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Congestion Pricing About-Face Raises Real Estate Industry Concerns Over MTA's Future

In the days following New York Gov. Kathy Hochul's eleventh-hour decision to slam the brakes on congestion pricing, less than a month before the tolling program was set to be implemented, many New Yorkers hoped that the Metropolitan Transportation Authority would have the authority to move forward anyway. 

Those hopes were dashed on Friday when the MTA broke its silence, announcing that it won't be able to put in place the first-in-the-nation tolling program that it has spent years — and more than $500M — getting ready to implement. The board of the authority said it required the state's consent to launch the program, and Hochul had revoked it.

A subway sign promotes congestion pricing.

That decision dealt a severe blow to the future of the city's subway system, the underpinning of the U.S.' largest economic engine. Congestion pricing has been backed by the real estate industry as a way to bring foot traffic back to struggling business districts and advance post-pandemic recovery.

“It is simply physically impossible for cars to lead the return to Manhattan offices and retail,” the Real Estate Board of New York wrote in a letter co-signed by other business leaders in 2021

REBNY doubled down in a statement Wednesday. 

“Congestion pricing will provide environmental and transportation benefits that will make New York City more competitive on the national and international stage,” REBNY President James Whelan said.

But in her last-minute announcement, Hochul claimed the opposite, saying the toll would be an “obstacle to our economic recovery.” 

“My focus must be on putting more money back into people’s pockets,” Hochul said in a statement.

By placing a $15 toll on cars driving below 60th Street, many hoped more people would be funneled to the streets, passing by stores, restaurants and offices on their way to their destination. 

Last year, subway ridership was 68% of 2019 levels, as typical riders have cut their commutes and increasingly opted to shop in their neighborhoods since the onset of the pandemic, according to the MTA.

Under the congestion pricing plan, the MTA would be armed with $15B over time to make upgrades to the more than century-old subway system, in addition to the Long Island Rail Road, Metro-North Railroad and other public transportation methods. The MTA said projects will be “reprioritized,” as Hochul has yet to reveal a new plan to get the MTA funding.

Among the potential replacements for funding streams is a new tax on businesses, Bloomberg reported. Any new plan would require buy-in from Albany, a lengthy process, before approval. 

The congestion pricing plan was first proposed in 2007 and enshrined into law in the 2019 state budget. Hochul was on board for years prior, touting it in a speech in Ireland just weeks ago, before changing her mind last week. Tolling devices finished installation last month — part of a $556M contract, the New York Daily News reported.

“We stand firm that the needs of our transit riders and investment in our future is critical — no one wants a return to the system of the 70s and 80s,” New York Building Congress President and CEO Carlo Scissura said in a statement. “Our industry stands ready to put shovels in the ground to build and expand our transit system as planned.”

Many neighborhoods uptown and in the boroughs have been resilient during the pandemic, thanks to their residents shopping near home. But storefronts in the city's central business districts have only recently experienced revived leasing interest.

During the first quarter of 2021, the Upper West Side's retail availability rate was just 17%, according to data from Cushman & Wakefield, compared to Herald Square's rate of 39% and Lower Manhattan's availability rate of 23%.

Three years later, the Upper West Side's vacancy rate was just 10%, while Herald Square and Lower Manhattan have recovered to 36% and 20%, respectively

REbrick Real Estate Advisors founder Nick Dries said that, over time, congestion pricing would be positive for Lower Manhattan’s retail environment, improving quality of life and air quality, in addition to the transit system. 

“Once these capital projects are completed, visitors to Manhattan’s central business district should be more committed to staying and experiencing everything the borough has to offer,” Dries said in an interview. “This additional cost to businesses and their customers would be a new challenge. Over the long term, if the reinvestment is managed correctly and the MTA enhances the whole ecosystem of Manhattan, that should benefit your business.”

Construction at the Grand Central Terminal subway station Wednesday. With congestion pricing halted, the MTA said such projects will be “reprioritized.”

The MTA faced several lawsuits in the months leading up to the implementation of congestion pricing, including from a group called New Yorkers Against Congestion Pricing, the town of Hempstead on Long Island and the state of New Jersey. All claimed that the toll would hinder people’s ability to come to — and spend money in — the city. 

However, Compass Vice President and commercial broker Robin Abrams told Bisnow that most businesses wouldn't have felt a negative impact.

“A lot of retail businesses cater to a local customer base, and secondarily, they may serve the tourist population,” she said. “Tourists generally don't drive a car in the city. Or if they do, they come to the city, park and are then in the city for the duration of their stay.”

As for leasing, the area that would be impacted by the toll already has one of the highest barriers to entry in the country. The toll would separate the strong tenants from the weak, even if congestion pricing would have increased the cost of operation through delivery costs, Dries said.

“The marginal cost of congestion pricing is not going to be significant enough that retailers will change their expansion strategies for opening new locations south of 60th Street,” Dries said. “Most of these businesses have a solid forecast for their profitability and sales performance. They will now need to consider congestion pricing as part of their expenses, and if they're not optimistic about the profitability or sales at a specific location, they won't sign a new lease there.”

Hochul also cited the need to improve attendance in the city's office buildings as a reason for her decision to temporarily pull the plug on congestion pricing. But Micah Remley, CEO of workplace management company Robin, said it is unlikely a $15 toll would have had a markedly negative impact on return-to-office rates.

“If you are in a financial position to commute by car into an office in New York City already in that Midtown and Lower Midtown area, then my take is that $15 isn't going to dissuade you,” Remley said. “In fact, if there's less congestion, you might be more likely to come into the office.”

Time lost due to morning rush-hour subway delays costs riders as much as $390M a year, according to a study by the Independent Budget Office. The agency expects that those costs will only grow as the transportation system ages. 

Partnership for New York City President and CEO Kathryn Wylde called Hochul’s decision “disappointing,” pointing to such related losses.

“Her reluctance to impose a new toll at this time is understandable. New York has become one of the most expensive cities in the world in which to live and do business,” Wylde said in a statement.

“But the toll revenues would amount to only $1B a year, which is far less than the $20B+ cost of lost productivity, overtime and fuel expenses, environmental and health costs that are the result of excess traffic congestion on the city’s streets and highways.”

Ciara Long contributed reporting for this story.

UPDATE, JUNE 10, 6:15 P.M. ETThis story has been updated to include a new statement from Carlo Scissura and commentary from Robin CEO Micah Remley.