian Point.
So now, somebody might say a lot of cities face these problems. And that’s true, which is why we compared New York to 21 other large cities according to four main categories. An urban recovery Score, which looks at urban mobility and are people going back to restaurants and supermarkets and retail stores. Within that category, we also look at mass transit utilization and real estate vacancies. And on that basis, New York City actually ranks above median compared to the, within this 22-city group. And there’s a color-coded heat map, summarizes some of this, and green is good and red is bad as you might expect. And here New York ranks slightly above median.
The problem is the city is dragged down by a very slow economic recovery since 2019. When you look at the labor force and payrolls and housing permits, personal income spending and outmigration here, the city ranks way below median. The city also ranks way below median on things like housing affordability, zoning, unemployment, ease of doing business, tax rates, electricity prices. And then lastly, the fourth category looks at fiscal health, which is tax revenues, government debt, liquidity and unfunded pensions, and retiree healthcare, and here the city ranks below median as well.
So when we put all those four categories together, New York is in a difficult spot ahead of only Chicago, Detroit, and unsurprisingly, San Francisco. The stories that we read when we started this project about the doom loop in San Francisco have been confirmed by the data that we actually came across as we were pulling this all together. So I’m not going to go into too much detail; we’re just going to show you a few pictures and then talk about some of the policy options that we were thinking about.
We have a chart in here that shows this is the urban recovery. Apple did some tracking on this, so did Google, but there’s a University of Toronto study which uses mobile phones to track visits to retail stores, markets, restaurants, museums. Again, New York ranks at the high end here, a 30% gap versus 2019, still significant, but New York ranks better than a lot of other cities.
Here we also have a table on mass transit recovery. And here as I mentioned, the city is around 75% of pre-COVID levels. But again, these a very capital and operating-intensive systems to run, and that’s a very expensive problem for New York that’s going to have to be resolved.
But here we have a chart that that shows in a lot of different ways what the city’s facing. We have a chart that shows the utilization rates of the Long Island Railroad, the subway, Metro North, and the bus systems, ranging anywhere from 60 to 70%, 75% maybe. But New York City office building utilization is still at around 50% pre-pandemic levels. And that gap is essentially telling you all about people that are circulating and going places. They’re just not going to their white-collar office jobs, and this is the work-from-home issue.
The vacancy rates in the city, when you include pending vacancies, have hit about 18%. That’s as high as we’ve seen certainly since the early ‘90s. What’s kind of remarkable is that the city ranks ninth-best compared to other cities. So this underutilized office space issue is a national phenomenon. And were 11 or 12 cities in the peer group that had vacancy rates, office vacancy rates even higher than New York.
The issue is that New York has the highest work-from-home percentage, and at least as of July of this year, was showing little signs of changing. We’ll see in the next few months whether that that shifts. But a lot of the people who study this don’t think it will, which raises a lot of complicated questions about how cities can change and repurpose underutilized office space instead of letting it become vacant, affecting tax revenues, resulting in areas that are underpopulated. You end up with a lot of squatters and all of the things that you might imagine would take place.
We have a few slides in the in the main deck on crime reported by the city from the FBI, which allows us to compare it to other cities. And New York kind of ranked in the middle in terms of violent crime and much better than a lot of cities in terms of property crime. Recently there’s been a surge in auto larceny.
But I thought this was interesting, ‘cause it was very timely. This is a table from the census. They do a household pulse survey. And each week they do surveys and they ask what percentage of people are feeling pressure to move from where they live because they’re in an unsafe neighborhood. And here again New York ranked kind of in the middle and was outflanked by Seattle, San Francisco, Phoenix, surprisingly, and LA and Philadelphia and Chicago. So again, another data point that complements the notion that sometimes the crime situation in New York City, at least from a statistical perspective, doesn’t look as bad as you might think.
But where New York definitely has an issue is in the outmigration of its population. And this is hard data to get, because the IRS reports migration of taxpayers, but only with a three-year lag and only at the state level. So we went to our colleagues in Chase Data Science and we asked them can you try to figure this out based on change-of-address forms with respect to their credit card bills, and they did. They then matched it up with some historical data from the census and was remarkably close, like out to the second or third decimal.
When I complimented the Chase Data Science people on how well their approach went, their response was well, we knew it was going to be really good and they were very confident in their data, ‘cause we do bank somewhere like two-thirds or more of the country’s households, so they felt confident that it was going to match and it did. And here you can see the net migration data from New York was among the highest in the country over the last few years.
And that’s complemented by this. As I mentioned, this is the IRS data, which looks at migration statistics, both in terms of number of filers and adjusted gross income. We have a table in here that shows the five states with the most inflows and the five states with the most outflows, and New York ranks 49 out of 50, only head of Alaska, on both measures. So there’s something going on in New York that is resulting in people leaving, and that’s a bad fact.
As I mentioned, one of the benefits of the city is the sheer size of the place, which attracts a lot of people and employers. And this is the way that we’ve decided to show it. We created an index that combines economic output in dollars, labor force in terms of number of people, and personal income in dollars. New York on this basis is almost twice as large as Los Angeles, almost three times bigger than Chicago, and almost four times bigger than Dallas. So there’s a size advantage to New York City that draws people here.
