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Factors Shaping the Future of Commercial Real Estate in NYC

Local Law 97 is considered to be among the most ambitious plans for reducing carbon emissions in the nation. It is included in the Climate Mobilization Act which passed the City Council in April 2019 as part of NYC’s Green New Deal.  The aim is a dramatic reduction in carbon emissions produced by the city’s largest buildings of 40 percent by 2030 and 80 percent by 2050. The law also established an Advisory Board and Climate Working Groups to advise the City Council on how best to meet these aggressive goals.

As affected owners and landlords began discussing ways to retrofit their buildings to conform to the new laws, they were hit by several catastrophes that have continued to wreak havoc on owners, tenants and residents. 

The Covid-19 pandemic arrived in March 2020 and it has affected every New York City resident and business, with little end in sight. According to the Center for NYC Affairs at The New School, New York City’s payroll job count fell by 510,000 jobs this past July compared to the pre-pandemic level, representing a nearly 11 percent decline that persists 18 months after the start of the pandemic. Jobs in the city have declined by more than three-and-a-half times the national average, making New York the hardest-hit large city in the country. And as Federal unemployment benefits end in September, we are likely to see a growing economic hardship among low income residents. Politico adds, “the city’s commercial real estate and retail sectors are facing foundational changes with the forced adoption of remote working that may alter the city’s landscape forever.”

MarketWatch has reported that New York City’s small retail businesses now face a pandemic-altered commercial real estate landscape. International tourism has virtually disappeared, domestic tourism is below pre-pandemic numbers, and New York City office workers have yet to return to the workplace. And with New York City’s infamous high rents and operating costs, many of our clients who are small business owners continue to face an uphill climb toward profitability. Covid-19 has changed the office building and retail landscapes dramatically … perhaps forever.

Severe weather events are becoming common in the City, says Bloomberg, who report that severe weather events in New York City are becoming the new normal

Tropical Storm Henri recently broke two rainfall records in New York City for the rainiest hour in NYC history with 1.94? of rain falling between 10-11 pm. Builders of the New York City Transit System, which was finished way back on October 27, 1904 (original subway), never anticipated that this amount of flooding would or could occur. Nor did builders of older residential and industrial buildings with sunken garages and basements that were not built to withstand the flooding caused by the dramatic amounts of rainfall now pouring down in a matter of hours.  Just a few weeks ago, Hurricane Ida drenched the City, again flooding subways, streets and basements.  “Climate change is clearly seen in these new normals,” said Michael Palecki, project manager at the U.S. National Centers for Environmental Information.  

From one weather event to another, our company is now dealing with hundreds of thousands of dollars in damages to the commercial buildings that we own and operate in the outer boroughs.  And with Covid-19 and these unexpected weather catastrophes continuing to play out with an increasing frequency, buildings owners and landlords are now experiencing mounting financial challenges that include tenants whose rent bills have been unpaid for 22 months due to Covid-19, repairs related to severe weather, and now Local Law 97, which requires most buildings over 25,000 square feet to meet new energy efficiency and greenhouse gas emissions limits by 2024 with stricter limits coming into effect in 2030. We’re talking about some 60,000 affected buildings throughout the City.

We believe the new Mayor, the New York City Council and it’s Local 97 Advisory Committees should consider the financial challenges building owners face in recovering from the pandemic and historic weather events so that they can adequately address the requirements of Local Law 97. Our concern is that higher costs to building owners normally translate into rising rents.  If that occurs and rental costs rise, we could see a migration of commercial tenants leaving the City for less expensive buildings that are available on Long Island, Westchester, New Jersey and Connecticut.  If a company has to choose between driving a few extra miles to the City versus the financial hardships of operating a small business profitably in the outer boroughs, well the answer is obvious.

According to Forbes, ”The flight out of New York has been in the works before the pandemic. Wall Street executives previously relocated thousands of jobs to states outside of New York, in an effort to cut costs.”  If companies continue to migrate from New York City because the cost of doing business here is no longer viable, then we can envisage City and State taxes rising to cover the tax shortfalls, especially given job losses and the rising social needs exacerbated by the pandemic.

If owners and landlords lack the ability to operate their buildings profitably and small businesses can no longer build profitable businesses in the City, then the timing of Local Law 97 may end up killing the industrial and retail lifeblood of the city. 

Yet another factor in the future of commercial real estate is how the Federal Government is dealing with the 1031 Exchange Rules, a popular way for investors to bypass capital gains taxes when selling investment properties. According to Forbes, “President Biden’s proposal would still allow for 1031 exchanges of real property, but minimize the benefit to only allow a deferral of $500,000 per year or $1 million if filing a married filing joint return.”

When you add it up, commercial real estate in New York City is facing real challenges. Some of them we can address. Our hope is that New York City’s industrial and retail base will strengthen and recover, and that politicians will work collaboratively with building owners and tenants so that we can avoid a mass migration of businesses from New York City and instead, draw companies to New York City.

Neil A. Dolgin is co-president of Kalmon Dolgin Affiliates. Founded in 1904, Kalmon Dolgin Affiliates (KDA) has grown into one of the New York metropolitan region’s leading commercial and industrial real estate firms. Kalmon Dolgin Affiliates specialize in all aspects of real estate services for developing, managing, selling, leasing and marketing commercial and industrial property. KDA’s highly-trained professional brokers offer clients a practical, street-wise approach to commercial and industrial real estate brokerage, leasing and sales, supported by the latest in real estate marketing, management and research technology.

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