New York City real estate recovery post-COVID-19

It was previously predicted that New York City real estate recovery from the COVID-19 pandemic wouldn’t occur until 2025. Ahead of schedule, the city has seen job rebound, population recovery, and an increase in demand for quality assets.

Good Underlying Fundamentals Prompt New York City Real Estate Recovery

Between April 2020 and July 2022, New York City’s population decreased from 8.80 million to 8.34 million, a 5.4% decline. Despite initial pandemic setbacks, the city managed to recover, regaining all lost private-sector jobs by October 2023. The unemployment rate also dropped 5.3% in September 2023.

Office space vacancies remain New York’s biggest Achilles’ heel, at a high of 40%. Still, retail, dining, and hospitality sectors have shown improvement. Midtown and Lower Manhattan witnessed a recovery of 74% compared to 2019 levels. New York City’s apartments remain in high demand, with a tight vacancy rate of 2.5%. Additionally, record-high apartment sales reflect a strong desire among people to live in the city permanently.

NYC has endured previous crises like 9/11, the ’08 recession, superstorm sandy, and survived the worst of COVID-19. The road to recovery has been rocky, but the comeback is official, and savvy investors know there’s a reason New York comes back every time.

 

The Metrics that Trace the Tenuous Path Forward

In the aftermath of the lockdowns, people initially left NYC but were swiftly replaced by newcomers seeking opportunities. By 2022, the city experienced a resurgence as those who first moved away returned to the city. Interestingly, Manhattan saw a notable increase in population.

New York County, encompassing Manhattan, welcomed over 17,000 new residents by 2022, marking a positive turnaround. Other areas like the Civic Center and Lower East Side Manhattan, as well as Brooklyn’s popular neighborhoods like Brooklyn Heights and Williamsburg, have seen significant population growth. This growth is fueled partly by their proximity to Manhattan and attractive amenities. Meanwhile, quieter, lower-cost areas in South Brooklyn, such as Coney Island and Spring Creek, have experienced resurgence due to their waterfront appeal and more affordable real estate options.

However, not all areas have rebounded equally, some inner neighborhoods of Brooklyn continue to face population declines. The state as a whole experienced a population decline of 2.6% between 2020 and 2023, according to the Moving Migration Report from North America Moving Services. Nonetheless, there is optimism for the city’s future. While the post-COVID-19 urban revival varies across neighborhoods, neighborhoods with unique offerings are likely to thrive. This indicates continued demand for urban living despite the challenges posted during the pandemic.

How Job Recovery Aided with NYC Real Estate Recovery

Within the early weeks of the pandemic, the city lost nearly one million jobs, with unemployment skyrocketing to 21%. In October 2023, it was announced that New York City regained all private sector jobs lost, and the unemployment rate was down to 5.3%. The city currently has more total jobs than ever before, totaling 4.7 million. The Urban Displacement Project tracked cellphone data which shows Midtown and Lower Manhattan as two employment centers that have seen increased visitation in offices, shops, and public transit.

As the job market has improved, retail, dining, and hospitality have all witnessed increased foot traffic trends. Midtown and Lower Manhattan have seen a recovery level of 74% in comparison to 2019 levels. Additionally, foot traffic has increased to 80% and more businesses opened in 2022 than in 2019.

New York is a city that is constantly reinventing itself. Once plagued by an oversupply of retail, the pandemic shook out the retailers that weren’t going to survive and/or adapt to new consumer shopping habits. This opened up the market up to more opportunities for New York real estate recovery.

Return-to-Office in NYC Real Estate

While the end of lockdowns and the return-to-office seems to have lured people back to the city, the office sector still has a challenging year ahead as office utilization has yet to fully recover. This is impacting New York real estate recovery. The return to-office movement has been marked by fluctuations in employee attendance.  The number of employees reporting to their offices on a given day stuck at less than half of pre-pandemic levels, as tracked by keycard swipes.

A Look at the Data

The Kastle Barometer for office card swipes indicated that in Q1 2023, the rate went above 50% compared to pre-pandemic levels but dropped below 50% by Q2 2023. Data from the partnership of New York City shows an average attendance for workers returning to New York. At the same time, the Real Estate Board of New York reported a visitation rate of 61% of pre-pandemic baselines across 250 office buildings in Manhattan in Q1 2023.