But New York also has among the lowest home-affordability metrics in the country, and that’s bad too, because that’s one of the things that was going on in San Francisco before the city imploded. And what’s notable is that it’s not just the number of people that affects housing affordability. We looked at the Wharton, Wharton at the University of Pennsylvania has a residential land, the land-use index. And they score each city based on its restricted sub-zoning. And we have a chart in here that shows that there’s a pretty decent correlation between how severe your zoning restrictions are and the affordability of housing in that city. And so that’s something that has to be, we’ll talk more about later.
This is the tax data. You have to look at tax rates for households as a function of their income. We picked $75,000 a year because it’s reasonably close to median income for a lot of these big cities. And here you can see that New York is close to the top in terms of the combination of income, property sales, and auto-tax rates. So that’s part of the issue that’s pressuring the city.
And then the city is facing a pretty big fiscal cliff. And the way this kind of stuff works with cities is they can’t run large deficits generally the way the federal government does. So whenever you see projections of deficits, those deficits have to be closed by some combination of tax increases or spending cuts. And what’s interesting about New York is on the left, you get a projection of the deficits from the mayor, essentially the Office of Management and Budget of the mayor’s office. But separately there’s an independent New York City controller that is projecting budget deficits that are twice as large as the mayor’s office, and the single largest component of that difference is the asylum costs that the city is expected to incur in the next few years.
The other analysis that we do, for those of you that have been fans and readers of the Eye on the Market, is we look at the cost of not just government debt but also paying off unfunded pension and retiree healthcare plans. I won’t go through all the details here, other than to say that New York is not at the top, right. I mean, Chicago will continue to set world records of insolvency as it comes to these kind of things. But New York is definitely on the high side related on this measure too. So that’s an additional pressure point.
Energy prices, they’re high. Here you can see that New York has one of the highest electricity costs per kilowatt hour in the country and I’m not surprised. The chart on the right is interesting in the following regard. A few years ago, Indian Point was shut down, and I understand why people wanted to shut down Indian Point. There’s a natural gas line that runs underneath Indian Point. So combining a gas line with a nuclear power plant’s not a great idea.
At the time, NYSERDA, which is the New York Energy Agency, said don’t worry about it, wind and solar is going to make up the gap. That turned out to be about 95% false. As you can see in the chart, most of the gap is made up by natural gas and imports of electricity from neighboring states that produce it with natural gas. So while this might have been an important decision to make, I think the energy gurus in the city, at least so far, have misunderstood what the dynamics were going to be in terms of electricity generation.
I’m not going to spend too much time on the office conversion issue. There are pathways by which they can happen, but they tend to require, they’re very expensive to do. They only make economic sense when they can be purchased at 60 to 70% discounts from the prior owners. And then basically, the only way you can make money is to charge rental income in the 90th percentile of rents. And so while some of those projects may take place, I can’t imagine how that’s going to end up impacting the kind of stock of affordable housing, or even upper-middle-class housing in the city.
So what should the city do about it? I don’t know; I’m not a public policy expert. But I consulted people who are. And there’s no magic bullets, just a few ideas on the margin to increase efficiency and productivity. New York ranks last or close to last in every single zoning regulation index that you can possibly find. And according to the Department of Transportation, who did a study on this kind of thing, when you relaxed owning restrictions in big cities, you can really increase output and wages, because you can decrease commuting times for a lot of people that are forced to live so far from the city that it decreases what their job options are.
And just to kind of tick through some of the things about New York, in parts of the city, you can’t build apartment buildings in parking lots or where one-story retail used to exist. New apartments often have to, and new retail often require off-street parking, which can be prohibitively expensive, and which is strange in a city that’s trying to encourage mass transit. Some areas have limited development, special-district status that have been in place since the ‘70s. Some places have never been zoned for apartment buildings at all.
And some streets preclude development of new housing, even though they’re adjacent to public transit. So there’s an enormous amount of work that can be done here, and a lot of people are focused on this. I know the mayor’s office is focused on it as well. But one of the reasons that you rank last in some of these indices is when a city - - really hard to change those things.
The city should encourage more public-private partnerships to develop apprenticeship programs, particularly for those people without four-year degrees. J.P. Morgan is active - - the New York CEO Jobs Council. More companies should get involved. Second-chance legislation is important. You would be amazed at how many adult males have some kind of criminal records, serious or not, and which can severely impair their ability to get a job and obtain housing and raise a family. And so second-chance legislation is something that helps increase employment and reduce recidivism.
The city should probably reduce the licensing requirements that make it difficult in terms of impairing interstate mobility. Occupations that require licensing in New York City include barbers, court reporters, nail cosmetologists, horse trainers and jockeys, notary public. You get the point.
And then the last one that I thought was notable was it may be time for the city and a lot of cities to rethink the tax-exempt status of hospitals, universities, museums, and religious institutions in terms of being tax-exempt owners of New York City real estate. A lot of universities in the country have technology-transfer offices to privatize and profit from federally-sponsored research. They collect millions of royalties, and all of that’s tax-exempt.
Entities like the Trinity Church has a real estate portfolio reportedly worth $6 billion. Columbia University is the city’s largest land owner, and its property tax savings are 50% larger than those given to Yankee Stadium. And the city, and it gets worse every time Columbia expands ‘cause it’s taking over property that used to be on the tax rolls. All in, there’s around 12,000 New York City properties that were worth at least $40 billion ten years ago and that were exempt from property taxes, even though the entities that owned that real estate earned $134 billion in revenues that year, and that’s something that should probably change.
