By Gary Eisenman | February 8, 2021

The occurrence of the Covid-19 pandemic is unprecedented and there are still months to go. NYC, the epicenter of its outbreak, required a lock down in March and April. The pandemic remains unresolved and NYC remains on the defensive.

The shutdown has had a negative economic effect on the city. The estimated GDP of NYC in FY 2019 was $1.57 trillion, roughly 85% of the NYS GDP and 8% of the US GDP. NYC Comptroller Stringer estimated that the NYC GDP declined 36.3% in the first 2 quarters of 2020 and although recovering, remains impaired. NYC is the largest municipal economy in the US, the engine of financial well-being of the nation. The financial engine of NYC is arguably its real estate economy. Statista estimates the real estate economy of NYC (together with the finance and insurance sectors) accounts for $433 Billion of NYC’s GDP. A 2014 analysis by economists at Rutgers University estimated that the value of “developable land” in Manhattan, not including the value of structures, highways, roads or parks, was equal to $1.74 Trillion. There is no other segment of the NYC economy that is equivalent in its impact on the collective economy.

Many would agree it is part of a historical pattern in NYC that as the real estate economy goes, so goes the health of the overall economy. On his death bed in 1848, John Jacob Astor, then the wealthiest person in the world, said “could I begin life again, knowing what I know now … I would buy every foot of land on the island of Manhattan”.

Residential rents are down to 2008 levels, 61.4 mm square feet of office space is vacant in Manhattan (a 26 year high at 15.2%, with leasing activity down 47% compared to Q4 2019), the psf value of Manhattan office condominiums has decreased by 32% since the onset of the pandemic, 90% of the office work force is absent, the future of the use of offices is the subject of debate (with new leases and renewals in the balance), tenant evictions are looming along with the related wave of foreclosures and bankruptcies. There is reason to be concerned about the bottom of this. For the state and city this is significant. The state and city budgets depend on revenue from taxes generated by its real property, including real property taxes (e.g., this largest portion of budgetary revenue was down 18% in the first 2 months of the city’s tax year and is projected to decrease by $2.5 Billion next tax year), commercial rent taxes, mortgage taxes, transfer taxes and income taxes generated by income from real property. According to the NYT “roughly half the city’s tax revenue comes from real estate” and City officials estimate that the market value of the tax class that includes hotel, office and retail properties has already decreased by 15.8%. NYC’s current estimated budget gap for its next fiscal year is $3.8 Billion.

Recovery planning is subject to the uncertainty of timing and impact. When will the virus recede and people feel safe? There are estimates of 6 months to a year, but no clear answer. This leaves the precise impact of the pandemic on the economy, to be determined: e.g., how many people will be unemployed, how many people will be displaced, homeless or food insecure, how many restaurants and retail businesses will be closed, how many square feet of office space will remain un-leased, how many businesses and residents will have left NYC, how will businesses under leases view the use of their offices, how many hotels will remain closed, what will the state of the entertainment business be, what will the impact on all tax collections be, what will the financial assistance from the Federal government be and how long will NYS or NYC budget deficits persist?

The components of this economic disruption and loss are undefined, myriad, complex, intertwined and subject to limited governmental resources to ameliorate them. The SFY 2022 Executive Budget reflects the best current thinking and estimates, but the pandemic’s effects on the two largest categories of state spending – health care and education – limit available actions on the spending side. Certain efforts to raise revenue may create economic risk.

Collective forward thinking in this context is an essential defensive measure and we have the tools. The strength, discipline and diversity of the citizens of Gotham will lead to a successful outcome of this crisis. History provides insights that serve to provide optimism. To name a few calamitous and destructive events that resulted in “building back better”: the Great Fire of 1776, the Manhattan Draft Riots of 1863, the economic crashes of the Great Depression and the 1970s and the attack of 9/11/2001. In addition to the 1918 Flu Pandemic, the city has overcome and prospered after various epidemics of communicable diseases: the Yellow Fever Pandemic of 1793-1805, a cholera epidemic, a typhoid epidemic, small pox and the scourge of HIV-Aids.

If the past is prologue, NYC will not only overcome its current circumstances it will evolve stronger and more vibrant than prior to 2020. The history of calamity and recovery in NYC bears witness to the likelihood of this outcome.

Act to Reimagine.

The NYT in an article dated 12/11/20 stated, “the pandemic has created a crisis in NYC’s commercial real estate industry. Some leaders think it’s time to reimagine the city’s business district”. As reflected in Governor Cuomo’s 2021 SOS, reimagining is about the business districts, but is also about other aspects, and areas, of the life of the city.

Reimagining might begin with the impact on NYC real estate because this is the literal bedrock of the economic well-being of the city and the prosperity of the commercial districts is critical. Reimagining is also about the housing of NYC’s citizens in decent, safe and affordable homes; the availability of shopping and eating establishments and food supply in all communities; accessible and reliable transportation; proper education for all of its children (including broadband access as the Governor has proposed); the preservation of cultural assets; and the availability of healthcare for all, when and where they need it. We must also turn the negatives of the crisis into an opportunity to create greater racial and social justice as part of a holistic reimagining. In short, the reimagining and revitalization of the communities of NYC.

