New York Real Estate Tumbling

There is a big lesson about to be taught to many. History might not repeat itself but it does look very similar.

I am old enough to recall New York City in the 1970s. How do I say this nicely? It was a sh*thole. Over the past few decades, the city turned around yet, unfortunately, is heading back that way.

Mayor Ed Koch walked into a hornet's nest when he took office. He was a Democrat who described himself as "a liberal with sanity". During his 12 years in office, he was able to accomplish a great deal turning the city around. He slashed the size of the city government, cut taxes, and encouraged businesses to locate there. He also got "tough on crime" as part of lifting up the appeal for migration into the city.


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The city is presently going in the opposite direction. We see the present mayor intent on cutting the budget of the police force by $1 billion. The city is on lockdown and the upper end (wealthy) are already starting to flee. Just wait until the time comes to pay for the shortfalls in the budget. A tax and spend mayor is going to have a field day with the increase in taxes.

Unfortunately, Manhattan, which has some of the most expensive real estate in the world, is already seeing signs of cracking. This will likely turn into a full blown bursting of the damn when all is said and done.

Commercial real estate is getting killed as remote working is starting to take hold. Landlords are having to slash rents in an effort to keep existing tenants or draw in new ones.

Rent prices were discounted across 34.7 percent of properties in the Big Apple during the second quarter, according to new data from real estate website StreetEasy.

The median asking price fell by 6.7 percent, which is about $221 per month or $2,652 per year, due to reduced demand.

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This was the first time since the Great Recession that year-over-years rents dropped in the metro area.

Commercial real estate was not the only sector affected. Residential real estate also got hammered.

According to CNBC:

The total number of sales in the second quarter fell by 54%, the largest percentage decline in 30 years, according to a report from Miller Samuel and Douglas Elliman. The median sales price fell 18% to $1 million, the biggest decline in a decade.

There were only 1,147 sales in the quarter — the lowest number on record, according to Compass.

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This is a major "ouch".

While it is easy to engage in class warfare and want to attack those elitists who have all that money, it is important to note most of these properties are backed by debt. This means that falling rental rates increase the likelihood of default. When you are talking about properties that enter the tens of millions, the numbers add up quick. In other words, it takes a lot of single family homes in Des Moines to get the same tally.

Another issue is migration. The wealthy are able to pack up and leave. Who can forget Rush Limbaugh getting tired of New York taxes and moving his entire enterprise to Florida. His conservative views were not the only thing to head south. He also took his $30 million paycheck with him, tax revenue the city and state is no longer getting.

The situation really gets back when companies up and leave. It is one thing to take the tax revenue out of the system but add in the job loss and you see a mess. In the 1970s, cities such as Stamford, CT saw a big influx of companies moving out of NYC.

We are likely going to see a repeat this time. We are in an age when it is easier than ever to digitize many parts of a company and have people work remotely. In an era of servers, cloud, and VPNs, geographic location is less important.

I know of one law firm that is in Manhattan. In talking with their head of IT, it was revealed to me that the main partner is questioning their real estate decision. They occupy two floors in a building in mid-town. A quick calculations revealed they could get a much cheaper office to keep the address, set up one in Westchester, and have the rest work from home.

Annual savings: $2 million right off the bat.

The challenge with real estate is the length of the tentacles. Following the money shows how much of an impact to the economy that it has. When we consider all the jobs that are tied to real estate, in one form or another, it gets devastating. Add in the fact that most is leveraged and defaults echo throughout the economy.

This will end up becoming a nationwide problem.


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Everyone is fleeing the city and heading to the suburbs and less crowded cities working remotely. This may be the exit...

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