So the last comment I would make is New York is a very difficult place to do business and is being outflanked by cities with a different approach. And we have a chart in here that shows as the ease of doing business score goes up, so has the economic and demographic growth of that city since 2019, so something for the city and its officials to think about. And then we close with a discussion about Detroit. For everybody that is inclined to think that raising taxes is the answer, it’s a difficult one when you’re in a downward spiral. And we have a chart in here that shows that Detroit continued to raise tax rates, but as entities fled the city, their actual collection of tax revenues fell.
So anyway, that’s just a quick podcast synopsis of the research that we did. If you want to take a closer look, all the information is available in the Eye on the Market that was released today. Good to see everybody, and we’ll be back to you before Thanksgiving with an update on the markets.
FEMALE VOICE: Michael Cembalest’s Eye on the Market offers a unique perspective on the economy, current events, markets and investment portfolios, and is a production of J.P. Morgan Asset and Wealth Management. Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management and is one of our most renowned and provocative speakers. For more information, please subscribe to the Eye on the Market by contacting your J.P. Morgan representative. If you’d like to hear more, please explore episodes on iTunes or on our website.
This podcast is intended for informational purposes only and is a communication on behalf of J.P. Morgan Institutional Investments Incorporated. Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation. Outlooks and past performance are never guarantees of future results. This is not investment research. Please read other important information, which can be found at www.JPMorgan.com/disclaimer-EOTM.
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Text, J.P.Morgan. The views and strategies described herein may not be suitable for all clients and are subject to investment risks. Certain opinions, estimates, investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice. This material should not be regarded as research or as a J.P. Morgan research report. The information contained herein should not be relied upon in isolation for the purpose of making an investment decision. More complete information is available, including product profiles, which discuss risks, benefits, liquidity and other matters of interest. For more information on any of the investment ideas and products illustrated herein, please contact your J.P. Morgan representative. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. INVESTMENT AND INSURANCE PRODUCTS: NOT A DEPOSIT. NOT FDIC INSURED. NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY. NO BANK GUARANTEE. MAY LOSE VALUE.
"New York, Just Like I Pictured It" NYC's post-COVID recovery compared to other large cities October 2023 Michael Cembalest, Chairman of Market and Investment Strategy INVESTMENT AND INSURANCE PRODUCTS ARE: NOT FDIC INSURED. NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY. NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES. SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. J.P. Morgan. Michael Cembalest speaks from a rectangle on the upper right corner of the slide.
(SPEECH)
Good morning, everybody. This is Michael Cembalest with the October 2023 Behind the Market Podcast. This one's called "New York Just Like I Pictured It". A couple of months ago, a client of the firm, which is one of the largest apartment owners in the United States asked me if I would prepare a forensic study of New York City, specifically, for-- to present at their board meeting at the end of September, for purposes of a discussion about the rationale for continued long term capital investments in the city. And I agreed to do it under the condition that I would be able to share it with our clients after I was finished with the project because I knew it would be a lot of work. And they said yes. And so, here we are. There's a four page Eye on the Market Word doc HTML that you can read. And then there's an attached deck that's got over 100 slides. I'm just going to walk through some of the main points here. But you should look to other resources, if you want to see what we did.
And here's the summary. New York City has a lot of advantages related to its outright size. There are-- it dwarfs every other city including Los Angeles and Chicago just in terms of its overall economic output, the size of its labor force, its purchasing power. New York City has a lot of business sector diversification, which is surprising because a lot of people think it's just about finance. And it's not.
Within the financial sector, New York City still has a global financial sector dominance versus other competitive cities. And then, in terms of the post COVID recovery, a lot of measures have now reached prepandemic levels, like the labor force, people going out to dinner, airport utilization.
The residential and industrial sectors within commercial real estate are in pretty good shape in terms of low vacancy rates. And the thing that would surprise you is that New York City crime statistics, at least the way they were reported by the FBI and by the city itself, compare favorably to a lot of other cities. And sometimes that comes as a surprise.
But mass transit utilization is still only around 3/4 of 2019 levels. And that's pretty much unsustainable, given all the capital and operating costs even at 100% utilization rates. New York City office vacancy rates are the highest since they've been since the early 90s. There's a lot of leased but underutilized space.
Around 35% of New York City workdays are still done from home, according to the work that Nick Bloom at Stanford does, where he compares the different cities. And as we explained in the deck, office to residential conversions are, in principle, possible. But once you filter through all of the regulatory and economic costs, they're unlikely to make that much of a dent.
The city has some very daunting operating deficits in front of it. And we'll have to enact some very deep budget cuts or tax hikes, while at the same time trying to figure out how to reinvest in aging infrastructure and public housing. New York City is still a really difficult place to do business. And the zoning restrictions in particular are burdensome at a time when flexibility is paramount.
And the city's tax rates are very high. The municipal debt burdens are high. Home affordability is low. And that may explain why New York City has had one of the highest net outmigration rates in-- of all the cities we looked at, and why New York State actually ranked next to last, other than Alaska, over the last decade regarding outmigration of both the number of taxpayers and their adjusted gross income.