Although this marked a 10-point increase from Q1 2022, it falls short of the 65% peak in Q1 2021. In Q3 2023, there was a nine-point increase in workers returning to the office, reaching 58% between August 23 and September 15. This compares to 49% during the same period in 2022. Despite this, mobile device activity in the city’s central office districts, primarily in Midtown but also in the Financial District and Brooklyn, remains 26% lower than pre-pandemic levels. However, this decline is comparatively less than in cities like Miami and Austin.

Only 40% of total office space is currently occupied, one of the lowest percentages across the county. It is crucial to highlight that 60% of the available office space is located in buildings that have not been renovated in over a decade.

 

Office Space Utilization

A recent Bloomberg News analysis estimated that office workers are spending $12.4 billion less annually in Manhattan due to the rise of hybrid work. Still, the possibility of more return-to-office mandates could prompt a significant return of workers to their office space. In the tech sector, there’s a notable growth in office presence, with companies like Apple focusing on expansion plans concentrated in Manhattan’s thriving West Side. Additionally, Amazon has become New York’s second-largest private employer, employing approximately 20,000 workers, despite canceling plans for a second headquarter.

Flight to Quality

Despite the office occupancy numbers, the flight to quality is evident in specific locations throughout New York. For example, One Vanderbilt generated approximately $25 million in NOI in 2023, boasts a mere 2% vacancy rate, and broke records in 2023, with 6,400 people visiting The Summit, an art, technology, and architecture-focused observation deck, in a single day. While this concept isn’t new, it’s a promising sign for the New York office market.

The market has become increasingly bifurcated as these quality buildings benefit from significantly lower vacancy rates and rental premiums. The flight to quality is most observable in Manhattan, where the net effective rent for trophy office space averaged approximately $100 per square foot in Q1 2022 and jumped to $112 per square foot in Q1 2023. This trend is here to stay as hybrid work drives employers to create a more inviting and fulfilling working culture that supports the return-to-office movement.

Top Amenities

The most sought-after features in high-quality office spaces today are the building amenities and proximity to public transportation.

• World-class restaurants
• Rooftop bars
• Gyms & fitness studios
• State-of-the-art conference centers
• Messenger center
• Speedy elevators
• Valet parking
• Transportation access
• Floor-to-ceiling windows
• Outdoor areas
• Lounge/recreation spaces

While Manhattan has not seen major companies relocating elsewhere, there are approximately 10 million square feet of new office space to be delivered. This indicates that developers remain optimistic about the Manhattan office space market despite the rising concerns that these deliveries will contribute to the increasing vacancy rate. With several surveys and reports providing insight into the evolving office landscape, there are notable infrastructure changes, such as those around Grand Central Madison, that have made living and working in the city more accessible. This reflects the ongoing efforts to adapt to the changing dynamics of office attendance and urban life.

Subway Ridership’s’ Impact on NYC Real Estate Recovery

A substantial investment of $171 million has been made in the Subway Safety Plan. The plan aims to benefit working individuals by restoring confidence in the transit system. Thus, facilitating their return to work and enhance accessibility for employees in the city. Alongside these initiatives, significant infrastructure enhancements, such as the new Grand Central Madison, have been implemented. Remarkably, the MTA achieved a milestone by accommodating over four million riders in a single day on May 17.  This achievement is particularly noteworthy as it signifies a recovery from the early days of the pandemic when subway ridership plummeted by more than 90%. Ridership has rebounded to approximately 68% to 72% of its pre-pandemic levels, reflecting a resilient and evolving public transportation system.

Tourism

New York City’s tourism industry is experiencing a surge, with significant developments on the horizon. In the next three years, the city plans to add 11,000 hotel rooms, building upon the 10,000 rooms that were added or renovated in 2022. In 2023, tourism surpassed 61 million visitors. This is an increase from 22 million in 2021 and 56 million in 2022, inching closer to the pre-pandemic mark of 70 million tourists in 2019.

