New York by the Numbers
Monthly Economic and Fiscal Outlook

A Message from the Comptroller

Dear New Yorkers,

As we approach summer, NYC’s hospitality and tourism sectors are bounding back with Broadway ticket sales, hotel occupancy, and airport volumes at or exceeding 90% of pre-pandemic levels.

Office occupancy, however, remains well below pre-pandemic levels, with a number of indicators pointing to a more permanent shift to remote and hybrid work schedules in office sectors. Office vacancies are plateauing at high rates. This month’s spotlight explores the potential implications of the changing office market on the City’s property tax revenues.

Job gains and wage increases continue to drive New York City’s recovery, but unevenly. The number of jobs is nearly back to pre-pandemic levels in higher-wage sectors, but job growth lags behind in lower-wage sectors like hospitality and retail. Wage gains have been seen across the board, but here too, stronger in higher-wage sectors.  Black New Yorkers continue to face disconcertingly high unemployment. And inflation continues to bite into household incomes.

We are closely watching the implications of the Federal Reserve’s efforts to address enduringly high inflation in a strong job market without driving the economy into recession – and we are attentive to the fact that long before a recession, every lost job or business-not-started hits families hard. Residential real estate sales are already beginning to slow, likely as a response to mortgage rate increases.

Given these uncertainties, along with tax revenues for FY22 that are over $3 billion higher than projected, we have proposed that the Mayor and City Council make an additional $1.8 billion deposit at the end of the fiscal year into the City’s Rainy Day Fund, based on a new formula for deposits that we developed. Check out our recent report on the topic here.

Enjoy the longer days.  We’ll keep watching the numbers.

The U.S. Economy

• U.S. employers added 390,000 jobs in May, exceeding the consensus expectation of 318,000. The unemployment rate remained unchanged at 3.6% while the growth of average hourly earnings was +5.2% year over year.
• The nation’s Consumer Price Index (CPI) rose by 8.3% for the 12-month period ending April 2022, a slight deceleration from the prior month. The gap between the U.S. and the NY-NJ-PA metro area CPI decreased slightly, with the metro area rising to 6.3% for the year ending in April, up from 6.1% in the prior month.

NYC Labor Markets

• The private sector gained 36,500 new jobs in New York City in April 2022 (Table 1). This is an improvement from the 29,400 jobs gained in March.
• Most industries showed some gains with the largest occurring in Health Care and Social Assistance (+11,000), Professional and Business Services (+10,400), Accommodation and Food Services (+5,900) and Educational Services (+3,600).
• As of April, the private sector has recovered 717,000 jobs or 78.9% of the losses suffered in March and April 2020.

Table 1: Seasonally Adjusted NYC Private Employment, by Industry (‘000s)

SOURCE: NYS DOL, and NYC Office of the Comptroller. Due to revisions to earlier months, numbers may not match to previous monthly newsletters

• Newly released data for the fourth quarter of 2021 from the Quarterly Census of Employment and Wages show employment in low-wage sectors of the economy was below 2019 levels while higher-wage sectors were close to pre-pandemic levels.
  • Fourth quarter employment in Accommodation and Food Services remained 21% below levels from the fourth quarter of 2019 (Table 2), though the gap has improved since the last quarterly update. Retail employment was 14% below the fourth quarter of 2019.
  • Employment in the Information sector was 7% above 2019. Jobs in Finance and Insurance declined by 3% and jobs in Professional Services declined by 1% compared to 2019 levels.
• Average wages were well above 2019 levels for both low and high-wage sectors, though higher on average in high-wage ones.
  • Average wages increased by 13% in Accommodation and Food Service, and by 23% in Retail Employment.
  • Average wages increased 26% in the Information sector, by 38% in Finance and Insurance, and by 23% in Professional Services.

Table 2: Employment and Wages in High and Low-Wage Sectors of the New York City Economy, Q4 of 2019, 2020, and 2021

SOURCE: Quarterly Census of Employment and Wages. Low wage sectors and high wage sectors are chosen according to average quarterly wages in 2019.

• The New York City unemployment rate (not seasonally adjusted) declined to 5.8% in April from 6.1% in March, but it remains far above the nation’s (3.3% in April 2022).
• Using the three-month average, the unemployment rate for Black New Yorkers increased again to 11.6% in April, while the unemployment rate for Hispanic New Yorkers declined to 5.3%, compared to 4.2% for white and 4.8% for Asian New Yorkers. This is a divergence from the pattern prior to the pandemic, when Black and Hispanic levels were nearly identical. (Chart 1).
• Compared to pre-pandemic levels, the unemployment rate was 0.5 percentage points higher for Hispanic residents, 3.1 percentage points higher for Asian New Yorkers, 2.7 percentage points higher for non-Hispanic White New Yorkers, and 6.1 percentage points higher for Black New Yorkers.

