Perhaps my biggest defect as a predictor of the future is that at heart, I am sometimes too optimistic. Maybe it is my natural contrarian instinct not to fall prey to the media’s irrepressible spirit to seek out and promulgate the most depressing and negative news possible.
So here I go again. As a philosopher, I will do my best to be strictly analytical, albeit with a slight optimism bias……
I have written previously about New York City in this article and it pointed out that every time people have bet against New York City in the past two hundred years, it has been a losing bet. And I don’t see anything different this time around. Here is my analysis:
I will start with the negatives, and there are many of them. Indeed, the statements of doom and gloom keep getting deeper. Indeed, many are saying that “this time it’s different” and NYC is really going down for the count. There are various reasons to sound the death knell for NYC. Here are the ones that come to mind:
- Zoom and working from home have made it obvious there is just no reason you “have to” be in NYC anymore. You can do your job from anywhere – so why suffer through the miserable commute.
- There is a lot of negativity towards the real estate industry in NYC. Indeed, some politicians wear as a badge of honor that they are refusing contributions from the real estate industry.
- There have been various initiatives targeting the real estate industry. This includes last year’s calamity to rent-stabilized housing that, in one moment, wiped out almost everyone’s equity in this asset class.
- The Climate Mobilization Act – although having excellent intentions – will put an enormous cost burden on real estate owners in NYC.
- This is not to mention all of the COVID initiatives ranging from forced non-evictions to (almost) rent strikes, with whatever will happen certainly not over with.
- COVID itself is scaring the heck out of people, so they don’t want to return to work. Someone did the math that for a big office building, if all employees wanted to get to their desks, with social distancing requirements, it would take a month of waiting for them to get to work for that single day.
- So many people are leaving the city. Indeed, it seems anecdotal that almost anyone who has a second home, or access to a second home, outside NYC, is at that home right now. Moving trucks are everywhere, and you keep hearing statistics about U-Hauls seen leaving the city.
- Google just announced that it is planning to have employees work from home till June of 2021.
- Restaurants and bars and similar establishments are shut down, which continues to keep people out of work.
- And what is going on with back to school? If you have school-age kids in NYC, you are in a tizzy one way or another.
- Some businesses are moving their office to the suburbs, having concluded that they don’t “have to” be here.
- All of the reasons to be in NYC in the first place aren’t here right now, i.e., theater, public and exciting gatherings in bars and restaurants, sports, etc., all are shut down. So, again, there is no reason to be here.
- Taxes are through the roof – let’s remember the SALT misery from last year – and the budget shortfalls will doubtless raise taxes again. And depending on election results, those taxes might go higher still. And some politicians are talking about raising taxes on the rich even further.
- And – as I was preparing this article – I hear that the Pied-A-Terre tax is back as a possibility. Plus a possible tax on mezzanine debt and even preferred equity.
- Crime is rising, and there is an awful lot of anger everywhere.
- My industry friends have so much doom and gloom you wouldn’t believe it.
And there is so much more. Every day you hear more and more about how this time NYC is really finished.
I have one word in response:
Maybe it is because I am a bit older and have been around in NYC real estate for almost 40 years that I have a different perspective. A short walk down memory lane:
- Before my time there were panics, booms and busts galore. Read The House of Morgan, by Ron Chernow, for a quite readable walk down memory lane for NYC. He takes the reader through panics and booms and busts, not to mention the great depression that lasted for close to ten years.
- The S&L Crisis – who remembers that anymore? Starting in the 1980s and stretching into the 1990s;
- Crime rising in the seventies and eighties.
- The end of the tax break permitting see-through buildings in 1989. This ushered in the real estate super great depression of 1990 to 1995 when (just about) every single player in the real estate world went belly up, and real estate ceased to exist for five miserable years. For real estate players, today’s travails are minor compared to that wonderful time for real estate.
- In 1999 we had the bursting of the internet bubble.
- In 2001 we had 9/11, when army trucks, armed soldiers marched through the streets, and many loved ones perished. We were sure the city was finished as it would be a perennial target of terrorism.
- In 2009 we had The Global Financial Crisis, and everyone was sure that there was no chance for NYC; however, billions (and maybe even a trillion) dollars were made over the next ten years as prices rose relentlessly and NYC became the largest attraction of talent and coolness ever seen in human civilization.
Now today, we have a bunch of setbacks. Are they “worse” than the ones I just enumerated? I don’t think so. They are different, with the biggest difference being that today’s setbacks are “now,” and we feel horrible as we are experiencing them “now.”
Consider a few thoughts though, to the contrary:
- There are certainly a lot of people who have left NYC for their second home. But consider for a moment where these second homes are. Are these second homes places where people want to live full time? I have a second home in Cape May and love it there, and it was a haven for me for a while in March and April, but there is not a chance I would want to live there full time. I would get bored and miss all my friends.
- As a related point, people who can afford second homes have moved away from the big city due to pandemics for hundreds – and maybe thousands – of years. Then they come back. Ask London.
