Is New York as dead as they say?
Will Manhattan come back?
It’s Monday morning at 7:30 AM on February 22, 2021. The streets of Manhattan are dead. There is no hustle and bustle to make it into the office – no New York Minute. Homeless people sit on cardboard with a cup of change, or sleep in alcoves. In 2019, the brogues and ties in Manhattan migration were as predictable during Rush Hour as herds on the Serengeti following the water. A jogger passes, and then a young couple who look to be headed to coffee, not work.
According to Unacast and Reuters, about 3.57 million people left New York City in 2020, while “3.5 million people earning lower average incomes moved into the city during that same period.” All told, there is a net loss of just 70,000 denizens in the five boroughs. Higher-end neighborhoods in Manhattan are seeing more vacancies and weakening rents – much more so than the other four boroughs. Even with the pullback in home values of about 5%, the average home costs over a million in Manhattan. Rents are equally unaffordable. Commercial real estate, however, is plunging.
Kushner’s Times Square Building Enters Foreclosure
Jared Kushner’s Time Square building is entering the foreclosure process. According to Bloomberg, 229 West 43rd Street was valued at $470 million in 2016. The building was reappraised in 2020 at just $92.5 million – a dive of -80%. There are at least $370 million in loans and mezzanine debt on the building. The asset value is a mere 25% of the debt.
Earlier today, as I gazed out from my 8th floor sublet in the Murray Hill area of Manhattan, the buildings across the street looked abandoned. Day and night over 85% of the windows are dark and empty. The building I’m in has never had another person waiting for the elevator, and I’ve been here three weeks now. The same held true for the Kips Bay sublet I had from November through mid-February, 2021.
I continue walking up Sixth Avenue for signs of life. There are a few essential workers scampering through the brisk air toward retail shops that won’t be open for a few hours.
During my daily walks (for health and exercise) on Fifth Avenue, the iconic storefronts of yesteryear present little of their former luster. Jewelry shops have nothing on display, except barriers to entry. While Saks Fifth Avenue went all out with their festive winter holiday display – stunning to behold – many of their storefront windows today look like they belong at a discount retailer. The interior is a ghost town.
The streets of Manhattan were even more deserted last night (Sunday) at 9 PM when I walked from Chelsea back to midtown. During the entire 35-minute trek, I encountered less than a dozen people. The streets were eerily empty. With the legendary Flatiron Building looming large, pointing to the illustrious Fifth Avenue and a dark Broadway, it felt as though I had stepped into an alternate universe. Surely, I must be dreaming. How else could I walk Manhattan’s bustling streets all alone?
The Bank of China building is lit up, but there is no one inside. Bryant Park’s Winter Wonderland – ice rink and adorable kiosks – has no frolickers. The SalesForce Tower at 3 Bryant Park has only three offices lit up, with no one inside.
This is to be expected. Salesforce’s President Brent Snyder announced on February 9, 2021 that ”the 9-to-5 workday is dead.” According to Snyder, most of their staff will work remotely or “flex,” coming into the office only 1-3 days/week for “team collaboration, customer meetings and presentations.” This “work-from-anywhere model” means that Salesforce will be able to reduce its real estate footprint, according to the Wall Street Journal.
The Bank of America tower next to the SalesForce building looks even more abandoned. One floor is full of junk. The News Corporation building on 47th and 6th Ave., where Fox News used to boastfully broadcast with open windows, is completely covered up, so spectators cannot peak inside. The skyscraper above the studio has very few office lights on.
Will the Vaccine Breathe Life Back into Manhattan?
There are a few fundamental problems with trying to get things back to where they were in Manhattan. How many of us will feel safe enough to return to the office? How long will it take for the vaccine to bring a pre-pandemic normalcy back to the crowded subways and elevators? Will we ever squeeze in at rush hour again?
If you want to get to the 70th floor of the building you have to take an elevator. Elevator capacity is extremely limited due to social distancing. The queue just to get to the office could add an extra hour to the commute. On both ends. Who’s going to do that? And then, once you get up to whatever floor your office is on, and all of the adjustments have been made for social distancing on the interior, how can the company justify the cash burn? At a time when everybody needs to shore up and batten down the hatches to weather the economic storms of this pandemic, is it feasible to pay prime dollar for a space with 1/3 of the usefulness?
The reappraisal of Kushner’s Times Square building eviscerated the Loan to Value. This is a huge concern for banks with exposure to Manhattan commercial real estate. The income of Kushner’s building didn’t come close to paying even the interest-only portion of the liabilities. According to Bloomberg that was already the case in 2019 – before the pandemic.
The plunge in Manhattan commercial real estate has been true of luxury homes as well. 12 East 69th Street, a mansion known for its saltwater pool, theater and Versailles-inspired dining room, listed at $114 million in 2013. The price of this exclusive Central Park dwelling was slashed to $79 million in March of 2020, and has finally found a buyer for $60 million this month (source: Business Insider). Most Manhattan homes are staying on the market for about six months. 12 East 69th Street was on and off the market for eight years.
Banks with Exposure to Manhattan Have a Negative Outlook
According to the CEO of New York Community Bancorp Thomas Casgemi, a majority of the Manhattan real estate loans are paying interest-only at this time. He’s hopeful that the easing of restrictions will bring everything back to normal. The loan-to-value on the Manhattan portfolio seems strong, at 54-56%, according to Casgemi. Casgemi assured the analysts on the January 27, 2021 earnings call that he has sponsors lined up to buy the assets, should the current owners fail to meet their obligations.
However, the process of getting back the property and re-pricing it for a post-pandemic reality is not something that happens overnight. If the Kushner Times Square building is a trend, then the loan to value on Manhattan commercial real estate is already upside down. In our highly leveraged world, that is quite easy to imagine.
How much work will actually be conducted in these giant office buildings going forward? Can clothing and lifestyle brands afford a storefront window after the Retail Apocalypse? It’s hard to imagine sophisticated sponsors scooping up Manhattan commercial real estate without the existing debt and valuation taking quite a haircut, something that will negatively impact the local banks.
As we head into the Stimulus Bill and Spring Rally, it’s possible that a gleeful stock market might carry up commercial real estate and the financial services industry alongside the high-growth, low-debt industries (albeit at a slower pace). NY Commercial Bancorp has rallied to $12/share, after plunging to $7.72 in March of last year. However, the astute, enlightened investor will understand that there are structural shifts and troubling trends in these distressed industries. Overvalued, highly leveraged retail and office space, such as Kushner’s Times Square building, will be the most vulnerable, as will the banks and brokerages that underwrite the debt.
Seeing just how far and fast the knife can drop on real estate valuations should offer a warning for homeowners as well. Even if you feel Equity Rich, it’s a good idea to do the math on your housing budget and home value to be sure that you can withstand the economic storms on the horizon. This remains one of the most challenging economic times of our lifetime.
A properly diversified and protected plan protects your wealth from downturns, and allows you to build wealth in the bull markets. You lean into areas of strength and hot industries, so that when rallies occur, your wealth grows at twice the speed. You rebalance regularly, so that you keep your gains instead of watching them evanesce in the next downturn. This is a buy low, sell high plan on auto-pilot for your nest egg, which is the soundest strategy in the late stage of a secular, overpriced bull market, in the middle of the most challenging economy of our lifetime.
This is something we teach at my Financial Empowerment Retreat. The next one is April 24-26, 2021. It’s online so you can join us from anywhere. Get the best price when you register by March 15, 2021. Receive additional information and testimonials by linking to the flyer. Click on the banner ad below.
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Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 4th edition of The ABCs of Money was released on October 17, 2020.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.