For those readers in New York, has anyone been down to Penn Station recently? If you have and you are old enough to remember the 80’s and early 90’s, you may think you just took a time warp: shuttered buildings, homeless people roaming aimlessly and drugs, a lot of drugs.
I had to be very frank with a friend who was visiting from out of town who was a former resident last week: New York is not the same place right now. Nowhere is really, but there are particular challenges in New York that are starting and will continue to manifest themselves more quickly than in other places.
Downtowns Face a Reckoning
I have been raving about the advantages and opportunities that work from home offers for us as individuals for some time now. To manager’s surprise, it seems that across industries, productivity has not fallen off a cliff and some people may have even become more productive.
In my own personal situation, I reckon I am becoming more productive because I am getting more sleep. Taking away an hour commute on public transportation each way, as well as the prep time and waiting time that goes around that, has given me more time to do other things such as research for this blog and prepare meals. I am better rested for my day job so when I am working, I recall things more easily and make better decisions. This may not be everyone’s experience but in a role that requires a lot of grey area judgement calls, this is very valuable.
It’s travel and location independence for workers who are able to telecommute which is the overwhelming big advantage though, and likely a big reason many do not want to go back to the office. I envision our futures not being totally dominated by work from home but rather morphing into a hybrid of the former binary world of working from an office or not.
Many of my co-workers and colleagues at other firms have decamped to second homes, parent’s homes, or even just lived on AirBnB in smaller towns to escape the situation in New York or other large cities. This phenomenon has also played out to some degree with colleagues in Europe as well. Many have speculated that this phenomenon could start a new suburban boom.
There are macro benefits as well as personal benefits to the work from shift. The environmental effects of the drop in traffic is substantial. Large employers, especially those in expensive midtown Manhattan are starting to realize they can reduce expenses by cutting their real estate footprint if so many are working from home, making companies more profitable and efficient in the long run.
However, there is a dark side to both these individual and firm level decisions: cities and states, already battered by the lockdowns and the cost of fighting the pandemic, are going to face challenges like we have not seen since places like NYC went bankrupt in the 70’s.
Manhattan 1979, Source: flashbak.com
When the pandemic and subsequent lockdown hit, office buildings emptied out. Not long after, the food service companies such as the lunch spots and deli’s that those office workers supported went bust. With less foot traffic also came the shuttering of shops of convenience like drug and specialty stores in the immediate area. Those businesses and those jobs are not coming back anytime soon. A look around midtown Manhattan will show you that most of these places are already boarded up and stripped of their interior furniture and lighting. There will be no “V-shaped” recovery in these areas.
This will have a knock on effect on urban housing as well. Previously, new residents paid a huge premium for the privilege of living in Manhattan, especially if it was on a tree lined block near public transportation or within walking distance to their office. I remember how we used to envy our bosses who were able to walk to work from their condos perched in the sky with a view of the city.
Now those places are looking like a liability. With entire neighborhoods looking devoid of people and abandoned, an eery sense of insecurity has taken over some places. Multiple times I have been walking down a major street lined by skyscrapers and been one of maybe 2-3 people on the entire block. Devoid of the businesses that used to provide a steady stream of shopkeepers and delivery people on a street at any given time, this solitude can be unsettling. If you are a well off transplant who has never had to experience petty crime or the threat of it, you will likely want to avoid these experiences at all costs. So it doesn’t surprise me to see home prices falling in Manhattan.
Back to Fear City
Source: flashbak.com
The sum of all this will fall on city and state budgets. New York and the states that make up the Tri-State area have announced massive revenue shortfalls already for the 2021 fiscal year.
Source: Partnership for New York City
This has already touched off spending reductions which will reduce the number of social workers, administrators, librarians, teachers, fireman and law enforcement. The immediate effect of this will likely be a decrease in amenities and the quality of life in high density areas that depend on these services as part of the social fabric. The last time there were cuts like this, it either touched off, or was correlated with an increase in crimes of all types, including murder, that didn’t subside for almost 2 decades.
Source: Financial Times
Significant industries in the city have already seen big impacts in terms of employment, with service sector workers taking the brunt of the pain.
Source: Partnership for New York City
That is just the beginning however. These are just the immediate effects that analysts can forecast. We haven’t even begun to see how the wider individual level and firm level decisions will play out. The Northeast and Midwest are high tax states with terrible weather, what happens when those high earners don’t need to reside in those places anymore and don’t need to pay their taxes for the same opportunity? They leave.
As a friend of mine at a tech start up recently pointed out: “with shit weather and high taxes, what keeps me in New York is the opportunity that isn’t available anywhere else, if I can get that same opportunity somewhere else I will take it.” Indeed it isn’t just the pandemic and the fallout that has been contributing to a decline in the region, high taxes and state intervention have been creating competing incentives to leave places like New York and California for years.
When the state tax deduction was capped by the Trump tax cuts, homes values in high tax, high real estate value places took at hit. New Jersey home prices, already with the highest real estate taxes in the nation, have been struggling since the tax reform was passed. The story is the same in other areas like Connecticut and parts of suburban New York. This already created an incentive to decamp to places like Florida which have no state income tax and much more reasonable real estate prices, a trend which could already be seen 5 years ago.
Source: actprop.com
But Americans have been moving out of these large cities for generations while the opportunity they provide keep foreign immigrants coming. Both Los Angeles and New York each have about a third of their populations being foreign born.
The clampdown on immigration will squeeze these cities even further. It all creates a budget Armageddon for places like NYC: lower real estate taxes, high earning residents moving out, services cut, jobs lost, which decreases the attractiveness for foreign immigrants (who almost can’t come anyway now), which further lowers the tax base which leads to further budget cuts.
It’s a vicious cycle we are just in the midst of starting and it doesn’t look good for those “high tax, shit weather” states especially. At least LA has the beach.
How Will States Respond
The key is how states will respond to this mess, don’t look for states like New York to do the best thing first. Their initial reaction may be to double down on the second highest tax rate in the nation after California (12.696% in NYC compared to 13.3% in California). Why? Because it has worked before, politicians think they can mandate change but sometimes they need to respond to it. In the past, skilled and unskilled immigrants were happy to take the place of those natives that left the area. If, due to recently imposed restrictions on work visas for foreigners which may stay in place until year end, the replenishment of tax paying workers may not take place. This would further deepen the fiscal crisis both the city and states are facing.
As for the natives, we may initially see many high earners try to switch residency to places like Florida. If the take home pay is the same or higher, high earners will likely be glad to take a gross pay cut and so will the companies paying them. The only losers in this scenario are the state and local governments who lose out on their tax base. Look for high tax states and cities to try and grab this fleeing revenue by expanding the definition of those that are residents. At the moment, those that “maintain an abode for a period of 90 days or more” count a New York State residents and are subject to local income taxes. For those that attempt to live in lower tax areas but maintain a home in New York, the state may go as far as to cut out the 90 days and just qualify it with “maintain an abode.” This would have the headline grabbing effect of requiring former residents like President Trump to declare their income again in New York.
Whether the state will go this far and whether it is even legal is still up for debate. The point is that the crisis will likely play out very differently for different states and how they respond will have big effects for local economies and local residents, stay tuned for more.
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