New York's Economic Recovery Depends On Federal Funding That Might Not Arrive
In the early days of New York City’s coronavirus shutdown, the real estate sector repeatedly pointed to other times of financial crisis — the months after 9/11 and the 2008 recession — as proof of New York’s unparalleled economic resiliency.
More than a month into social distancing, with a reopening unlikely even after the current stay-at-home order expires May 15, New York’s comeback isn’t so assured. Experts, real estate leaders and former government officials reiterated in interviews with Bisnow over the past two weeks how anomalous and dire the city and state’s economic situation is.
Almost all said New York probably won’t be able to get itself out of the deep financial hole it has fallen into without two things: a clear, strategic economic development plan from City Hall and funding from the federal government. Neither is looking likely in the near future.
“This particular crisis is deeper and more fundamental than any of those other crises, and I don’t think that any of us can just take it for granted that the city will automatically recover from this crisis,” said Seth Pinsky, a former executive at RXR Realty who worked for former Mayor Michael Bloomberg. “I think that for the city to recover, we need to be very strategic and we need to be thoughtful with how we deal with the crisis period.”
The city and the state face budget gaps: New York State Comptroller Tom DiNapoli estimates that the state’s deficit, now at $6B, could reach $13B by the end of the year, and Mayor Bill de Blasio scaled down his proposed budget for the city by $6B in addition to tapping into the city’s savings, he said in an April 16 press conference. The city is also anticipating a $7.4B tax revenue loss this year.
These budgetary gaps will lead to fewer capital projects and a probable tax increase, ultimately severely impacting the city’s economy and real estate market, regional experts say.
Without federal funds to cover holes in the city’s budgetary spending and a clear governmental strategy to move the city into recovery, New York is in more danger of losing its vitality — long its competitive edge over peer cities — than it has been in 50 years.
“Our tax revenue goes to so many services. If we don’t have subways that are operational, if we don’t have a police force, if we don’t have teachers, nurses, if we don’t have these services, the viability of New York City is in jeopardy,” REBNY Senior Vice President of Urban Planning Paimaan Lodhi said. “This is probably the biggest threat to New York City that we’ve experienced so far.”
The crisis is unique in several ways, said Francisco Pineda, a Royal Institution of Chartered Surveyors fellow and director of the Master of Science in Construction Administration program at Columbia University, who has spent 20 years in development, construction and investment.
A trifecta of factors — the global pandemic, a voluntary global economic shutdown and coming down from the top of a booming economic and development cycle — make it more severe than crises the city’s real estate industry has seen in decades, he said.
“I think it’s detached from reality if you think we’re going to go back to where we were four months ago,” Pineda said. “It’s a delusion.”
Learning From The Past
Rudin Management CEO Bill Rudin joined the family business in 1979, on the tail end of what many point to as the economic crisis that most resembles this one. Even amid the trying economic times of the 1970s, the Rudin family bought up several buildings because they believed in the future of New York and that their investment would only grow.
“My father always said ‘Never bet against New York City … Don’t overleverage your properties, work with your customers and your tenants, your partners and financial institutions,” Rudin said. “That has held us in good stead ... In tough times, be compassionate and understand the people that have issues and they’ll get through.”
Rudin Management was able to survive the most dire economic situations for New York City in the past 100 years based on these principles, said Rudin, the grandson of company founder Samuel Rudin.
Others in New York City real estate were not so lucky. During the economic crisis of the 1970s, there was mass flight of the middle class out of the city and into the surrounding suburbs. Unable to pay their bills because of the dire financial situation, the city nearly filed for bankruptcy. It took about five years for Rudin Management's buildings to regain the value they had before the 1970s economic crisis, Rudin said.
The city was pulled from financial ruin when President Gerald Ford decided that it couldn't let the nation’s economic center file for bankruptcy, said Rudin, who is the chairman of REBNY and was named to Gov. Andrew Cuomo's reopening committee.
Ford was hesitant at first, and many mark the federal government’s delay in response as a reason that the city's crisis went on as long as it did, Center for an Urban Future Executive Director Jonathan Bowles said. Other factors that lifted the city from economic ruin were establishing many private-public partnerships and bringing back a middle class to New York.
“All of these businesses are in New York because the talent is here, and the talent is here because it's an incredibly livable city," Bowles said. "It's an experience in New York that you don’t have anywhere else in the country."
Thousands of New Yorkers have already left the city, if only temporarily, to ride out stay-at-home measures in more spacious quarters. What's more, New York was already losing population before 2020 even began. If the trend accelerates, then the city’s story after the pandemic could echo its history in the 1970s.
“Restaurants and theaters and live shows and concerts — right now, a lot of that is in jeopardy," Bowles said. “In my mind, before the city thinks about big economic development projects its gotta focus on the essential. Making sure New York is a safe, livable and attractive place for people to live and making sure restaurants are able to survive this. There needs to be an attractive street life for people that want to come to this city.”
In order to do this, experts say that the city needs to develop a proactive plan. Pinsky, who led Bloomberg’s economic development team in the aftermath of the 2008 recession, said that administration ensured recovery by focusing on one sector and making New York a hub for it. In 2008, it was technology.
