Alpha and the City

Key Concepts

• New York City's Resilience: The city's ability to recover from past crises (9/11, financial crisis, COVID-19) and its inherent strength as an ecosystem.
• Leadership Change: The election of a new mayor and its potential impact on the city's economic and social landscape.
• Real Estate Market Dynamics: Current trends in office leasing, residential multi-family, and retail, with a focus on vacancy rates, leasing commitments, and investment.
• Economic Ecosystem: The unique combination of diversity, energy, culture, and capital that makes New York City attractive.
• AI and Future of Work: The impact of artificial intelligence on job markets and the role of New York City in innovation and application development.
• Housing Affordability: Challenges and potential solutions related to housing supply, cost, and the role of government and private sector.
• Investor Confidence: The perception of New York City among institutional and international investors and its influence on capital flows.
• Public-Private Partnerships: The importance of collaboration between government and the private sector to address city challenges.

New York City's Resilience and Economic Outlook Amidst Leadership Change

This discussion features prominent real estate developers Scott Reckler and Bill Rub, who express strong optimism about New York City's future, despite concerns surrounding the election of a new, socialist mayor. They highlight the city's inherent resilience, its robust economic ecosystem, and current positive trends in the real estate market, particularly in office leasing and residential multi-family sectors.

Current State of New York City and Market Indicators

• Optimism from Insiders: Both Reckler and Rub emphasize that those who live and work in New York City feel its energy and confidence.
• CEO Commitments: CEOs are actively committing to New York City, evidenced by record levels of office building leasing.
• Long-Term Leases: Companies are signing leases not just for the immediate future but extending to 2028, 2030, and 2032, indicating strong commitment.
• Luxury Real Estate Sales: The sale of 42 luxury condominiums over $4 million in a single week after the election signifies continued investment and commitment to the city.
• Low Residential Vacancy: The residential multi-family market in New York City has a low vacancy rate of 1.5%, indicating high demand.
• Commercial Office Leasing: Over 40 million square feet of commercial office leases are projected to be signed by the end of the year, a level not seen in nearly two decades.
• Business Activity: Brokerage meetings reveal no indication of companies reducing their footprint or delaying expansion; companies are actively expanding and leasing space.
• Vibrant City Life: The difficulty in securing dinner reservations and the booming theater industry are cited as indicators of the city's vibrancy. Subway ridership is also up.

Concerns Regarding New Leadership and Potential Risks

• Mayor-Elect's Profile: The new mayor is described as a 34-year-old socialist with no prior executive experience, raising concerns about his ability to manage the "capital of capitalism."
• Caricature vs. Character: Reckler notes that the mayor-elect is a "caricature" that can be easily defined, posing a risk.
• International Anxiety: While New Yorkers are optimistic, international observers and other city dwellers express significant anxiety about New York's future under the new leadership.
• Socialist Governance: The prospect of a socialist mayor in the "center of capitalism" is unprecedented and raises concerns about potential tax increases and business decisions.
• Investor Hesitation: Institutional investors have shown hesitation, with some pulling back from large New York City investments to observe the unfolding situation.
• Global Perception: The mayor-elect's name is a frequent topic of discussion globally, even in boardrooms like the Federal Reserve, indicating a significant international focus and potential impact on capital flows.

Resilience and Investment Strategies

• Historical Resilience: New York City has a proven track record of resilience, having overcome 9/11, the financial crisis, and the COVID-19 pandemic. The developers believe one mayor cannot dismantle the city.
• Doubling Down During Downturns: Both Reckler and Rub have historically used city downturns as opportunities to invest. For example, they purchased $2 billion of multi-family properties during COVID when people were leaving the city and 7 million square feet of office buildings in the last 24 months.
• JP Morgan Headquarters: The opening of the new JP Morgan headquarters is highlighted as a significant development that could attract people to New York.

