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The three-headed dragon plaguing New York City real estate

Jul 07, 2023

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The cost of living in New York City is 38% higher than the state average and 80% higher than the national average, so it’s no wonder that the Big Apple tops the list of the world’s wealthiest cities, clocking in with a total of 340,000 millionaires. But regular folks — workers in the service industry for instance — are getting priced out of the real estate market and leaving in droves.

Straight Arrow News contributor Peter Zeihan looks at three reasons behind the slowing demand for NYC real estate.

Excerpted from Peter’s July 5 “Zeihan on Geopolitics” newsletter:

New York is a service-based economy, and anytime you have a system like that, cost of living becomes an issue. While the finance bros working 80-hour weeks might be able to afford NYC prices, there’s a three-headed dragon wreaking havoc on everyone else … real estate.

The first head is the demographic problem, which comes naturally with being part of the fastest-aging region in the US. Many of these lifelong New Yorkers are aging into retirement, and it doesn’t make sense to stay there anymore. So we are amid a mass exodus of lifelong NYC service workers.

The second head was/is COVID. Once people realized they could work remotely and live a more spacious life outside the city, many didn’t want to crawl back into their studio apartments. Yes, NYC has made a more robust recovery than San Francisco, but it’s still not quite back to how it was. The government is taking quite a hit for each person that never returned to the city.

This dragon’s third and worst head is international fear and its impact on rent prices. As economies across the globe enter a state of flux, there’s nothing quite like parking your assets in a 50th-floor penthouse apartment in NYC (even better if you never step foot in it). For people who actually want to live in the city (like my social media manager), that means crazy rent prices and low inventory.

Does this mean that NYC is done? Of course not. For many, this probably sounds like the status quo for the world’s financial capital. However, the business models for the private sector and the government will have to change if NYC wants to thrive for years to come.

Everybody, Peter Zion here coming to you from New York Central Park. New York is a city obviously, where there’s not a lot of manufacturing, or agriculture because there hasn’t been Greenfield potential here in over a century. It’s a services economy with finance, of course, being the biggest and baddest. But in any system that is based on services, cost of living becomes a critical issue, because these are all very highly value added jobs, but people still have to live there. And the people who serve the services economy and serve the people who serve the services economy still need a place to live as well. So living costs are a big issue with real estate probably be at the top of the list. And in that New York is facing a triple challenge. The first is demographics. The American Northeast is the oldest and fastest aging part of the country. And as more people move into retirement, a lot of folks who have lived here all their lives to serve the servicers are discovered it’s kind of out of their paygrade. So we’re seeing a significant amount of relocation of older folks to warmer climes. Of course, not everyone can afford to up and leave a rental apartment in New York for a condo in Boca. So it’s disproportionately hitting people who are on the wealthier end of that scale. The second big issue is COVID. And more importantly, technology. When COVID hit and everything shut down in the office went away temporarily. New Yorkers in many cases decided to DeCamp to other places, some moved to Upstate, some moved to the south, some moved to Florida, because if you could just wire in for work, then you didn’t need to be paying a New York rent, or New York taxes in many cases. And now that COVID is over, those technologies have only improved and a lot of people are resisting coming back. Now New York has not had as much of a problem getting people to move back and say San Francisco, but it’s still had a disproportion hit on the economy overall. Specifically, you’re talking about people moving into places like Jackson Hole, or Charleston and maybe commuting in once or twice a month. And that’s a very different real estate picture on this side of the equation. Because any money that you can use to buy a condo in New York, you’re gonna be able to get, you know, a mansion in South Carolina. And since roughly 8% of the population of New York pays 90% of the taxes, every person who relocates is a real fiscal hit to the government here. But the third one is probably the most important because even with people living out, we’re still seeing rental costs here in New York be stable to positive. The third big factor is international fear. The more problems we see in Europe, and especially in China, the more people who try to get their money out and get it into a place with rule of law where you might actually be able to buy a physical asset with real estate being the number one for most consumers. And so you get these, these ridiculous needle buildings in New York that not a lot of New Yorkers live in. Most of these have been bought out by foreigners who may not even have an intention of ever looking at the floor, much less moving in simply as a way to park their assets. And so we’re getting these huge distortions and a lot of property markets around the country with New York and being at the top of that list, where foreigners have come in and bought up property, especially at the higher end just to park on it. And that’s made it more difficult for everyone else to find a place or even find someone to build a place because the hot money is going to something like this, that is not really of use to solving the real estate or the living cost problems of the city. All right. Does this mean that New York’s done course not steal the world financial capital, but it does mean that the business model for both private sector and the government is going to have to change in order for the city to thrive in the future. All right. That’s it for me, y’all. Take care

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