As things stand now, the asylum situation threatens to substantially impair the city's financial situation, I think the mayor has been clear about that as well. And to top it all off, the electricity prices are very high. New York State has among the lowest wind and solar capacity factors, which is a measure of raw materials, solar and wind power, solar and wind power. And then, on top of that, the city is increasingly exposed to natural gas prices with the closure of Indian Point.
So now, some of you might say, a lot of cities face these problems. And that's true, which is why we compared New York to 21 other large cities.
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Text, Heat map of current conditions: NYC above median on high frequency measures of urban recovery, but dragged down by a weak economic recovery, structural problems related to business conditions and poor fiscal health. In a table below, 22 cities are compared in the categories of urban recovery, economy/demographics since 2019, business conditions, and fiscal health. The cities are given a color-coded score in each of the categories, with lower scores in warmer, redder colors and higher scores in greener colors. Each city is given an equal weighted composite in the last row of the table. For example, Boise has a weighted composite of 73, dark green, while New York City has a weighted composite of 43, orange. Text, Source: JPMAM. 2023. See report for individual sources for each measure. NYC trails most cities in the peer group, and is ahead of only Chicago, Detroit and San Francisco.
(SPEECH)
According to four main categories, an urban recovery score, which looks at urban mobility and are people going back to restaurants and supermarkets and retail stores. Within that category we also look at mass transit utilization and real estate vacancies.
And on that basis, New York City actually ranks above median compared to the 20-- within this 22 city group. And there's a color coded heat map that summarizes some of this. And green is good. And red is bad, as you might expect.
And here, New York ranks slightly above median. The problem is the city is dragged down by a very slow economic recovery since 2019 when you look at the labor force and payrolls and housing permits, personal income, spending, and outmigration. Here the city ranks way below median.
The city also ranks way below median on things like housing affordability, zoning, unemployment, ease of doing business, tax rates, electricity prices. And then lastly, the fourth category looks at fiscal health, which is tax revenues, government debt, liquidity, and unfunded-- unfunded pension, and retiree health care. And here the city ranks below median as well.
So when we put all those four categories together, New York is in a difficult spot, ahead of only Chicago, Detroit, and unsurprisingly, San Francisco. The stories that we read when we started this project about the doom loop-- the doom loop in San Francisco have been confirmed by the data that we actually came across as we were pulling this all together.
So I'm not going to go into too much detail. I'm just going to show you a few pictures and then talk about some of the policy options that we were thinking about.
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Text, NYC ranks at high end of urban recovery measures (mobile-phone tracked visits to retail stores, supermarkets, restaurants, museums), but a 30% gap is still significant. A chart is entitled, Downtown recovery rankings of major metropolitan areas Recovery vs pre-COVID activity levels, tracked via mobile phone use. In the graph, 21 cities are listed in descending order on the x-axis, with percentages from 20 to 80% on the y-axis. Each city has three color-coded dots, corresponding to May 2020, February 2022, and May 2023. For NYC, the 2020 dot rovers around 30%, the 2022 dot just above 50% and the 2023 dot just below 70%. For San Francisco, at the far right end of the graph, each dot hovers around 30%. For Salt Lake City, at the far left end, the 2020 dot sits at around 50%, and the 2022 and 2023 dots are off the chart, at 123 and 139% respectively.
(SPEECH)
Then we have a chart in here that shows this is the urban recovery. Apple did some tracking on this. So did Google.
But there's a University of Toronto study which uses mobile phones to track visits to retail stores, markets, restaurants, museums. Again, New York ranks at the high end here. A 30% gap versus 2019 is still significant. But New York ranks better than a lot of other cities here.
We also have a table on mass transit recovery. And
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Text, NYC ranks #8 in transit recovery, while most transit systems are still operating well below pre-pandemic levels due to remote work. A table below lists the 22 cities in descending order, with NYC ranking 8th at 73% recovery vs 2019. Miami ranks first at 100%, and Detroit last at 48%.
(SPEECH)
here, as I mentioned, the city is around 75% of pre-COVID levels. But again, these are very capital and operating intensive systems to run. And that's a very expensive problem for New York that's going to have to be resolved.
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Text, NYC transit recovery exceeds NYC office utilization, which is consistent with national trends. A graph below is entitled, Mind the gap: NYC transit use vs office utilization % vs pre-pandemic baseline, 3-week average. The graph compares L I R R, subway, Metro-North and Bus utilization against Kastle NYC office utilization, 200 buildings. Time, from March 2020 to September 2023, is listed on the x-axis, while percentage, from 0 to 100% is listed on the y-axis. For each of the five lines on the graph, there is a precipitous drop around March 2020 and a jagged, slightly upward sloping trend from around August 2020 to September 2023. The lines for each transport category mirror the office utilization line below them.
(SPEECH)
And here, we have a chart that shows in a lot of different ways, what the city is facing. We have a chart that shows the utilization rates of the Long Island Railroad, the Subway Metro North, and the bus systems, ranging anywhere from 60% to 70%, 75% maybe.
But New York City office building utilization is still at around 50% of prepandemic levels. And that gap is essentially telling you all about people that are circulating and going places that aren't just going-- they're just not going to their white collar office jobs. And this is the work from home issue.