Addressing Housing and Development Challenges

• Housing Crisis: The need for housing is a critical issue, and the developers are committed to helping the new administration find pathways to create more housing.
• Public-Private Partnerships: The mayor-elect has shown a willingness to consider private sector involvement in housing, a shift from his initial stance.
• Office-to-Residential Conversions: Mayor Adams and Governor Hochul's "City of Yes" initiative and tax abatements are enabling conversions of obsolete office buildings to residential units. Two such projects are underway, creating 700 units, with 25% designated as affordable.
• Zoning and Incentives: Major rezonings have occurred in areas like Jamaica, Long Island City, and the Brooklyn waterfront, allowing for thousands of new units. However, changes to tax incentives (from 421A to 485X) have made development economically challenging for larger projects due to wage requirements.
• Affordability Solutions: The core issue for affordability is building more housing. The "everything bagel syndrome" of demanding union labor, sustainability, and all affordable units simultaneously is seen as hindering development.
• Market-Rate Housing Impact: Research from the Minneapolis Fed suggests that building market-rate housing indirectly creates affordable housing by enabling people to move up, freeing up existing units.
• Vacant Apartments: Approximately 40,000-50,000 apartments in New York City are vacant due to outdated laws that disincentivize owners from investing in necessary upgrades (lead removal, new wiring, kitchens, bathrooms) for rent-stabilized units. Changing the economics to allow owners to reinvest is crucial.

The Role of the Governor and Potential Federal Intervention

• Governor as Firewall: The governor is seen as a critical firewall against potentially detrimental policies from the new mayor. Her re-election prospects are tied to her ability to protect the city's economic interests. A Republican governor in a year would also serve as a firewall.
• Presidential Involvement: There is a concern that former President Trump might use the mayor's inauguration as an opportunity to create chaos or cut funds. However, if crime increases, his involvement might be welcomed as public safety is paramount.
• Communicating Safety: It's important to communicate that New York City is a safe city, despite perceptions, to avoid potential negative reactions from federal entities.

The Impact of AI and the Future of Work

• AI and Compute Power: The transformation to AI is driven by compute power (data centers) and people power (office buildings in New York).
• New York's Role in Innovation: New York City is where capital formation, transaction activity, and creativity occur, enabling the application of AI and driving revenue.
• Job Displacement Concerns: While AI may automate back-office and administrative jobs, these are often located outside of New York. The city is seen as the "tip of the spear" for activating new innovations and finding revenue opportunities.
• New Office Development: Significant new office buildings are planned, such as a 2 million square foot building at 350 Park Avenue and a 2.8 million square foot building replacing the Hyatt Hotel, indicating long-term confidence in office space demand.

Office Leasing Market Strength

• Urgency in Leasing: Despite potential short-term uncertainty, there is a significant shortage of high-quality office space, creating a sense of urgency for tenants.
• Rapid Lease Signings: Leases that would normally take over a year are being signed within 21 days due to high demand and limited supply.
• Talent Acquisition: Companies view real estate as crucial for attracting and retaining talent, making it a small but essential part of their P&L.
• Landlord Pricing Power: For the first time in a decade, landlords have pricing power, with reduced concessions and free rent.
• Tenant Demand: Real-time information indicates that tenants are still actively seeking high-quality space to attract and retain employees.

Retail and Community Development

• Strong Retail Activity: Retail, particularly restaurants, has seen strong activity, with many new establishments opening and taking advantage of lower rents during COVID.
• Walkable Communities: Office-to-residential conversions are creating "walkable 15-minute live, work, play communities," similar to those in lower Manhattan, making businesses and retailers more vibrant seven days a week.

Addressing Disenfranchised Populations and Bureaucracy

• Root Causes of Political Shifts: The success of figures like the mayor-elect and former President Trump is attributed to a segment of the population, particularly young people, who feel disenfranchised and lack economic opportunity. They are frustrated with big business and government.
• Complex Problems, Simple Answers: The mayor-elect and former president offered simple answers to complex problems like housing affordability and job retraining.
• Bureaucratic Reform: The mayor-elect has acknowledged the need to address a "big bloated bureaucracy" of 327,000 city employees, which is seen as a positive step.
• Fiscal Responsibility: The need for fiscal responsibility is emphasized, with suggestions to look within existing budgets for funding rather than solely relying on new initiatives.

Conclusion

The prevailing sentiment from the real estate developers is one of cautious optimism, grounded in New York City's historical resilience and current market strengths. While acknowledging the potential challenges posed by new leadership and the unprecedented nature of a socialist mayor in a capitalist hub, they believe the city's fundamental economic drivers and the collaborative efforts of the private sector, supported by a strong gubernatorial firewall, will ensure its continued prosperity. The focus remains on addressing critical issues like housing affordability through increased supply and innovative public-private partnerships, while leveraging the city's unique ecosystem to capitalize on future growth, including the transformative potential of AI.