Chart 1

SOURCE: Current Population Survey, unemployment rates are not seasonally adjusted, unemployment rates by race/ethnicity calculated as 3-month averages. 3-month averages are used due to sample size concerns.

NYC Real Estate Markets

• Data from Streeteasy.com show a continued sharp ascension in median asking rents citywide, jumping from $3,000 in March to $3,200 in April. April’s median asking rent represents a 28 percent increase from the prior year (Chart 2).
• Citywide housing inventory in April dropped by approximately 1,800 units from the prior month with total inventory now down 54% from the April 2021 total.

Chart 2

SOURCE: Streeteasy.com

• Real estate sales in April showed some signs of weakening as mortgage rates went up (averaging 4.98% in April) following the rest of the nation (existing home sales declined by 2.4% year over year in the United States), with total sales declining to $6.4 billion, down from $10.8 billion in March, and $6.9 billion in April of 2021 (Chart 3).
• Residential sales fell the most, totaling approximately $3.4 billion compared to $6.1 billion in March. Commercial office building sales declined to $1.9 billion down from $2.8 billion, and rental building sales fell to $1.1 billion down from $2.0 billion in March.

Chart 3

SOURCE: Comptroller’s Analysis of Department of Finance Data

• Residential building permits filed in March represent a sharp surge in activity, likely prompted by the looming June 15^th expiration deadline of the 421-a tax benefit program in New York (Chart 4). 4,019 residential building permits were filed citywide in March, which is 3.3 times the prior month, and 2.3 times higher than typical March activity (excluding 2020).

Chart 4

SOURCE: U.S. Department of Housing and Urban Development SOCDS Building Permits Database

• Monthly data from the United States Post Office (USPS) on change of address requests to and from New York City show that moving trends have been better than or close to pre-pandemic norms since July 2021 (Chart 5). Citywide, the number of net residential moves (that is, move-ins minus move-outs) in which the mover indicated that the move was permanent fell precipitously in the spring and summer of 2020 and remained well below historical trends through the end of 2020 and early 2021.
• USPS data include any person or household who requests mail forwarding services, including moves to another country. Because the data exclude moves from abroad, as well as movers who do not request mail forwarding, the data does not precisely track migration patterns. However, comparisons against the historical baseline are indicative of domestic migration trends.

Chart 5

SOURCE: NYC Comptroller’s Office analysis of United States Postal Service, “Change of Address Stats,” https://about.usps.com/who/legal/foia/library.htm.

Note: Data is based on requests for mail forwarding from movers who mark that the move is permanent. Movers may be an individual or a family. USPS data may include moves to another country but does not include moves originating abroad.

• New York City’s commercial office space vacancy, as shown in Chart 6, remains stubbornly high and is relatively unchanged compared to a year ago, as the shift to remote/hybrid work schedules continues to unfold, as evidenced in the next section.
• The long-term trend will depend on a number of factors: how companies alter their space needs in response; whether they require all employees to be in the office on the same but fewer days (still needing close to peak capacity) or opt for smaller footprints or other layouts; and what strategies owners and the public sector take to encourage new types of users (Mayor Adams and Governor Hochul recently established a commission to look at this question, chaired by former Deputy Mayors Dan Doctoroff and Richard Buery).
• Asking prices remain below pre-pandemic levels, though have crept up slightly in recent months. This month’s spotlight explores the potential implications of the changing landscape in the office market on property tax revenues.

Chart 6

SOURCE: CoStar

NYC Return to Office

• NYC’s return to office pattern is reflecting the national trend. A nationwide survey published this month by the Federal Reserve showed 22% of U.S. adults working remote and another 17% working hybrid at the end of 2021, compared to 7% in 2019.[1]
• The latest Google mobility data show time spent at New York City workplaces continued to be 23% below pre-pandemic levels through May – same rate as it was May of 2021 (Chart 7). Time spent in workplaces has been stagnant with occasional dips during holidays and Covid waves suggesting that declines reflect the shift to hybrid work noted above.

Chart 7

SOURCE: GPS mobility data indexed to 1/3/2020 to 2/6/2020, from Google COVID-19 Community Mobility Reports.