A reimagining to build back better calls for a proactive and comprehensive process, driven by data. It requires regular communication between stakeholders to balance their economic and political interests, and an agreed upon paradigm and process for analysis and data collection. It aspires to a shared vision that (as we approach and pass the end of the public health crisis) will show the way, by providing guidelines for a process that leads to the stability and prosperity of the real estate sector, the general economy of the city and well-being of its people.

The NYC commercial real estate community began reimagining by proposing the conversion to residential use of up to 10% of 400 mm square feet of office space, including provision for affordable use. In response, the Governor has undertaken to propose legislation that will provide for a five-year window allowing for such conversions. The conversion from office use to residential use has market precedent in NYC prior to the pandemic as demonstrated by the partial conversion of the iconic Woolworth Building. It is also an “increasingly common” practice in the UK, with conversions growing by 40% in 2017. This proposal by the real estate industry assumes changes to zoning and density rules as well as the provision of tax benefits to make it viable.

Conversion is not a stand-alone proposal, along with the various proposals already made and those to follow, it will be considered as part of a comprehensive plan. This broader approach will take lead time and minimizing delay in implementation would be beneficial. The implementation of any single recovery proposal will be subject to the resolution of many details, the creation of a plan that is comprehensive, dynamic, results in community building and economic recovery, will be that much more challenging. Solely with respect to the proposed commercial conversion program there might be numerous considerations, such as:

  • Is 20% the correct affordable set aside in every case? Should there be a relationship between governmental action and the affordable unit set aside? Can a regulatory process be established which allows for efficient transaction execution and true community building?
  • Will the same zoning and density changes be available to all conversions?
  • Is the proposed 10% of the office stock the correct target for conversion? What portion of the office stock is physically conducive to conversion? Will as of right conversion permitted under the proposed legislation include partial conversion of a building? If so, with what criteria?
  • Should office conversion include other uses such as medical, educational, assisted living,

e-commerce, etc.?

  • If partial conversion is permitted as of right, should the condominium process be streamlined to promote conversion?
  • How will existing and new lenders view and underwrite the full or partial conversion of a building?
  • How can existing programs such CDBG and Section 108 loans be utilized? Will the Federal government provide additional financial assistance and regulatory relief in these programs?
  • Is it possible to include these areas in the definition of “distressed area” under the Opportunity Zone Statute to allow for private capital to be leveraged?
  • Are there changes to the LIHTC, NMTC, and HTC programs that are helpful to this objective and achievable?
  • How can true public-private partnerships be created in this process to promote economic revitalization?
  • How would a reinstatement of Section 421-g tax abatements work in this context?
  • Will the NY Federal Home Loan Bank assist and how?

These are a but a few of the questions raised by this one proposal, which is but one of many proposals (made or to be made) and the details inherent in each will all beg many questions as stakeholders begin to consider their interests in the cauldron of issues swirling about.

Governor Cuomo has already commenced and laid the ground work for this; the NY Forward Advisory Board, the Eric Schmidt Chaired Governor’s Reimagine New York Commission, and (as proposed in the SOS) the creation of a Commission on the Future of New York’s Economy have, and will, positively contribute to a Build Back Better plan. Along with a re-empowered Financial Control Board the role of the state in directing this process is taking shape and is essential to ensure its economic integrity, comprehensive scope and political continuity, recognizing that NYC will elect a new Mayor this year. However, boards and commissions result in recommendations which need to be evaluated and, if approved, shaped into law and functioning policy and action. To accelerate this process the state might consider a vehicle for the institutionalization of the build back process to propel it forward, in detail.

There are any number of ways in which this process could be institutionalized. For example, after the destruction of 9/11 the city and state formed the Lower Manhattan Development Corporation, which initiated the rebuilding process (with the state providing incentives such as 421-g tax abatements to catalyze the conversion of office buildings to residential use) and administered the resources available for this purpose. This agency still continues its work and could have its mandate altered and its jurisdiction expanded to all of NYC.  Alternatively, the state could unilaterally create a new subsidiary of the Empire State Development Corporation for this purpose. One of the great innovations of the turn-around of the 1970s economic crash was the Municipal Assistance Corporation. MAC had far reaching powers to direct the economic revitalization of NYC as well as the ability to issue debt to fund it. This or an entity similar in power and scope could be of great utility in the context of the projected NYC budget deficit(s) and the evolving long-term recovery of the general economy of NYC.

There is a metaphorical saying that I am fond of: “if you are standing on a highway and see 2 lights in the distance, don’t fool yourself, it’s a vehicle, and you better get off the road or you are going to get run over”. The pandemic’s impact on the NYC economy is the metaphorical vehicle. It is clear that the process of moving off the road has begun, but will take time, and the challenge remains, be off the road by the time the vehicle arrives.

The pandemic has created a once in a lifetime opportunity to evaluate and implement the restoration and revitalization of NYC in order to propel it into the 21st century. With the leadership of Governor Cuomo, together with the strength, discipline and diversity of its citizens, there is no question in my mind that the Empire State will create the plan for NYC, set the standard and generate the propulsion for the nation to follow it, in building back better.

Gary Eisenman, of Counsel and Senior Advisor at Brown & Weinraub.