Will New York Real Estate Recover?

New York City is well on its way toward reopening. The city has weathered the storm better than some critics had feared, and even the fiscal situation of the city has held up surprisingly well. However, the pandemic has left important challenges in its wake for the next mayor to address.

The biggest of these changes revolves around the future of remote work. In the last few decades, Gotham has reinvented itself as a finance and tech hub for educated and skilled workers. Paradoxically, their jobs are the easiest to do remotely, but they have been, in practice, performed by workers willing to pay high premiums for urban density. [1]

This core of educated workers drove an urban renaissance not only in New York but in many other cities. Urban areas have always attracted young people, creative professionals, and immigrants hoping to make it big. But what changed in the last few decades is that these educated workers stuck around even after having a few kids. This affluent middle class that made NYC their home formed the core of a thriving city. These cohorts increasingly saw cities as safe places where they could raise children. And they continued to make their way to midtown and downtown offices because they felt that cities offered expanded amenities, such as nice bars and restaurants, as well as the productivity and career enhancements of face time at the office.

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Even before the pandemic, housing costs were beginning to drive residents away. Median house prices nearly doubled from 2010 to 2019, while rents grew at 3.9% yearly—twice as fast as median income. [2] In the pre-pandemic years, the New York Metropolitan Statistical Area (MSA) approved just 3.2 housing units per 1,000 people (and much of this was in New Jersey), barely edging out San Francisco. [3] Given high housing costs, it’s not surprising that NYC’s population was already declining slightly in the pre-pandemic years. [4]

In those years, many New Yorkers remained in the city because they greatly valued the cultural and social opportunities, or simply because they were tied to the city for reasons of job access. But increasing numbers were already making the calculation that the costs just weren’t worth it. And a greater number were choosing not to move to the city in the first place—immigration to the city dropped 45% during 2016–19. [5] While this was partly a product of lower national immigration, even those who did immigrate were often drawn to the many immigrant communities that have sprouted up in suburbs.

These patterns abruptly shifted in March 2020. With the onset of the pandemic, there was a large urban exodus—primarily driven by younger, more educated, workers who were able to work from home. The pandemic disrupted everything that makes cities attractive—many firms changed to remote working policies, and amenities such as restaurants and Broadway shut down. In my work with Josh Coven and Iris Yao, we found that as much as 13% of the population of Manhattan left in March 2020, with even larger declines in neighborhoods including the West Village, the Financial District, and the Upper East Side. [6] Much of New York resembled a ghost town.

Many who fled headed to suburban areas, rather than to other cities. They relocated to the suburbs of New Jersey or Connecticut, where they could set up larger remote offices for work and children’s schooling. Some went to traditional destinations within the New York metro area, such as Westchester, Bergen County, or Fairfield—and thus are likely to stay connected to their employer and the city in general. But considerable numbers headed to even more distant exurban locations in the Hudson Valley or central New Jersey. These workers are no longer spending money in core metropolitan areas, and likely will not be returning to the city nearly as frequently, if at all. This shift poses serious concerns for municipal government, which is losing out on several key sources of taxation.

Property-tax revenues tend to change slowly, so these losses are not reflected immediately in city revenue. But the city expects to see a $1.6 billion drop in property-tax revenue in the next fiscal year, as office properties see a 16% citywide drop in valuation. [7] The city is looking at additional losses from the departure of workers and changing commuting patterns, especially around the central business district. And a large tax battle is looming on the horizon with workers who have left and do not even commute back into the city but who currently pay NYC taxes.

Is this exodus permanent, or will New York return? While much of the urban flight appears to have been temporary, it may have led people to realize that there were better places where they could live and raise a family. My research with Stijn van Nieuwerburgh, Jonas Peeters, and Vrinda Mittal suggests a mix of temporary and permanent effects.[8] To formalize these channels, we contrast the effects of the pandemic on rents and prices. Rental rates are set based on equating supply and demand at any given moment, so they can change rapidly, based on market conditions. NYC saw large decreases in rents, with drops as much as 20% in the city center at the bottom, reflecting this decreased demand.

At the same time, house prices have generally held up better. Prices declined only slightly for areas in the city core, less than six miles from Grand Central Station, and, on average, increased for areas farther away. Because house prices are set based on the expectation of future values, the stability of the housing market points to reasons for optimism for the city.

We formalize these effects in a simple model that includes evidence on rents, prices, and future expectations across a sample of 30 MSAs. Our best projection is that urban rents will come back—we project that NYC rents will increase in the future, with the return of residents.

Looking across metropolitan areas, however, NYC has several attributes that leave it relatively more vulnerable. The share of workers who could potentially work remotely is relatively high in the city, at over 40%—these are the footloose workers who have increasing options for where to locate. Regulatory constraints on building are also quite high for the city, contributing to a more expensive metropolitan region. New Yorkers, in other words, have both an incentive and the ability to leave; and those elsewhere have reason not to move into the city in the first place.

A critical issue for the city is the future of remote working policies. Technologies that enable remote work have been around for a long time. As the influential business author Peter F. Drucker noted in 1992: [9] “It is now infinitely easier, cheaper and faster to do what the nineteenth century could not do: move information, and with it office work, to where the people are. The tools to do so are already here: the telephone, two-way video, electronic mail, the fax machine, the personal computer, the modem, and so on.”

