NYC must focus on filling empty buildings again — not profits or tax revenues

“Enact a vacancy tax on retail, office and residential property.”

New York City’s government and real-estate industry have a common purpose: to keep real-estate prices high. City Hall wants tax dollars. The industry needs high prices to avoid defaulting on debt. But what Gotham needs right now may be the opposite: lower prices.

As offices reopen, the industry is putting on a brave face. “We felt it was really important, as the largest office landlord in the world, that we demonstrate leadership in returning to the office,” Brookfield CEO Brian Kingston told The Wall Street Journal. About a quarter of Brookfield workers were expected to return last week. The chief of the company that owns the Empire State Building, Tony Malkin, recently said: “We believe in work from work.”

They’re right, to some extent. White-collar workers aren’t going to work from their bedrooms forever. But nor is there any indication they’ll be back to work in Manhattan five days a week. People working two days a week, or three, in a central office will require less space, overall. Two people, on different days, can share a (sanitized) desk meant for one.

Sure, each person will require more space, to stay apart from co-workers. But this extra-space requirement makes the space less valuable, as the space doesn’t generate as much revenue.

Retail? Big property owners absurdly think they’re going to collect back rent from tenants that, by law, couldn’t open stores over the past three months. Even as Gotham allows shopping, foot traffic in major corridors is going to be down for months, if not years, affecting how much retailers can pay.

These markets were struggling with rising vacancy rates even before COVID-19 hit, as was the high-end housing market. The deepest-pocketed condo buyers were would-be investors (not residents), whose only interest in the property was that someone else would pay a higher price later. Market-rate rentals depend on Manhattan jobs.

None of this is insurmountable, in the long term. History shows that lower prices lead people to use space in unexpected ways. Starting in the 1950s, pioneering artists converted industrial lofts nobody wanted anymore into live-and-work-studios downtown. In the ’70s, as more than 1 million people fled New York, others saw an opportunity, buying and refurbishing brownstones and rebuilding the tax base. In the ’90s, immigrants helped repopulate the South Bronx.

There is a nightmare scenario, though: People and jobs leave the city, but prices don’t adjust to allow new people and businesses to come in.

How could that happen? With the Federal Reserve keeping interest rates at zero percent, and with stock markets still overvalued relative to economic activity, global investors have few places to park money.

They may well refinance the debt owed by half-empty office and apartment buildings, because other opportunities are scarce, and current lenders don’t want to take losses on the buildings’ existing debt.

Counterintuitively, lenders would rather see a building maintain empty space at high theoretical rents than have a property owner lower the rent, thus accepting that the rent has fallen.

New York City and state could correct for national and global distortions, through local policy: enacting a vacancy tax on retail, office and residential property, increasing the longer a property stays empty, with the extra revenue going to lower sales and income taxes, to bring people back to the city.

But the city has the opposite incentive. This year, before the pandemic, it expected to collect $30.9 billion in property taxes, nearly half of the $65 billion tax total.

The property tax is supposed to be the city’s most stable tax, impervious to fluctuations. That’s because increases and decreases in property values are phased in over five years and because property values shouldn’t rise or fall that fast.

But they have. In 2011, the property-tax take was $19.3 billion, adjusted for inflation. In 2001, property-tax revenue was $11.9 billion. This source of tax dollars, then, nearly tripled over two decades, largely thanks to huge inflations in commercial-property values.

It doesn’t always. In the decade leading up to 2001, as the Empire Center’s E.J. McMahon has observed, property-tax revenue didn’t rise at all. Before that, it rose far more gradually.

Could it fall over the next five years? A cash-strapped city government doesn’t want to take that risk. But expensive empty buildings won’t spur the economy.

https://nypost.com/2020/06/23/nyc-must-focus-on-empty-buildings-filled-again-not-prof-its-or-tax-revenues/

From NY to Houston, flood risk for real estate hubs ramps up

The number of properties in the United States in danger of flooding this year is 70% higher than government data estimates, research released on Monday shows, with at-risk hot spots in Houston, New York, Los Angeles and Chicago.

The higher risk identified could have implications for property values as well as insurance rates, municipal bonds and mortgage-backed securities, according to investors and researchers at First Street Foundation, which released the data http://www.floodfactor.com.

“This could change the calculus on whether a given property is resalable, or what price you sell it at,” said Tom Graff, head of fixed income at Brown Advisory.

The data, which covers the contiguous United States, found that around 14.6 million properties, or 10.3%, are at a substantial risk of flooding this year versus the 8.7 million mapped by the Federal Emergency Management Agency (FEMA).

FEMA maps are currently used to determine rates on government flood insurance and underpin risk assessments done by mortgage lenders, investors and home buyers. The maps, however, only account for coastal flooding – not rain or rivers – and do not incorporate the ways climate change has made storms worse.