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Text, Remote work is a key driver of rising NYC office vacancy rates; Manhattan office vacancy of ~18% is high but above median within the peer group. Below, a graph sits next to a table. The table, titled, 2023 Availability, compares the 22 cities with columns titled, All Buildings, Rank, New Buildings, and Rank. Manhattan is ranked 7th for all buildings and 9th for new buildings. Boise is ranked number 1, and Raleigh, 22. The graph it the left is entitled, Manhattan office (10k sf+) daily vacancy. Time, from 1988 to 2023 is listed along the x-axis and percent from 5 to 19% is listed on the y-axis. Three lines on the graph track Availability, Vacancy Rate - CoStar, and Vacancy Rate - CBRE. The lines closely mirror one another, sloping steeply upward around 2009, plateauing, then rocketing upward again around 2020.
(SPEECH)
The vacancy rates in the city, when you include pending vacancies, have hit about 18%. That's as high as we've seen certainly since the early 90s. What's kind of remarkable is that the city ranks ninth best compared to other cities. So this underutilized office space issue is a national phenomenon. And there were 11 or 12 cities in the peer group that had vacancy rates, office vacancy rates even higher than New York.
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Text, ..close to 35% of NYC work days are still remote which is modestly above the national average, and showing no signs of changing. A graph below is entitled, Pandemic permanently increased remote work nationally. Percent of full paid days worked from home. Text, Employee population: U.S. residents, 20 to 64 years old, who report work-related earnings greater than $10k to $20k. The chart tracks NYC against he 10 largest cities and against the US average, with time fro 2019 to 2023 on the x-axis and percent from 0 to 60% on the y-axis. The NYC line shows the same trends as the other two lines but consistently hovers above them, beginning around 50% in 2021 and sloping down to below 40% in 2023. Text, Source: "Why working from home will stick", Barrero, Bloom and Davis, NBER. July 2023.
(SPEECH)
The issue is that New York has the highest work from home percentage, and at least as of July of this year, was showing little signs of changing. We'll see in the next few months whether that shifts. But a lot of the people who study this don't think it will, which raises a lot of complicated questions about how cities can change and repurpose underutilized office space, instead of letting it become vacant, affecting tax revenues, resulting in areas that are underpopulated. You end up with a lot of squatters and all of the things that you might imagine would take place.
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Text, Updated census surveys on moving intentions due to crime are consistent with our prior findings: NYC is median, while the crime situation in SF is more impactful. A table below is entitled, Pressure to move in the last 6 months due to an unsafe neighborhood, %, share of respondents (per two-week period of 2023). The table compares 14 cities, with 4 columns, corresponding to time periods between June and September, and a fifth average column at the end. New York ranks 7th, with an average of 3.2%. Seattle ranks first with an average of 5.9%, and Boston last, with 1.2%.
(SPEECH)
We have a few slides in the main deck on crime reported by the city from the FBI, which allows us to compare it to other cities. And New York kind of ranked in the middle in terms of violent crime and much better than a lot of cities in terms of property crime. Recently there's been a surge in auto larceny.
But I thought this was interesting because it was very timely. This is from-- this is a table from the census. They do a Household Pulse survey. And each week they do surveys and they ask what percentage of people are feeling pressure to move from where they live because they're in an unsafe neighborhood. And here, again, New York ranked kind of in the middle and was outflanked by Seattle, San Francisco, Phoenix, surprisingly, and LA and Philadelphia and Chicago.
So again, another data point that complements the notion that sometimes the crime situation in New York City, at least from a statistical perspective, doesn't look as bad as you might-- as you might think.
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Text, While the spike in estimated NYC net out-migration has stabilized... From April 2020 to July 2022, NYC estimated net migration was -5.3%, which matches Census data (in which NYC ranked 793 out of 796 metropolitan areas). In a graph on the slide entitled, Estimated NYC migration patterns Percent, monthly rate, three lines track in-migration, net migration, and out migration from 2019 to 2023. The y-axis extends from negative 0.6% to 0.3%. The net migration line dips midway between 2020 and 2021, then slopes back up and plateaus around negative 0.1%. Text, Source: J.P. Morgan Data Science, JPMAM. June 2023.
(SPEECH)
But where New York definitely has an issue is in the outmigration of its population. And this is hard data to get because the IRS reports migration of taxpayers, but only with a three year lag and only at the state level.
So we went to our colleagues in Chase data science. And we asked them, can you try to figure this out based on change of address forms with respect to their credit card bills? And they did. They then matched it up with some historical data from the census and was remarkably close, like, out to the second or third decimal.
When I complimented the Chase data science people on how well their approach went, their response was, well, we knew it was going to be really good. And they were very confident in their data so because we do banks somewhere like 2/3 or more of the country's households.
So they felt confident that it was going to match. And it did. And here you can see the net migration data from for New York and-- was among the highest in the country over the last few years.
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Text, IRS state-level statistics: From 2011-2021, New York had the second highest outmigration rate of both people and income, exceeded only by Alaska. A table below is entitled, IRS migration statistics: Top 5 and Bottom 5 states, 2011-2021. The table is divided into two sections, Number of filers, net annual change, and Adjusted Gross Income, net annual change. Each section lists the top 5 and bottom 6 states, with New York ranking 49th in both sections. Nevada ranks first in section 1 and Florida ranks first in section 2.
