It was mid-April when it all began to sink in, instead of just being something real estate brokers, developers, and investors theorized about.
Within a week of America locking down as COVID-19 began sweeping the nation, tens of thousands of New Yorkers fled all five city boroughs in the fastest out-migration since September 11th. Many literally packed their bags and bolted overnight.
COVID’s NYC exodus continued through Memorial Day as infections, hospitalizations, and deaths surged, merging into a kind of super-migration with the typical, annual wave of New Yorkers who flee the city for summer anyways. In their wake, one of the world’s most vibrant metropolises eventually looked almost Apocalyptic: empty streets and parks, and vacant restaurants, bars, museums, and businesses block after block.
For more than two decades, developers, investors, and brokers—as well as millions of home and business owners—had always assumed that New York City’s real estate music could never stop. Now, thanks to the pandemic, the city’s real estate market is facing a silent and uncertain reckoning that no one ever saw coming.
What if all those people who fled never come back? What then?
“This certainly doesn’t look good,” Victor Rodriguez, Director of Market Analysts for real estate intelligence firm CoStar Group, tells me.
“The problem for New York City’s office and residential markets is that there’s now tons of available space with much more set to arrive over the next five years with all the developments already under construction. To put that into perspective, it took two years after the Great Recession for the market to reach its highest vacancy rate. But because of the ongoing pandemic, it’s only taken only six months this time around to hit maximum vacancy, and New York City hasn’t even hit the bottom yet.”
In many ways, COVID for NYC was an accelerator for a city that had already reached “peak real estate”. Many businesses and homebuyers were already seeking more space, greater affordability, less density, and lower taxes and regulations long before coronavirus arrived.
“COVID for New York City has definitely been an accelerant rather than a 180-degree change agent,” continues Rodriguez. “Many companies in New York City were already downsizing or flirting with remote work pre-pandemic, while on the residential side, if you were looking to move to the suburbs or relocate out of state then COVID turned your 1-year plan into a 1-month plan. And plenty of retailers and restaurants were already struggling in NYC’s high-priced, competitive market. But months of slow business has turned out to be enough for many to throw in the towel.”
Six months after COVID’s first flight out of New York City began, this inevitable real estate “re-balancing” is finally starting to show up in the data.
Across New York City’s five boroughs, including Manhattan, the Bronx, Queens, Brooklyn (Kings County), and Staten Island (Richmond County), the Big Apple is bleeding residents faster than at any time in recent memory, including the Great Recession and post-9/11. Vacancies, listings, and days on market are up. Rents and for-sale prices are down. And moving companies are putting sellers on waiting lists.
“Stemming from the coronavirus pandemic and its early and devastating impact upon the city, New York’s housing market has experienced a noticeable slowdown in activity across the board,” Realtor.com’s chief economist George Ratiu tells me. “Our current sales and pricing data show a decline in all five boroughs for both condos and single-family homes. Rents are also sliding and vacancy rates are rising at an increasing rate as the pandemic seems to have no end in sight.”
The most important question no one has the answer to yet is how—and when—does the hemorrhaging stop.
Year over year, Manhattan apartment rent rates are down -10.4% on average, according to Realtor.com. Studios are dropping fastest, at -15.4% year-over-year. On the sales side, the data are even more bruising. As of September 1, the average median sales price for condos and townhomes in Manhattan year-over-year is down -24.3%. Closed sales have dropped -37%, even accounting for the decrease in prices.
Brooklyn’s short-term outlook is even worse. The median sale price year-over-year for condos has fallen -17.9%. Closings are down -53%. Single-family homes have slipped similarly, -13.1% and -29%, respectively.
Behind NYC’s dire numbers are two simple forces—out-migration and demand contraction—which combined have tipped what was once America’s hottest international real estate epicenter to a buyer’s market for the first time in decades.
Active for-sale listings across all five boroughs are up 53.2% year-over-year, tracking a similar trend in median days on market, which has nearly doubled in Manhattan to over 100 days and is up 46% in Brooklyn and 34% in Staten Island.
“In addition to what’s going on with New York City’s relative market pricing-wise, the main driver of these trends is an overall migration trend away from the high-density, high-cost city centers toward lower density suburbs, and more affordable towns within a one-to-two hour commute distance,” Realtor.com’s Ratiu says of the data. “While this shift was already in the works pre-COVID as many Millennials found themselves priced out of the market over the past decade, the pandemic has accelerated everything that was already happening.”
New York City’s new real estate “normal” is already hitting real estate agents, brokers, investors, and developers where it hurts most—in their pockets—in addition to the millions of homeowners who for years had assumed their property investments would comprise a large part of their retirement strategy or the means by which to send their kids to college or start a new business.
“People are leaving because of the pandemic and population density, period,” admits Dottie Herman, co-founder, President, and CEO of Douglas Elliman, America’s 6th largest brokerage and one of the few real estate executives willing to give me an honest perspective on the New York City market. “This is particularly true for older residents who are fleeing to the suburbs because of fear of the virus and other safety issues. New York City residents are also the most tax burdened in the nation so the current crisis is coming from both sides and forcing people to make decisions now that they may have only been thinking about for years.”
Exacerbating New York City’s real estate crisis is the broader reality that property flight by definition also inevitably works its way upstream—from renter and owner, to landlord and developer, and eventually to the banks that hold the loans. Thanks to COVID, the alarms bells in New York City are now reaching full pitch at the highest levels.
Despite eviction moratoriums for the city’s renters that have been in place for months, concerns about an impeding housing crisis that will compound the already grim reality for many property owners are becoming more real every day as the clock on those temporary stopgap measures starts to run out.
According to a recent survey of New York City’s Community Housing Improvement Program (CHIP), more than one in seven of the city’s landlords anticipates they’ll default on their property tax, water, or sewage bills by January 2021 without additional state or federal aid.
So what happens next?
Recovery, says Douglas Elliman’s Herman, despite the less than optimistic current data.
“Tech will lead the way,” she predicts, “They recognize the advantage of New York’s high concentration of talented workers, being close to Wall Street, and are committed to New York City. Google, Amazon, Apple, Facebook, and Microsoft are all buying up office space right now. That’s not going to stop. Facebook just leased the former main post office complex near Penn Station. Amazon just paid nearly $1B in March for the Lord & Taylor building on Fifth Avenue, and TikToK just signed a deal for 232,000 square feet in Times Square. The tech giants were already expanding and investing in New York City prior to the pandemic and they’re seeing what’s happening now as an opportunity to expand further.”
Realtor.com’s Ratiu is similarly confident that New York’s global vortex of talent and vibrancy will eventually backbone the city’s long-term recovery, particularly driven by Millennials and younger adults.
“With the pandemic’s health impact continuing to hamper New York’s vibrant energy—from restaurants and bars, to Broadway theaters and concert venues—the current shift will be a drag on real estate markets into 2021,” predicts Ratiu. “Moreover, as remote work policies extend into the second half of 2021, more people will continue to look toward outlying areas. But New York City’s allure is unlikely to diminish. Its attractiveness will just have to go through a re-pricing.”
“There’s something very special about this city,” agrees Herman, who was born and raised in Long Island. “There’s a vibe. There’s a beat. There’s a pulse that can’t be replicated. New Yorkers are tough. This city will always come back.”
The most important question right now for real estate brokers, investors, developers, and homeowners is how long that will take—and how many businesses will survive the recovery and “re-pricing”.