A FEMA spokesperson said that First Street’s maps build on those created by the agency and the two are not incompatible.

Los Angeles, Chicago, Houston, New York and Cape Coral, Florida top First Street’s list of cities with the most number of properties at risk. At the state level, Florida, Texas, California, New York and Pennsylvania have the most to lose. Florida and Texas also top FEMA’s list, but with significantly fewer properties estimated to be at risk.

Washington, D.C., has the greatest deviation from FEMA’s numbers, 438.4% more properties at risk, because First Street accounts for potential flooding from the Potomac and Anacostia rivers and a drainage basin under the city. Utah, Wyoming, Montana and Idaho have the next highest deviations, all between three to four times greater than FEMA estimates.

Commercial mortgage-backed securities (CMBS), investments that pool loans for office buildings, hotels, shopping centers and more, are among the securities most exposed to flood risk because of the concentration of cities on the U.S. coasts.

“There is a moral hazard within the investment community of not pricing in the risk of something like this happening,” said Scott Burg, chief investment officer at hedge fund Deer Park Road.

Nearly 20% of all U.S. commercial real estate value is located in Houston, Miami and New York, according to CoStar data, each of which has been hit by hurricanes in the last decade.

Hurricane Harvey, which slammed Houston in 2017 and caused $131 billion damage, affected over 1,300 CMBS loans, 3% of the CMBS market in 2017, according to BlackRock research. Hurricane Irma in 2017 affected 2%.

The BlackRock report concluded that 80% of the commercial property damaged by those two storms was outside of FEMA flood zones, indicating that many of the buildings hit may not have been appropriately insured.

Any floods this year could compound the effects of the coronavirus pandemic, which has sent more than $32 billion of commercial loans into special servicing – negotiations for relief in the event of a default – according to Moody’s.

“For property owners that’s like getting your arm amputated and then your head lopped off,” said Jacob Hagi a professor of finance at the University of North Carolina and a First Street research partner.

https://www.reuters.com/article/us-usa-floods-real-estate/from-new-york-to-houston-flood-risk-for-real-estate-hubs-ramps-up-idUSKBN2400YV

College towns have been clobbered by COVID-19

Once considered largely recession-proof, college towns have been clobbered by COVID-19. Without financial assistance from the federal government, the likelihood they can recover anytime soon is dim.

Defined as communities in which an institution of higher education has a significant presence, college towns vary widely in size, location, and economic vitality. Examples include Champaign-Urbana, Ill., State College, Pa., Auburn, Ala., and Grinnell, Iowa. By some measures, Massachusetts alone has over a hundred such villages, towns and cities. What college towns have in common is their heavy reliance on a single industry — higher education.

In the past, that reliance has served college towns well. Despite the closure of some colleges and universities in recent years, higher education has been remarkably resilient over the long run. Colleges and universities, ours among them, are among the country’s oldest continuously operating institutions. These public and private institutions draw hundreds of thousands of students every year, along with parents and visitors, sometimes doubling the resident population for at least nine months. All these new arrivals spend money in local stores, restaurants, and hotels. In Blacksburg, Va., over half the local economy depends on Virginia Tech, and football games attract 400,000-500,000 visitors each fall.

Colleges and universities provide steady employment for faculty and staff, who buy homes in the area, enroll their children in local schools, and contribute to local tax rolls. Although tax exempt themselves, a substantial number of colleges and universities make annual contributions to their local municipalities. Most important, perhaps, unlike other small or large-scale enterprises, colleges and universities cannot pick up and move to another location. 

Their economic activity has tended to insulate college towns from the swings of the business cycle. But the pandemic has turned this dynamic upside down. Almost overnight, colleges closed their doors, sent their students home, suspended construction projects, and cancelled sporting events, graduations, and reunions — at enormous cost not only to the colleges themselves but to their home communities. Canceling commencement cost South Bend, Ind., home of Notre Dame, about $17 million in lost revenue.

As Svante Myrick, the Mayor of Ithaca, N.Y., home to Ithaca College and Cornell University, notes, the pandemic has been “devastating for cities everywhere, but especially for college towns — because they have a much higher percentage of tax-exempt property.” Businesses have closed and sales tax revenues have plunged. As a result, Myrick told us he anticipates a $15 million revenue shortfall in 2020, roughly 25 percent of its budget. The city has already furloughed 97 employees — almost a quarter of its workforce — and froze hiring and salary increases. Myrick said he’s donating 10 percent of his salary back to the city.

The Village of Clinton, N.Y., home to Hamilton College, collected most of its taxes for the fiscal year before the pandemic hit, but for the coming year Mayor Steve Bellona told us he anticipates a loss of state municipal aid, a 25 percent drop in sales tax revenues, and a drop in user fees for the sewer system, “creating a deficit equal to roughly 12 percent of the village’s annual general and sewer budgets.”