(SPEECH)
And that's complemented by this. As I mentioned, this is the IRS data, which looks at migration statistics both in terms of number of filers and adjusted gross income.
We have a table in here that shows the five states with the most inflows, states with the most inflows, and the five states with the most outflows. And New York ranks 49 out of 50 only ahead of Alaska on both measures. So there's something going on in New York that is resulting in people leaving. And that's a bad fact.
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Text, The NYC advantage: the sheer size of its economy, work force and purchasing power compared to the peer group. A chart below is entitled, Relative MSA size: economic output (in $), labor force (number of people) and personal income (in $), Index (NYC equals 1). The graph compares the 22 cities, with NYC dwarfing the rest at 1.0. Los Angeles ranks next at 0.6. Boise ranks last at below 0.1. Text, Source: BLS, BEA, US Census, JPMAM, June 2023.
(SPEECH)
As I mentioned, one of the benefits of the city is the sheer size of the place, which attracts a lot of people and employers. And this is the way that we've decided to show it. We created an index that combines economic output and dollars, labor force in terms of number of people, and personal income and dollars. New York, on this basis, is almost twice as large as Los Angeles, almost three times bigger than Chicago, and almost four times bigger than Dallas.
So there's a size advantage to New York City that draws people here.
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Text, New York City ranks second-to-last in home affordability. Components, in order of highest to lowest weighting in calculation: Housing affordability, Cost per square foot, Maintenance affordability, Cost of homeowner's insurance, Cost of living, Real-estate tax rate, Rent-to-price-ratio, Home-price appreciation, Active listings per capita, Vacancy rates. A chart is entitled, Home affordability Score (high score equals more affordable). The chart compares the 22 cities, displaying them in descending order. Scores on the y-axis go from 0 to 80. New York City ranks second to last, with a score just above 30, outranking only Los Angeles. Detroit ranks first with a score around 70. Text, Source: WalletHub, US Census Bureau, NAR, C2ER, 2023.
(SPEECH)
But New York also has among the lowest home affordability metrics in the country. And that's bad too because that's one of the things that was going on in San Francisco before the city imploded.
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Text, Home affordability appears to have some connection to zoning policies. Wharton Residential Land Use Index. Number of zoning entities required for project approval: Density and lot size restrictions Exactions requirements (developer infrastructure payments), Permit delays, Community, judicial and political participation in project approvals, Constraints or caps on new supply. A chart is entitled, Zoning policies vs Housing Affordability. The x-axis reads, Wharton Residential Land Use Index (higher equals more regulation), and the y-axis reads, Housing Affordability Score (higher equals more affordable). A trend line shows lower affordability scores correlated with higher land use regulation scores. The dot corresponding to NYC sits at the far lower right part of the graph, with a low affordability score and high regulation value. Boise and Detroit sit at the upper left portion of the graph, with high affordability scores and low regulation values. Text, Source:Wharton Zell/Lure Real Estate Center, Gyourko et al. 2020.
(SPEECH)
And what's notable is that it's not just the number of people that affects housing affordability. We looked at the Wharton-- Wharton-- at the University of Pennsylvania has a residential land and-- land use index. And they score each city based on its restrictiveness of zoning.
And we have a chart in here that shows that there's a pretty decent correlation between how severe your zoning restrictions are and the affordability of housing in that city. And so, that's something that has to be-- we'll talk more about later.
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Text, State/local household tax burden in NYC is at the high end of peer group cities. A chart is entitled, Tax burden for family earning $75,000 per year. Bars on the chart compare the cities, displaying them in descending order, with color-coded sections on each bar for Auto, Sales, Property, and Income. Tax burden is listed in percent from 0 to 16% on the y-axis. NYC has the fourth highest tax burden, at just below 12%, behind only Detroit, Chicago, and Philadelphia. Austin has the lowest tax burden, at just above 6%. Text, Source: "2020 Tax Rates and Tax Burdens in the District of Columbia: A Nationwide Comparison", City of Washington DC. 2022.
(SPEECH)
This is the tax data. You have to look at tax rates for households as a function of their income. We picked $75,000 a year because it's reasonably close to median income for a lot of these big cities. And here, you can see that New York is close to the top in terms of the combination of income property sales and auto tax rates. And so, that's part of the issue that's pressuring the city.
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Text, NYC faces a fiscal cliff that will require large budget cuts and/or tax increases to close. On graph is entitled, Mayor's OMB budget gap projections, $ US, billions. The graph shows a widening gap between revenues and expenditures between fiscal year 2024 and fiscal year 2027, with expenditures steadily rising above revenues. 2027 shows a $7.9 billion difference, with $116.7 billion in expenditures and $108.8 billion in revenues. Text, Source: Mayor's Office of Management and Budget. June 2023. The other graph on the slide is entitled, NYC Comptroller's budget gap projections, $US, billions. This similar graph shows the same trend, but with a wider gap and larger difference. In 2027, the difference is $14.0 billion, with $124.5 billion in expenditures and $110.5 billion in revenues. Text, Source: NYC Comptroller. August 2023.
(SPEECH)
And then, the city is facing a pretty big fiscal cliff. And the way this kind of stuff works with cities is they can't run large deficits generally the way the federal government does. So whenever you see projections of deficits, those deficits have to be closed by some combination of tax increases or spending cuts.
