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Are We Out of the Woods Yet?

Source: https://madsenadvisors.com/publications/f/are-we-out-of-the-woods-yet

There's an old joke: How far can you walk into the woods? Answer: Halfway, because after that you're walking out.

As those regularly communicating with us heard us say at the time, New York City’s apartment market started its journey out of the woods at the beginning of March. From our on-the-ground perspective, after many months of declining sales, sinking rents and rising vacancies, we watched the market find its footing. Manhattan home sales contracts signed in January and February 2021 outnumbered those a year prior by 103% and 73%, respectively. Specifically for three- and four-bedroom homes, February’s increase was even higher at 80%, signaling interest from families with children. February brought the highest number of new Manhattan apartment lease signings since tracking began in 2008, reflecting a 112% increase over a year prior. Leasing agents reported worries expressed by prospective tenants that if they didn’t sign a lease soon, they might face higher rents later. Tenants started requesting two-year leases in an attempt to “lock in” current rental discounts. In March pedestrians reappeared on Midtown sidewalks and shoppers were back in stores, not in droves but in noticeably greater numbers than anytime we’ve witnessed around the city during the last 12 months. We watched as museum attendance and park usage increased, and we even spotted some tourists.

What caused this shift?

The COVID-19 Vaccine

While the vaccine rollout had a slow start in December, the pace picked up dramatically during January and February. Then on February 27, the FDA issued an emergency use authorization for a third vaccine – this one developed by Johnson & Johnson. On March 2, President Biden announced that the United States would have enough Covid-19 vaccine doses for every adult American by the end of May, dramatically accelerating his original timeline. On March 5 the daily number of Americans receiving their first shot (and for J&J vaccine recipients, their only shot) reached 1.8 million, the 7-day average exceeded 1.3 million, and the cumulative figure rose above 60 million. (The figure is 96 million today.) Suddenly near-term vaccination seemed like a realistic prospect for many.

Employer Callbacks

For most New Yorkers, the appeal of living in NYC has historically been (a) proximity to work or school and (b) immediate access to culture and entertainment. When both of those drivers switched off in response to the pandemic, more than 800,000 residents moved out of the city, and more than a million daily commuters stopped coming. According to a survey conducted by The Partnership for New York City in late February / early March, the percentage of Manhattan office workers returning to their workplace has remained stubbornly low at roughly 10%. Yet during the last few months, a number of employers started telling employees to prepare to return to work -- for at least a portion of the week -- sometime this year, and apartment shoppers started trickling back in response.

Some large employers did make significant commitments to the city during the pandemic, including the big tech firms we mentioned last quarter as well as Blackstone’s recent lease for 80,000 square feet at 345 Park Avenue and Mount Sinai's Icahn School of Medicine’s recent lease for 165,000 square feet at 787 11th Avenue (the former Packards Motor Building, which will be transformed into a life sciences research and office building). On March 11 Mayor Bill de Blasio said he expected all city workers to return by May, as more and more residents receive the vaccine.

However the overall messaging from employers has been mixed, with most signaling a “hybrid” model involving a rotation of in-office and remote work for the foreseeable future. At the very least, casual Friday looks to become work-from-home Friday going forward, and additional flexibility seems likely. Although the post-pandemic floorplan may call for more square feet per employee as a partial counterbalance, this does appear to translate to an overall reduction in near-term demand for office space in the city based on the volume of space currently available for sublease (including sizeable offerings from JP Morgan, PricewaterhouseCoopers, Omnicon and WPP among others). The laws of supply and demand still apply, however: As office market rents decline in response to reduced demand, we expect to see new, previously priced-out entrants leasing space until the office market finds a new equilibrium. The employees working for these new entrants will help restore demand for apartments.

School Re-openings

On February 25, middle schools reopened for in-person learning. On March 9, the New York City Department of Education announced that high schools would reopen for in-person learning on March 22. Additionally, it’s expected that in-person learning will be the standard for the 2021-2022 school year, making it possible for parents to once again work outside the home.

Katherine Fleming, New York University’s provost, told colleagues in an E-mail on February 23 of plans to have “all faculty teaching their classes in-person, in the classroom, in the fall 2021.” This is significant, as the school has more than 50,000 students.

Restriction Easing

On February 12, following a two-month ban and just in time for Valentine’s Day, NYC restaurants were allowed to offer indoor dining up to 25% capacity, increasing to 35% on February 26th and now at 50%. In early March, Governor Cuomo announced that movie theaters could reopen at 25% capacity on March 5, and arts, entertainment and events venues could reopen April 2 within certain limits. The wisdom of this easing was debated from all directions, but it undeniably reflected a sense that better days were coming, and coming soon.

The American Rescue Plan Act of 2021

The $1.9 trillion stimulus package passed in the House of Representatives on February 27, in the Senate (in modified form) on March 6 and again (as modified) in the House on March 10, and was signed into law by President Biden on March 11. Headline components of the Act include an unemployment supplement of $300 per week extending until September 6, and $1,400 direct payments to individuals under certain income thresholds. At least as profound, however, is assistance to state, local and tribal governments to mitigate the fiscal shock of the pandemic and reopen schools. As noted last quarter, New York City desperately needed this funding to bridge its looming multi-billion dollar budget gap, and news of this funding was the opposite of the infamous 1975 headline “Ford to City: Drop Dead.” If the politicians spend at least some of the federal funding wisely, New York City may well once again find itself on solid financial ground. For example, $6.5 billion of New York’s funding is designated for mass transit, helping stave off a vicious cycle of lower usage leading to service reductions, leading to lower usage, leading to more service reductions.

Are We In the Clear Yet?

No, New York is not there yet. But our journey out of the woods has begun, and the trail is being blazed for a return to the robust apartment market New York is known for. It may take a while, and June/July/August will likely be deceptively quiet as many New Yorkers normally spend their summers elsewhere anyway. But come Labor Day (September 6) which traditionally marks the end of summer vacations and commencement of a new school year -- and this time could also be accompanied by US herd immunity -- we expect to see unmistakable clearing as more people return and the city begins rebuilding itself.

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