This is perhaps one of the most fascinating stories taking place right now. It is also something that I am personally familiar with.
I am old enough to recall New York City in the 1970s and the craphole that it was. Crime was out of control, especially in Times Square. Businesses were leaving for White Plains or Stamford (CT). The City was broke. Unions were up in arms as the promises made to them were broken.
In short, it was a complete mess.
Are we seeing a repeat of what things were like in the 1970s?
All that is taking place in the Big Apple is moving it closer to life 40 plus years ago.
Today, companies are moving out in great numbers. Unlike the last time, we are seeing Wall Street institutions and funds opting for warmer (and less expensive) destinations. This is part of a trend that was taking place before COVID-19 struck.
This year, the trend kicked into high gear. Since March, the Post Office has received more than 300K change of addresses. This means that more than half a million (and possibly as high as a million) people left the confines of New York City for elsewhere.
Unlike the 1970s, one of the biggest trends is the work from home movement. This is putting a tremendous strain on real estate. To start, commercial real estate is getting decimated. Retail was already in trouble but now office space is getting hammered.
We are also seeing a big move down in residential buildings also.
Sales of commercial and residential properties -- everything from office buildings to hotels and condo units -- are down 49% this year through November, according to a report Thursday by the Real Estate Board of New York.
According to Bloomberg, this has led to a decline of $1.2 billion in lost revenue. This is a 42% decline over the same 11 months in 2019.
Amazingly, 53% of the city's revenues last year came from real estate.
New York is not the only city going through this situation. Many feel, that in due time, it will bounce back. However, most real estate experts expect 2021 to be a very difficult year with prices continuing to slide as properties sales slow.
Since World War II, we saw a great move towards urbanization. This was based, in large part, due to the employment opportunities presented in the cities. Technology is possibly making this a benefit for cities non-existent. Today, it is easier to work remotely than every before.
One thing COVID-19 did was show employers that the workforce can be equally (if not more) productive outside of the office. This will save companies billions of dollars in rents on office space.
Nowhere is the savings greater than in the high priced addresses such as New York City.
We also are likely seeing the end to the artificial urban real estate market. The move towards the cities caused a massive run up in pricing. Since people had few choices, all aspects of the market appreciated. Yet, it is not natural since the market was due to monopolistic factors. The urban areas had the jobs.
This is coming to an end.
Major cities like New York might have to get use to the idea that their tax revenues will be declining over the next few decades. If their real estate markets keep collapsing, the money simply will not be there.
Tens of trillions of dollars in capital formation is being erased right before our eyes.
This is going to take a long time to make up.
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