This time around, Pinsky thinks life sciences may be the key for moving forward.
“New York has a huge healthcare infrastructure, and some of the best healthcare institutions in the world and yet for decades now we’ve been trying to build a commercial life sciences industry here and have not succeeded for a variety of reasons,” Pinsky said. “And over the past few years, for the first time, we’ve been starting to get some traction.”
He also believes that there will be more of an interest in life science development in a way there wasn’t while the industry was booming.
“What I would double down on if I were the city was the life sciences, with the goal of making New York the leading center for life sciences in the next 10 years," he said. "And I think that is completely achievable, just like we were able to turn ourselves into one of the major hubs of technology in the world coming out of 2008.”
Cuomo and de Blasio are in very preliminary stages of planning the city and state reopening, but neither have announced specific economic development plans for restarting the economy. Rudin doesn’t doubt that the city and state will come up with a strong plan.
“It is like what Gov. Cuomo always says," Rudin said. "We’re New York tough."
‘The Federal Government Cannot Let New York Die A Slow Death’
Across the country, economic development and real estate experts are grappling with what recovery will look like.
Pineda has extensively examined the city’s budget, what recovery looked like for economic downturns in the past and the factors at play in the market when the pandemic hit to come up with several predictions for the market, he said.
“We’re probably going to see an increase in taxes, and the demand for real estate is probably going to come down,” he said. “We’ve overbuilt in the commercial real estate world.”
In order for the city’s redevelopment process to succeed, the city must ensure that there isn’t a mass exodus of talent and workforce.
“The one thing that could derail a long-term recovery in New York is people leaving,” Bowles said. “If highly educated, creative entrepreneurial people start moving out of New York because of fear, then companies are going to notice.”
Bowles said companies will reduce their office usage if their workers leave for other cities — or elect to work from their suburban homes. Pinsky said the government needs to invest in quality of life to ensure that doesn’t happen.
“If we start to see that quality of life decline, and decline in a serious way, whether that is because parks become dirty or crime begins to spike or the quality of our schools goes down dramatically, that’s when the workforce will think twice about their decision to live here,” Pinsky said.
With the state and city budgets decimated, government and business leaders have said the only sure way of ensuring these essential services are paid for and getting New York back on its feet is with federal aid.
“We're taking the actions that we can take, but the only force that can ensure that we get through this the right way is the federal government,” de Blasio said this month. “They have the ability to provide the resources in a way that no one else, no organization, nothing else on earth can help us the way the federal government can, and now it's their hour of decision.”
But the path toward federal aid is uncertain at best.
Senate Majority Leader Mitch McConnell would be in favor of letting states go bankrupt before lending them federal funds, he said last week on a conservative talk radio show. McConnell said states were irresponsible in depleting their savings.
New York leaders from both parties issued statements decrying McConnell’s position. Rep. Pete King, a Republican who represents parts of Long Island, called the McConnell the “Marie Antoinette of the Senate” while Cuomo called the statement “one of the really dumb ideas of all time.”
"You're not bailing out New York, New York has bailed you out,” Cuomo said. “We put more money into the federal pot every year. We're the No. 1 state in donating to the federal pot. No. 1. Kentucky is the No. 3 state in taking from the federal pot. They take out more from the federal pot than they put in. Every year. Every year.”
President Donald Trump weighed in on Twitter Monday morning, siding with McConnell and showing that getting desperately needed federal funds will be an uphill battle.
“Why should the people and taxpayers of America be bailing out poorly run states and cities in all cases Democrat run and managed, when most of the other states are not looking for bailout help,” Trump tweeted. “I am open to discussing anything but just asking?”
The second Coronavirus Aid, Relief and Economic Security Act passed by the U.S. House of Representatives Saturday didn't include any funding for state and local municipalities, despite repeated calls by Cuomo and de Blasio.
“They said, ‘don’t worry, don’t worry, don’t worry,’ it will be in the next bill,” Cuomo said during his daily coronavirus press briefing April 25. “I said to my colleagues in Washington, I would’ve insisted that state and local funding was in this current bill because I don’t believe they want to fund state and local governments.”
House Leader Nancy Pelosi responded to Cuomo’s comments during an interview with CNN Sunday morning, telling the governor to “calm down,” and that the funds would be a part of future coronavirus aid bills.
“We will have state and local funding, and we will have it in a very significant way,” Pelosi said. “There is no use going [into] what might have been ... state and local have done magnificently, they should be impatient. Their impatience will get an even bigger number.”
Despite this assurance, state and local leaders in New York are on edge about the funding. In every interview for this story, sources said New York’s centrality to the well-being of the national economy is a federal issue.
One of the big lessons from the city’s economic downturn in the 1970s was that the future of the city’s economic vitality at a time of economic downturn lies in aid from the federal government, Bowles said.
“There are lessons in there. For one, the federal government didn’t help New York [during the '70s] and partly because it took decades for what is the nation's major economic center to get back on its feet, that shouldn’t happen this time around,” Bowles said.
“The federal government cannot let New York collapse or die a slow death. It’s bad for the country. I think we all found that out 50 years ago.”