• April data from the Current Population Survey, however, show the share of New Yorkers working from home “due to COVID” continued to decline and reached the lowest point since the start of the pandemic at 15.5% (Chart 8). This may reflect a decline in people working from home, or may reflect that people now feel they are working from home as part of a longer-term shift to remote/hybrid work, rather than because of the pandemic.

Chart 8

SOURCE: Current Population Survey, COVID Supplement.  Note:  Whether a person works from home is determined by their answer to this question: “At any time in the last 4 weeks, did you telework or work at home for pay because of the coronavirus pandemic?”

• Weekday ridership on MTA subways and commuter rails has steadily improved throughout the spring (Chart 9). As of May, weekday volumes averaged 58% of pre-pandemic levels on the subway, 64% on MTA buses, 59% on the Long Island Rail Road (LIRR), and 57% on Metro-North Railroad (MNR).
• On Wednesday, May 18th, subway ridership exceeded 3.6 million for the first time since March 2020.
• Car crossings at the MTA’s bridges and tunnel have returned to pre-pandemic levels and remained steady there for several months.

Chart 9

SOURCE: Metropolitan Transportation Authority, Day-by-Day Ridership Numbers.

NOTE: Excludes federal holidays.

NYC Business and Tourism

• Ticket revenue on Broadway continued to climb closer to pre-pandemic levels through the end of May. Broadway shows grossed $33 million in revenue for the week ending May 29^th, reaching 96% of gross revenue during the same week in 2019 (Chart 10).

Chart 10

SOURCE: The Broadway League

• Revenue per available room in May rose to $249, a rebound to pre-Covid levels in May 2019. Total room demand in May reached 2.8 million rooms still shy of May 2019 when it was 3.49 million rooms, but on an increasing trend year over year compared to 1.64 million in May 2021 (Chart 11).

Chart 11

SOURCE: STR via CoStar

• Volume at New York City-area airports improved to 90% of pre-COVID levels in April, mirroring nationwide trends and setting a new pandemic-era record (Chart 12).
• As of March, domestic passenger volume was close to pre-pandemic levels at local New York City airports, but international volume was still down 35%, as compared to March 2019.

Chart 12

SOURCE: U.S. Transportation Security Administration and the Port Authority of New York and New Jersey.

City Finances

The FY 2023 Final Assessment Roll

The City’s Department of Finance (DOF) released the final roll for property tax assessments for the upcoming fiscal year which informs the tax bills which will be sent out this month. The final report reflects changes, generally reductions, from the tentative roll issued in January due to challenges to assessments and more complete information on exemptions. This year, reductions in taxable billable assessed values totaled $3.2 billion or -1.2%, consistent with past reductions and with the tax forecast for FY 2023 recently released by the Office of the Comptroller.

• The data confirm that market values for residential property classes have recovered from the effects of the pandemic (Chart 13).
  • Class 1 properties (1-3 family homes) were largely unaffected by the pandemic, and their market values continued to grow in FY 2023.
  • Values for Class 2 residential properties (generally, multifamily buildings, whether condos, coops or rentals) dropped in the valuations for FY 2022 but have since recovered. Current market conditions indicate further improvement, with rents exceeding pre-pandemic levels (see the residential real estate section of this monthly report).
  • Values for Class 4 commercial properties, though improving significantly in FY 2023, remain below FY 2021 levels. A more detailed discussion of Class 4 properties is provided in the spotlight.

Chart 13

SOURCE: NYC DOF

Cash Balances

• The City’s central treasury balance (funds available for expenditure) stood at $7.6 billion as of Tuesday, May 31st (Chart 14). At the same time last year, the City had $10.0 billion.  This difference in balances is primarily due to the timing of Federal aid receipts.  Last year, on May 18, 2021, the City received $2.1 billion in State and Local Recovery Funds under the American Rescue Plan.  This year, these Federal funds are forecasted to come in June.
• The Comptroller’s Office’s review of the City’s cash position during the third quarter of FY 2022 and projections for cash balances through September 30th, 2022, are available here.

Chart 14

SOURCE: Office of the NYC Comptroller

Spotlight

How do Commercial Real Estate Values Impact the City’s Property Tax Revenues?

This spotlight investigates how the current trends in the commercial office space market are likely to impact NYC’s property tax revenues. This year, primarily as a result of non-property taxes, the City is taking in far more revenue than expected; however, these trends are not projected to continue in future years.  Meanwhile, the plateauing of office occupancy indicates that market values may dip in the coming years. Usually, property tax revenues are relatively stable, because of a 5-year “smoothing” formula that accounts for market fluctuations. In previous downturns, this rule has protected the City from revenue losses. But the pandemic’s impact and the uncertainty of office space use given the shift to hybrid work is a large enough change that we could see the percent decline in the property tax revenues nearly match the percent decline in market values for the city’s office space.