These deficits far exceed those created by the Great Recession. Ithaca’s projected shortfall, for example, is now five times what it was in 2009-10, at the time the largest deficit in the city’s history. Other municipalities may have the luxury of raising property taxes to make up for a loss of sales taxes and other revenues, but much of the property in college towns is college-owned and therefore tax exempt. Facing their own large deficits, colleges — and state governments — are unlikely to do much to help. 

Ironically, the very thing that insulated college towns in past recessions — the share of their economies dependent on higher education — has rendered them more vulnerable than most communities to the economic impact of the pandemic. If colleges and universities do not bring students back this fall, there is, in Mayor Myrick’s words, “no telling how bad this will get.” More layoffs and steep cuts in services would be inevitable, delivering a body blow to the colleges as well as the college towns.

College towns cannot dig themselves out of the financial crisis they now face. Colleges and universities have received some support from the federal government through the CARES Act. Without a CARES Act providing financial assistance to state and local governments, a significant number of college towns may well face bankruptcy, an outcome that could contribute to a second wave of unemployment and underconsumption throughout the nation.

Glenn C. Altschuler is the Thomas and Dorothy Litwin Professor of American Studies at Cornell University. He is the co-author (with Isaac Kramnick) of Cornell: A History, 1940-2015.

David Wippman is the President of Hamilton College.

https://thehill.com/opinion/education/504337-college-towns-have-been-clobbered-by-covid-19

V-Shaped Narrative Dies As Commercial Real Estate Bust Accelerates

The last week of June marks the time when investors lost hope for a V-shaped economic recovery as confirmed COVID-19 cases are exponentially rising in Texas, Florida, and California, and the Tri-state area imposed quarantine restrictions on travelers. Reopening in some of these states has also been delayed as retailers close up brick and mortar shops for a second time. 

With that being said – the V-shaped recovery narrative is imploding – as many on Wall Street indiscriminately bought stocks (some used picking Scrabble letters to buy) as their belief in the Federal Reserve’s money-printing would lift the economy out of one of the worst downturns since the 1930s. 

Though the economy was never lifted in a V-shaped formation, instead, the stock market rose to new highs as wreckless financial speculation led to an army of Robinhood daytraders buying bankrupted companies. 

With the euphoric period likely behind us, notably, because the Fed’s balance sheet has contracted over the last several weeks and virus cases across the country are soaring – we now turn our attention to the commercial real estate bust. 

During euphoric periods, like what’s happened over the last several months in financial markets, the bad news is usually overpowered with happy stories (sometimes from Larry Kudlow) – but as sentiment shifts – we must not lose track of the instabilities that can wreck the financial system.

Bloomberg cites a new report via real estate research firm Savills, which details how the Manhattan commercial real estate industry could be headed for a prolonged downturn if there’s no V-shaped recovery in the economy. 

The report says Manhattan’s office rents are likely headed to their lowest levels since 2012, that is if the economy doesn’t have a speedy recovery. That means asking rents could drop by 26% to about $62.47 a square foot, the real estate services firm said. 

A speedy recovery or not – the trend in corporate America is to work from home – companies have found ways to implement remote access for employees – and this trend will only gain momentum. 

That being said, the office market in New York City is headed for a serious bust – with recovery years away. 

“Many assume that when the stay-at-home measures are lifted, there will still be Covid-19 fears that will continue to materially influence behaviors and the economy,” Savills said. “These fears will likely remain until a vaccine or antibody therapy is developed and widely available, which experts currently estimate is at least 12 months away.”

It’s not just the office market that is in trouble – we noted this week that one-third of hotels in the city could go bankrupt. 

The cracks in commercial real estate have already emerged, in early June, there was a massive jump in CMBS delinquencies, suggesting the bust has only begun. 

For more clarity on the recovery timeframes – UCLA Anderson Forecast’s latest report suggests 2023.

https://www.zerohedge.com/markets/v-shaped-narrative-dies-commercial-real-estate-bust-thrives

Workers Allowed To Return To NY Offices This Week; Almost None Did

Little is certain as New York City cautiously moves from crisis to functionality, but one thing is: Few people are returning to their offices, for the time being at least, despite it now being allowed.

Some 15 weeks after the city shut down, its workplaces were permitted to welcome back occupants starting Monday. Under Gov. Andrew Cuomo’s staggered reopening plan, the city entered into Phase 2 June 22, allowing commercial office properties to operate at 50% capacity, outdoor dining to commence, barbershops to reopen and real estate agents to tour properties. There were fewer than 1,000 hospitalizations from the virus Thursday, the lowest number since March 18, per state figures.

