Economy & Markets

New York, Just Like I Pictured It

A CEO client asked if I would prepare 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 is 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.

The heat map compares current conditions across multiple cities. The heat map shows that NYC ranks above the median on measures of urban recovery (high-frequency data), but is weaker on economic recovery, business conditions and fiscal health. NYC trails most cities in the peer group, and is ahead of only Chicago, Detroit and San Francisco.

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). Many universities have technology transfer offices to privatize and profit from federally sponsored research, collecting millions in tax-exempt royalties. In NYC, 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 combined5. The situation gets worse very time Columbia expands, since it takes over previously taxable real estate. In 2019, the NYT reported that tax-exempt Trinity Church owns a real estate portfolio worth $6 billion. There were ~12,000 NYC properties worth at least $40 billion in 2012 (almost certainly 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 year6. That should probably change.

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 convicted7
  • 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 earnings8
  • 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%9. 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 wages10
  • 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 services11. 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”12. 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 economic and demographic growth since the end of 2019. The x-axis shows ease of doing business scores that include: costs, tax rates, zoning requirements and more. The chart shows that NYC is below the majority of their peers in each measure.

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


1
See “How Different is Detroit”, Eye on the Market, Michael Cembalest, August 6, 2013
2Zoning and the Density of Urban Development”, Delventhal (Claremont), Kwon (USC) and Parkhomenko (USC), Pacific Southwest Region University Transportation Center, August 2020
3How 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
The Untouchables: How Columbia and NYU Benefit From Huge Tax Breaks”, NYT, September 23, 2023
6
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
7
Brennan Center for Justice, Matthew Friedman, November 2015
8
Barred from employment: More than half of unemployed men in their 30s had a criminal history of arrest”, Bushway et al, Science Advances, 2022
9
Colorado Law & Policy Center, “Ban the box legislation boosts employment and reduces recidivism”, Nov 2015
10
Expungement of Criminal Convictions: An Empirical Study”, Prescott and Starr, Univ. of Michigan, 2020
11
Occupational Licensing: a Framework for Policymakers”, Department of the Treasury, 2015
12New York Times, October 13, 2021

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