“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.
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