Despite these prognostications, the initial enthusiasm over remote work did not pan out. Instead of greater dispersion, we saw economic activity become even more concentrated in a handful of superstar cities—New York being one of the foremost—as reflected by a growing price gap between the largest cities and the rest.

What changed with the pandemic is the coordinated shock of remote work across a range of employers. As employers and firms start to appreciate the benefits of remote life, their attitudes toward office-space demands are becoming very different.

As a survey by Nicholas Bloom and coauthors finds, employees and employers are trying to get at least “hybrid” remote work functional. [10] The authors project that 22% of workdays will be supplied remotely, compared with just 5% before the pandemic, and that spending in city centers will drop by 5%–10%. These shifts would entail workers coming into the office two to three days a week and working from home the rest of the time. This fits with back-to-the-office plans reported by major employers such as Deutsche Bank, JPMorgan Chase, and Google.

Even if only partially remote work—i.e., spending two days a week in the office—becomes the norm, workers can more easily shift their residential locations. Constricted by regular commutes, many workers choose homes near their workplace. But many would be willing to live significantly farther from the city center if they didn’t have to commute daily. This helps explain house-price increases in far exurbs of NYC that were not previously regarded as commutable.

From the city’s perspective, a key advantage of these plans is that they do not leave workers untethered from the city; they are free to move elsewhere entirely. However, this degree of work shift would entail large changes in demand for office space. JPMorgan Chase, for instance, anticipates that new work practices would result in 40% less commercial office demand. Bloom’s survey anticipates that remote work changes are expected to be greatest in the densest office clusters—which will affect New York’s office clusters in midtown most of all. His survey suggests that Manhattan workers plan to work from home 34% of the time, even after the pandemic is over; if realized, this plan would result in a drastic shift in urban life.

It is difficult to know whether current remote plans will be realized. Past waves of enthusiasm for remote work have not panned out, often because workers perceive that their presence in the office is crucial for promotion and visibility, even when they could be equally productive at home.

Still, the impact of remote working shifts are already reflected in market prices. Office rents are plunging, and the prices of commercial REITs, which own and manage this office space, remain substantially down from pre-pandemic levels—despite the stock market in general, and many other real-estate firms specifically, performing well. A recent report on first-quarter 2021 trends by Savills Research, for instance, finds that Manhattan office availability has increased to over 17%, the highest level in decades, while market rents have fallen by over 9%, compared with pre-pandemic levels. [11]

The possibility of remote work means that NYC must compete harder to attract and retain residents—particularly educated and higher-income residents—than ever before. For decades, the city has relied on the finance and tech industries, which led to complacency in assuming that these firms and entities would always be interested in urban locations. But people now enjoy new choices of where to locate and work, so cities will need to engage in more active competition to attract and retain talent. The keys to doing so are building more housing in desirable, supply-constrained neighborhoods throughout the city and focusing intently on resident quality of life.

Responding to these changing realities requires the city to take a more proactive stance on urban land use. Despite the possibility of remote work, many people would still choose to live in NYC if it were more affordable. The recent zoning debates over SoHo/NoHo are a good example of possible policy changes—this proposed rezoning would accelerate the development of downtown New York toward further housing growth. [12] Being able to repurpose land from obsolete uses toward residential housing will expand housing access and limit urban flight.

Reducing local control over rezoning decisions is critical to achieving this goal. This might mean limiting the role of member deference, which allows local city council members to veto local rezonings. Shifting the approval process for new construction to the city level—and speeding up the process—will help make more construction projects financially viable. Eliminating parking minimums, which force the construction of costly parking spaces regardless of need, would also encourage development.

As the city faces new public-safety challenges, higher crime, and increasing homelessness, it should reconsider the role of housing. The city was once home to more than 100,000 single-room-occupancy units (SROs), which provided gateway housing for individuals facing incarceration or housing insecurity. While the housing shelter system addresses the needs of some New Yorkers, expanding the range of options could help New Yorkers who face more precarious housing situations from falling into homelessness.

More broadly, NYC should invest in the needs and wants of its current residents. Some low-cost ways to improve the quality of life include addressing externalities inherent in urban life, such as removing trash from the streets, [13] and further investments in Open Restaurants programs, which have successfully sustained restaurants while allowing for comfortable dining. [14] Enforcing rules against unnecessary car-honking and limiting noise from motorcycles and cars would be another small step to improve public life, while expanding the Open Streets program would improve pedestrianization and the quality of life. 

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Arpit Gupta is an adjunct fellow with the Manhattan Institute and an Assistant Professor of Finance at New York University’s Stern School of Business, where his research focuses on using administrative datasets to understand risk and return dynamics in alternative asset categories.

His interests in policy research include real estate, housing and land-use regulation, transit, infrastructure, public finance, pedestrianization, and the management of urban street space. His recent academic papers examine the role for foreclosure contagion in mortgage markets and estimate the risk-adjusted valuation of private equity funds.

He received his B.S. in Mathematics and Economics at the University of Chicago and his Ph.D. in Finance and Economics from Columbia Business School.