And what's interesting about New York is on the left you get a projection of the deficits from the mayor, essentially the Office of Management and Budget of the mayor's office. But separately, there's an independent New York City comptroller that is projecting budget deficits that are twice as large as the mayor's office. And the single largest component of that difference is the asylum costs that are the city is expected to incur in the next few years.
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Text, Debt analyses should include unfunded pension and retiree healthcare obligations as well as bonds; NYC total obligations ratio is at the high end of the peer group. We recompute the obligations ratio using normalized discount rates and amortization terms, and fully amortize unfunded balances. • Gap between reported and recomputed amounts in NYC mostly reflects underfunding of retiree healthcare plans Chicago stands alone within the peer group regarding fiscal distress. These calculations include essential service entities (water/sewer, mass transit, electric utilities) unless they are supported by the state. SLC recently completed construction of a new $4 billion airport; excluding essential service entities, SLC ratio is 5th lowest.
A chart is entitled, Cost of pension and retiree healthcare plans (including amortization of unfunded amounts), government debt and defined contrbution plans as a % of city revenues. Dots for each city correspond to the as reported value, while bars behind the dots correspond to the recomputed value. The cities are displayed in descending order of recomputed value, with NYC 7th at just below 25%. Chicago is first at around 43%, and DC is last at about 6%. Text, Source: Individual city CAFRs, Moody's, JPMAM. FY 2022.
(SPEECH)
The other analysis that we do, for those of you that have been fans and readers of the Eye on the Market is, we look at the cost of not just government debt, but also paying off unfunded pension and retiree health care plans. I won't go through all the details here, other than to say that New York is not at the top, right.
I mean, Chicago will continue to set world records of insolvency as it comes to these kinds of things. But New York is definitely on the high side on this measure too. So that's an additional pressure point.
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Text, NYC electricity prices are at the high end of the peer group; NY State faces renewable transition headwinds due to relatively poor wind and solar conditions. NY State wind capacity factors of 23% and solar capacity factors of 17% are among the lowest in the US. Natural gas and imports of gas-fired power are the primary replacements for decommissioned Indian Point nuclear plant. A chart on the left is entitled, Price of household electricity, US$ per kilowatt hour. The bar chart displays the cities in descending order. The y-axis extends from 0 to $0.40. NYC is listed 5th at $0.25. San Jose is listed first at around $0.37 and Boise last, at around $0.11. Text, Source: BLS, Energy Sage, JPMAM, July 2023. The graph on the right displays New York electricity generation by source in terawatt hours from 1990 to 2020. The lines on the graph correspond to natural gas, nuclear, hydro, imports, wind and solar, and coal.
Natural gas and imports rise, with the line for natural gas hovering consistently above all the others from 2010 to 2020. Nuclear precipitously drops off around 2020, and coal displays a downward trend to near 0 from 1090 to 2020. Text, SourceL EIA, JPMAM, 2022.
(SPEECH)
Energy prices, they're high.
Here you can see that New York has one of the highest electricity costs per kilowatt hour in the country. And I'm not surprised. The chart on the right is interesting in the following regard. A few years ago Indian Point was shut down. And I understand why people want it to shut down Indian Point. There's a natural gas line that runs underneath Indian Point.
So combining a gas line with a nuclear power plant is not a great idea. At the time, NYSERDA, which is the New York Energy Agency, said, don't worry about it, wind and solar is going to make up the gap. That turned out to be about 95% false.
As you can see in the chart, most of the gap has been made up by natural gas and imports of electricity from neighboring states that produce it with natural gas. So while this might have been an important decision to make, I think I think the energy gurus in the city, at least so far, have misunderstood what the dynamics are going to be in terms of electricity generation.
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Text, NBER Study: conversion of a 250,000 sq ft Class B office building into residential can be economically attractive but requires a LOT of assumptions. Conversion of a vacant 200-unit prewar Class B: Rentable space declines from 85% to 70%. Purchased from prior owner/bank $175 per square foot, a 60% discount to pre-pandemic value; owner has incentive to sell at distressed price since property was refinanced at peak LTVs and bottom in cap rates. Conversion cost of $320 psf + $40 psf for green efficiency. Rental income: 90th percentile of rents psf, $7,000 per month for an 875 sq 1 BR for a family of 3 ($96 per square foot annually.) Class B Office (assuming no conversion): • Pre-pandemic: $400 ps market value, 12% vacancy, monthly rent of $4.12 psf.
Post-pandemic: monthly rents decline 15% from $4.12 psf to $3.50, rent growth declines from 1.5% to 1%, vacancy increases to 17% by 2023 and to 27% by 2033, credit losses increase from 1.5% to 3.0%, imposition of GHG taxes. Other potential issues increasing conversion cost: amenities required to attract upper income tenants. Other potential issues increasing conversion incentives: rising tenant improvements and free rent required by office tenants. A graph compares annual net operating income, in US millions, between apartment market, apartment affordable, office pre-pandemic, and office post-pandemic from 2023 to 2033. Both apartment categories rise around 2025 and plateau. The apartment categories hover around $3 million and slope down slightly. Text, Source: "Converting Brown Offices to Green Apartments", Nieuwerburgh (Columbia), Gupta (NYU), Martinez (Columbia). August 2023.