- We hear that people are moving to the suburbs in droves. I am not sure these are permanent ‘moves,’ but even if so, consider what the word “sub-urb” means. A ‘suburb’ is, by definition, the place that surrounds and is “sub-ordinate to the “urb,” i.e., a suburb only exists due to its being next to an urban development. And NYC is the “urb” in this metaphor. Even if you move to the suburbs, you will eventually still be going into NYC for sports, culture, excitement, dinner, thrills, and, yes, your office where you will need to show up if you want your career to succeed. I know this personally since I have lived in NYC suburbs for close to 40 years, and the reason it is “cool” to live in the suburbs of NYC is that NYC is here in the first place.
- As a related point, do we think the Metropolitan Opera House, Madison Square Garden, or Rockefeller’s Christmas Tree are moving to Westchester any time soon?
- As another point, studies have shown that proximity to other human beings has been a key component to innovation and creativity and advances. Even if some do leave NYC, there are going to still be an awful lot of brilliant, talented, creative people left behind. Where are you going elsewhere that you can find that? Clearly, not another city, as other cities have the same issues but don’t have all of the magnets that NYC has. So where? I don’t see the place.
- We only hear stories about people leaving – and we’ve been hearing that for years – but I wonder has anyone adjusted the statistics on departures for the fact that people naturally retire or slow down at a point in life and move to sunbelt states. And Millennials are certainly at that point in life where retirement and moving to the sunbelt is looking better – maybe this is just a catalyst for a natural evolution of a career. Has that trend been enhanced or not at this point? I don’t know that, but I do know that the fact that Toby Jones decided not to move is definitely not newsworthy for the media, but the fact that Tobina Smith decided to move is newsworthy.
- Also, consider all the people who will finally be able to afford to come here if prices and rents drop and availability rises.
- And consider the fact that investors always hope to buy low and sell high. If prices drop, perhaps savvy buyers will be here for all the reasons they were here last time.
- It also bears mention that many organizations, including many (most?) of the strongest economically entities on the planet, have many billions invested in NYC. They won’t want just to walk away from it that easily. And if they try, where exactly are they going? Where are they going to find the talent pool that brought them here in the first place? Along these lines, Facebook just signed a small 730,000 square foot lease in the Farley Post Office building in addition to the 1.5M square feet they signed at Hudson Yards last year, and Blackstone is searching for 1,000,000 SF of office space. These parties are hardly “dumb money.”
- Work-From-Home works for some, and maybe for a while, but starts to get old and boring after a while. I personally am kind of loving the time with my wife but had real palpitating excitement when I went back to the office for a day last week. I can’t wait to get back and see my friends, colleagues, and clients. You know, before COVID hit I loved setting up Real Estate Salons with my cherished friends and clients and sipping scotch and brainstorming with them. Some things don’t translate as well to Zoom.
- Trust me -- when all of your friends are all back in NYC, you will want to be back there too.
- Talent wants to be with talent more than anything. Even right now – holed up in apartments – there is more talent in NYC than anywhere else on the planet.
- There is also a lot of talk about the obsolescence of office space. I doubt it, but if so, do we think the office buildings sink into the ground? No, they get – very quickly – repurposed to other uses that are timelier. Yes, some parties will lose money, but others will do the opposite. I note Vornado just announced they are probably turning the JC Penney store into a “last mile facility” -- the Neiman Marcus space at Hudson Yards is now being shopped as office space – and the Bryant Park hotel may also be marketed for office space.
- As for the restaurants that go belly up, here is where the green shoots of capitalism’s “creative destruction” will do its work, and new restaurants will take their place, potentially with the very same parties that owned the restaurant that folded.
- I could go on and on and on but will end by saying that NYC remains a hotbed of everything. Where else can you find in one place: Tech. Financial, Education, Life Sciences, Fine Dining, Entertainment, Art, Culture, Different makeups of races, backgrounds, religions – everything, and Fun – just walking around is a thrill.
NYC may be a bummer right now. Okay, it is a bummer right now. But as Wayne Gretzky famously said (paraphrasing a bit):
“Don’t skate to where the puck is – skate to where the puck will be”
And very soon, it will be obvious that the puck will be in NYC like it always has been.
So just like I did in my prior articles, I will stick my neck way out and say there is simply no better place in the world to own, buy, invest, lend or participate in than NYC real estate.
Finally, just so you don’t think I am just pontificating, for the past month I have been buying stock in all NYC REIT’s, other than ones on our law firm’s restricted list – and the business day before or after this article comes out, I will increase my positions. This is by no means investment advice that you should do the same – you should, of course, make your own investment decisions – I am just putting my money where my mouth is.
Before I close, I will note that many people keep asking me about my prior prediction for a Big V Recovery. I mean, with the virus resurging and all the troubles going on, am I sticking to my guns on this prediction? In that regard, yes, I am still strong on this, and I do think the upside will continue to surprise everyone pretty dramatically. Will I turn out to be right or wrong? That will be determined at the end of the third quarter of this year (i.e., the point of the prediction was a big downdraft in Q2 followed by a Big V spike in Q3). And as I have promised before, if I am wrong, I will eat humble pie and be as crystal clear about that as if I am right.
Best regards to everyone.
Bruce Stachenfeld aka The Real Estate Philosopher™