All cities are mad: but the madness is gallant. All cities are beautiful: but the beauty is grim

Cecile Babcock, Associate Director, 30 March 2021

Since March last year, when hundreds of thousands of residents left New York City in the wake of Covid-19, there has been endless speculation about whether New York is “done.”  On a superficial level it’s a valid reaction: by the end of 2020, the office vacancy rate had hit 15%, which works out to nearly 70m square feet of empty space across some of the most valuable real estate on earth.  Why, after all, would firms and people pay to be based in New York when everyone was working from home and everything that made the city appealing—restaurants, bars, theatres, museums, retail—was closed?  Why pay $3500 for a one-bedroom apartment in Manhattan when you could pay half of that in Miami if all you need is a stable wifi connection?  Sure enough, the Sunshine State has seen an exodus of New Yorkers that is larger than usual and seems as though it might be more permanent, with its zero percent tax rate and warm weather luring employees and firms alike.  Citadel, Moelis, and Elliott Management, amongst others, announced plans to open satellite offices in Florida at the end of 2020, sparking discussions about whether Wall Street would ever fully return to the actual Wall Street.

 

From a ground lease perspective, it’s safe to say that the notion of New York City being “done” is overblown.  The next three to five years won’t be the city’s best, but, given the economic, cultural, and political clout that comes with being one of the United States’ largest and most influential metropolitan areas for the last 150 years, it bodes well for the long-term.  As long as transactions are structured such that the effective rent is at least four times the ground lease payment, serving as a sufficient buffer for short periods where the vacancy rate may be higher, the effects of the pandemic are unlikely to have any significant impact on a 99-year lease. 

Inevitably, there have been comparisons to Detroit, once one of the United States’ most prosperous metropolitan areas and now synonymous with urban decline.  Covid-19 has prompted myriad discussions about a fundamental shift in the way we work, a key part of which is the role of the traditional office, and this has already had a major effect on the New York office market.  However, there are several critical differences between New York in 2021 and Detroit in 1950.  To name a few:

 

  • Diversity of industry: the automobile industry was the reason for both the rise and fall of the Motor City, largely because it completely dominated the local economy.  New York, on the other hand, is the global financial capital and one of the world’s leading centres of professional services, advertising, communications, creative industries, and high technology.  It is difficult to overstate the sheer diversity of the city’s economy, which provides a level of long-term economic security and has allowed for more predictable growth.
  • Service economy: in addition to the greater variation of industry, present day New York is a service economy, whereas post-war Detroit was a global capital of manufacturing.  Even before the rise of the auto industry, when the Detroit economy was substantially more varied, it was still based on the manufacturing of metalwork, tobacco goods, drugs, and chemicals.  The rise of automation and offshoring practices hit particularly hard as a result, and although New York is certainly not immune to the effects of either, its service-focused economy puts it in a position such that it will better be able to adapt.
  • Infrastructure: given the centrality of the automobile to the Detroit landscape, it is unsurprising that public transport was historically a low priority.  The rise of car culture was accelerated by the dismantling of the streetcar system and the passage of the Highway Act in 1956, the latter having created urban sprawl that continued unchecked by any limiting geographic features and further disincentivised investment in public transport systems, which became increasingly less cost-effective as the urban population and the metropolitan area’s density fell.  In stark contrast, New York has one of the world’s most comprehensive subway systems, as well as extensive bus and ferry systems; as a result 56.5% of residents commute by transit and car ownership is the lowest in the United States.  This is due in part to the geographic situation of the city, where the various bodies of water feeding into the Atlantic limit sprawl by default and allow for a level of density that is highly advantageous in terms of economic growth and innovation as well as being more sustainable. 
  • Global integration: despite its high levels of international migration and status as the automobile capital of the world, Detroit during its heyday was not what would be considered a global city.  Part of this was the dominance of the auto industry, which was a largely regionalised industry at the time, and part of this was the time period itself.  There were few if any global cities in the early to mid-20th century.  Present day New York, meanwhile, is the only metropolitan area apart from London to be classified as Alpha++ under the Globalization and World Cities Research Network framework, indicating the highest possible level of international interconnectedness.

Perhaps most telling is the simple fact that New York has existed for several centuries and not suffered an irreversible decline in that time, be it after the 1918 influenza pandemic, September 11th, the 2008 financial crisis, or even the economic stagnation of the 1970s.  As widespread as the effects of Covid-19 have been, they are unlikely to be the death knell of one of the economic, commercial, social, and cultural centres of the world.  Wall Street South is not going to replace the original, even if it does have a white sand beach, and the fundamentals of the New York market are solid enough that it stands to rebound from Covid-19 very much intact.

 

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