(SPEECH)
I'm not going to spend too much time on the office conversion issue. There are pathways by which they can happen. But they tend to require-- they're very expensive to do. They only make economic sense when they can be purchased at 60% to 70% discounts from the prior owners. And then, you're basically-- the only way you can make money is to charge rental income in the 90th percentile of rents.
And so, while some of those projects may take place, I can't-- I can't imagine how that's going to end up impacting the kind of stock of affordable housing or even upper middle class housing in the city. So what should the city do about it? I don't know. I'm not a public policy expert.
But I consulted people who are. And there's no magic bullets, just a few ideas on the margin to increase efficiency and productivity. New York ranks last or close to last in every single zoning regulation index that you can possibly find. And according to the Department of Transportation who did a study on this kind of thing, when you relax zoning restrictions in big cities, you can really increase output and wages because you can decrease commuting times for a lot of people that are forced to live so far from the city that it decreases what their job options are.
And just to kind of tick through some of the things about New York, in parts of the city you can't build apartment buildings in parking lots or where one story retail used to exist. New apartments often have to-- and new retail-- often require off street parking, which can be prohibitively expensive, and which is strange in a city that's trying to encourage mass transit.
Some areas have limited development special district status that have been in place since the 70s. Some places have never been zoned for apartment buildings at all. And some streets preclude development of new housing even though they're adjacent to public transit.
So there's an enormous amount of work that can be done on here. And a lot of people are focused on this. I know the mayor's office is focused on it as well. But one of the reasons that you rank last in some of these indices is when a city is really hard to change those things.
The city should encourage more public, private partnerships to develop apprenticeship programs, particularly for those people without four year degrees. JPMorgan's active when the New York CEO jobs council, more companies should get involved. Second chance legislation is important.
You would be amazed at how many adult males have some kind of criminal records, serious or not, and which can severely impair their ability to get a job and raise-- and obtain housing and raise a family. And so, second chance legislation is something that helps increase employment and reduce recidivism.
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Text, Automatically expunge certain criminal records if individuals remain arrest-free for a specified period; require private employers to postpone asking about an applicant's criminal record until after the applicant has had an opportunity to interview; prevent unpaid court debts (fines, fees, costs and restitution) from being a barrier to record clearing; and standardize record clearing timetables across states; end the practice of suspending driver's licenses for non-driving offenses and providing state-issued IDs for individuals leaving prison facilities, which helps with access to employment, housing, education and mainstream banking services.
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We-- the city should probably reduce the licensing requirements that make it difficult in terms of impairing interstate mobility. Occupations that require licensing in New York City include barbers, court reporters, nail cosmetologists, horse trainers, and jockeys, notary publics, you get the point.
And then the last one that I thought was notable was, it may be time for the city, and a lot of cities, to rethink the tax exempt status of hospitals, universities, museums, and religious institutions in terms of being tax exempt owners of New York City real estate. A lot of universities in the country have technology transfer offices to privatize and profit from federally sponsored research. They collect millions of royalties and all of that tax exempt.
Entities like the Trinity Church has a real estate portfolio reportedly worth $6 billion. Columbia University is the city's largest landowner. And its property tax savings are 50% larger than those given to Yankee Stadium. And the city-- and it gets worse every time Columbia expands because it's taking over property that used to be on the tax rolls.
All in, there's around 12,000 New York City properties that were worth at least $40 billion years ago, and that were exempt from property taxes, even though the entities that owned that real estate earned $134 million in revenues that year. And that's something that should probably change.
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Text, See accompanying word document for more details on each of these policy options. Michael flips through slides, landing on one that reads, NYC is a difficult place to do business, and is being outflanked by cities with a different approach. A graph is entitled, Ease of doing business vs economic recovery, Economic/demographic growth since 2019. A trend line slopes upward on the graph, with has ease of doing business score on the x-axis and growth on the y-axis. NYC sits near the far lower left end of the graph, with a low ease of doing business score, and low economic/demographic growth since 2019. Boise sits at the far upper right portion of the graph, with high growth and a high ease of doing business score. Text, Source: Ariz. State University, BEA, BLS, Chase Data Science, JPMAM. 2023.
(SPEECH)
So the last comment I would make is, New York is a very difficult place to do business and is being outflanked by cities with a different approach. And we have a chart in here that shows, as the ease of doing business score goes up, so has the economic and demographic growth of that city since 2019. So something for the city and its officials to think about.
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Text, This is the story of Detroit, whose tax revenues fell despite a series of tax hike... A graph is entitled, Detroit tax revenues fall despite new taxes imposed, Tax revenues, 2013 USS, billions. Four lines correspond to property tax, plus income tax, plus utility tax, and plus wagering tax. 6 inflection points are labeled on the graph, listing different legislative changes in Detroit. Each of the four lines trends downward, starting at about 1970 to 2010.
(SPEECH)
And then, we close with a discussion about Detroit, for everybody that is inclined to think that raising taxes is the answer. It's a difficult one when you're in a downward spiral. And we have a chart in here that shows that Detroit continued to raise tax rates. But as entities fled the city, their actual collection of tax revenues fell.
So anyway, that's just a quick podcast synopsis of the research that we did. If you want to take a closer look, all the information is available in the Eye in the Market that was released today. Good to see everybody. And we'll be back to you before Thanksgiving with an update on the markets. So long.
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