But businesses remain cautious with back-to-work plans, and occupancy at many office buildings this week has been even lower than some predicted, industry experts told Bisnow. Sources pointed to the summer lag as a contributing factor. Most acknowledged anxiety around the subway as a serious obstacle, and some said exploding infection rates in states that opened sooner has slowed the return.

”When we see high spikes outside of New York, there may be a fear factor here for going back to work, and it’s not a surprise,” said CBRE Senior Managing Director of Investor Services Thomas Lloyd, whose company handles property management for 80 office buildings in Manhattan and 20 across Westchester and Long Island. The company has been tracking occupancy levels each day since Monday. In the Downtown portfolio, which covers buildings south of 42nd Street, occupancy over the last two days was at around 6%. In properties north of 42nd Street, occupancy has been hovering around 9%, Lloyd said, and out of a total of 41 multi-tenanted buildings, six are still totally empty. In buildings in the suburbs, which entered Phase 2 ahead of the city, occupancy is at around 30%, Lloyd said.

“They are lower than expected, given the circumstances that the state of New York allowed 50% [capacity] and our surveys of tenants. We were expecting a 15% return to work in the first few days,” he said. “Clearly, the national viewpoint of this virus has changed outside New York, and that may give New Yorkers pause.”

In Texas, for example, the number of people hospitalized across the state has doubled since the start of June and hit an all-time high this week. Gov. Greg Abbott paused the state’s reopening, he announced Thursday. It is one of 29 states that have seen a rise in infections, and the nation hit a record high in cases Wednesday, and broke it on Thursday.

California and Florida, frequent sources of travel to and from New York, hit records for the highest number of cases in one day. So far, more than 120,000 Americans have died from the virus.

Most New York City office landlords were already expecting a slow return with their tenants, with some of the major occupiers of space saying they will not return until Labor Day or later. For many, the subway remains a crucial challenge. The system has seen ridership plunge as a result of the crisis.

“You have to look at it holistically. We are very confident that we can establish protocols that keep people who come to the building safe,” said Durst Organization Vice President of Public Affairs Jordan Barowitz. “We’re one link in a larger chain that includes people feeling confident on public transportation, having appropriate child care and not having underlying health conditions or living with people who are high risk.”

RXR Chief Operating Officer Frank Pusinell said the company’s office buildings, which include 75 Rockefeller Plaza, 230 Park Ave. and the Starrett-Lehigh Building, remain at between 5% and 15% occupancy.

“Any increase is going to come after July 4, and many tenants are still waiting for Labor Day for a very large uptick,” he said.

Pulsinelli himself is back at work, with RXR Realty bringing back employees on rotating teams.

“I feel great and much more productive,” he said. “One of the first big groups to come back are the real estate companies. We all want to put the money where our mouth is. We’ve done all this work to make the buildings safe.”

A spokesperson for Silverstein Properties, which owns 13M SF of office space, told Bisnow it has no figures yet on tenants’ return, but of the developer’s 406 employees, 25% are back in their offices this week. Related Cos. CEO Jeff Blau said earlier this month that he expected his staff to be back at the office “in full force” when Phase 2 begins. Brookfield Property Partners has predicted 25% of its 700 city employees will go back to their desks this week, The Wall Street Journal reports. RFR is planning for 60 employees to work from its Midtown office for four days a week, and Empire State Realty Trust CEO Anthony Malkin told the WSJ he expects about a third of his company’s employees to return within the week.

Flexible workspace provider Convene is not opening its three locations in the city until Monday, and It has taken the extra time to roll out new safety measures and protocols, Convene Chief People Officer Amy Pooser said. Convene’s locations in Los Angeles, Philadelphia and Chicago are up and running.

“If New York looks like other cities, we expect 15% to 25% members to come back in the first week,” she said.

Convene has worked to de-densify its workspaces, created a disinfecting schedule, installed new social distancing signage and put in hands-free temperature check machines.

“I think [Convene] members feel confident and safe in what we can offer them, at the same time some of them are not pushing employees to be back in the office yet,” Pooser said. “There is — like Convene internally and across the world — an increasing openness to flexible work.”

Phase 2 may be the testing ground for a whole new era of work, others pointed out. Drastic stay-at-home orders triggered a widespread work-from-home experiment, and people are now considering how much long-term impact it will have on the brick-and-mortar office market.

“We have a client in the Empire State building that has 350 people, they are talking about returning in Q4, regardless of what phase we are in. Others are talking about the beginning of next year,” Cresa Managing Principal Jim Pirot said. “It all reverts and revolves back to what commercial real estate looks like in the future … I doubt people are going to pay $100 a foot for lounge areas on Madison Avenue, so for a swath of the square footage, there will be consolidation and contraction.”

https://www.bisnow.com/new-york/news/office/phase-two-coronavirus-office-workers-04969-104969