The city’s infrastructure has also received upgrades. New terminals at LaGuardia Airport, Newark, and JFK enhance the overall travel experience. Additionally, the Moynihan Train Hall, a new 17-track expansion of Penn Station, has been introduced, improving transit facilities for commuters and tourists.

Furthermore, Broadway, a quintessential part of New York’s cultural appeal, has made a triumphant comeback. The current season has witnessed a remarkable surge in ticket sales, totaling over $1.3 billion, doubling the figures from the previous year. These developments signify the city’s resilience and appeal as a premier global tourist destination.

The Impact on Apartments

New York City’s housing market has experienced an unprecedented boom in recent months. This is driven by a rapid influx of returning residents who are all competing for a limited number of units. As a result, the vacancy rate plummeted to 2.5%, a near-historic low and making it the tightest among major U.S. markets. This surge propelled rent prices to record highs, reaching an astounding $5,100 per month in Manhattan alone. Over the past 12 months, rents have steadily grown by 2.0%, particularly in Manhattan and Brooklyn. However, landlords of recently delivered buildings are now offering concessions, a signal that owners are witnessing moderation. While rents have soared and vacancies remain scarce, there was a slight moderation in quarterly absorption totals in 2023 compared to the levels observed in 2022.

Development in NYC

This shift has led to a delicate balance where supply slightly outpaces demand. An average of 22,000 units were delivered against 19,000 units absorbed in the last 12 months. Currently, 65,000 units are under construction. This is 4.2% of the existing inventory, primarily in areas like Jersey City, Long Island City, and Brooklyn. However, with rising construction costs and the expiration of the 421A Tax Abatement program, filings for multifamily construction plunged in 2023.

What is 421A?

This tax incentive allowed developers to forego paying property taxes on new construction projects for a decade or more if they offered rental units at affordable prices for low- to middle-income families. The program required developers to rent out 25% to 30% of a project’s units at below market rents.

Critics argued that the program enabled the construction of luxury rental apartments. Some affordable units were priced as high as 130% of a household’s area median income (AMI). This was far beyond what an average family could afford. The City’s Controller Brad Lander estimated that the city gave up collecting $1.77 billion in property taxes in the past fiscal year due to this program. Developers contended that this figure was purely theoretical, as they claimed these properties wouldn’t have been built without the incentive.

Over the past decade, approximately 3,000 properties in the city, totaling around 170,00 units, utilized the 421 program, as reported by a study from New York University’s Furman Center.

According to a study by the Real Estate Board of New York, more than half, or 56% of all multifamily units constructed in the last eight years took advantage of this tax program.

What’s Next for New Development?

Addressing rent laws could alleviate market distress and aid in New York real estate recovery. 900,000+ units in New York are rent-regulated, nearly half of the city’s residential buildings, and all are experiencing significant challenges. The market has witnessed substantial transactions. Approximately $7.2 billion changing hands in the past year, predominantly in Brooklyn and Manhattan. Several deals were recorded above $100 million. Notably, Manhattan has experienced a three-decade high in sales. Records indicate that more apartments have been sold in the city between 2021 and 2022 than in the past 30 years combined. Still, investment volume slowed down tremendously in 2023. The amount traded is on pace to lag behind 2022’s total of $1.4 billion and the long-term annual average of $11.7 billion.

Looking Ahead

In 2024, the New York real estate recovery is poised for innovative transformations. Creative solutions will be pivotal in reimagining and rezoning areas into more mixed-use spaces. This includes revitalizing business districts and enhancing urban living experiences.

Challenges loom on the horizon, including rising borrowing costs, moderating rent growth, and near-term recession. In this evolving market, lenders will drive the trajectory of the real estate sector. CoStar Group highlights the need for careful consideration, suggesting buyers focus on specific buildings or locations with substantial rent growth potential. Otherwise, an upward adjustments on cap rates will be needed.

Navigating these complexities require adaptability, strategic planning, and a keen understanding of market dynamics. This will ensure that stakeholders remain agile in the face of changing trends, seizing opportunities for growth and development in the landscape of New York City real estate recovery.