The Class 4 commercial category, which accounts for 39% of the City’s property tax revenue, and an estimated 19% of its overall revenues, is comprised of different building types including office, retail, and hotel, among others. Property tax valuations for FY 2021 were first published in January 2020 and reflect pre-pandemic economic conditions. Almost all property types within Class 4 experienced declining values as the impact of the pandemic was incorporated into the FY 2022 valuations, with an overall decline of 17.4%. Data from the City’s recently released final tax roll for FY 2023 show that although market value estimates for Class 4 rebounded, they remain lower than the 2021 estimates (Table S.1).

Table S.1: Class 4 DOF Market Values by Select Property Types FY 21-FY 23

Source: NYC DOF: Excludes Office Condos

While Class 4 property values remain below the FY 2021 levels, economic conditions for most property types are improving, suggesting that DOF’s market value estimates will continue to grow for most categories. Hotels were most impacted initially because of the travel restrictions that effectively shut down the travel industry causing market value estimates to decline by almost 24% for FY 2022. Although not reflected in the FY 2023 valuations, hotel demand continues to rebound, as seen in Chart 11 of the newsletter above, and even the retail market has shown some signs of stabilizing.[2] However, as evidenced elsewhere in this newsletter, office properties, which by themselves account for approximately 20.2% of the overall property tax levy (including residential classes) in FY 2023, are lagging.

The current state of the office market

As noted in this newsletter over the last few months and again in Chart S.1. below, the overall office vacancy rate (direct and sublease) has not shown signs of improvement and has in fact reached a new all-time peak in the first quarter of calendar year 2022. Both the direct vacancy rate at 16.0%, and the indirect (or sublease) vacancy rate currently at 5.0%, exceed the vacancy rates of the 1990s recession and are far greater than the peak vacancies experienced during the 2001 and 2008 downturns.

Chart S.1

Source: Cushman and Wakefield, Years refer to calendar years

The fast rise in the direct vacancy rate, nearly 5 percentage points higher year over year, is particularly concerning because, unlike space available for sublet, direct vacancies cease to generate rental income. The rise in the direct vacancy rate has been both steeper and faster than in previous downturns.  The increase in sublet space, in turn, could result in even higher direct vacancies if market conditions remain weak and leases are not renewed.

How do vacancy trends and market values impact property taxes?

In past real estate cycles, deteriorating market conditions and slowing growth in the Class 4 market did not result in a decline in Class 4 tax revenue. In FY 2011 for instance, when market value growth slowed to 0.9 percent, taxable billable assessed value continued to grow by a strong 4.7 percent (Table S.2).

Table S.2: Class 4 Taxable Billable Assessed Value[3] and Market Value During the Previous Downturn

Source: NYC DOF

Taxable billable assessments continued to grow despite the drop in market value because market value changes (both positive and negative) are phased into assessed values over a 5-year period for properties in Class 2 and 4. This smoothing mechanism usually creates a pipeline of phased-in values and lessens the impact of year-to-year fluctuations in market value estimates on tax revenues.[4]

However, in the case of market value drops as severe as those that occurred in the FY 2022 tax roll, the taxable billable assessed values can also drop abruptly. Under NYS property tax law, billable assessed values for Class 2 and Class 4 properties are based on the lower of two values– 1) the actual assessed value (AV) which is 45% of the current-year estimate of market value and 2) the transitional AV, which is the result of the 5 year phase-ins of past market value increases.[5]  The “pipeline” is formed when the actual AV is higher than the transitional AV, as it is in most market conditions.

Table S.3 shows an illustrative example of how the impact of changing market values (up or down) on Taxable Billable Assessed Values can be mitigated by this pipeline, but only when the drops are less severe. In years 2016-2020, the phase in of market values in the pipeline resulted in a gradual increase in taxable billable AV, thereby protecting the property owner from sharply rising property taxes.  In 2021, the decline in the market value estimate was moderate, so the remaining pipeline still led to an increase in the taxable billable value.

Table S.3:  Illustrative Example of the Impact of Changing Market Value on a Sample Property

Source: NYC Comptroller. The example assumes that the property does not qualify for tax exemptions.

However, in 2022 the decline in market values is so steep that the relationship flips: actual AV is lower than transitional AV, and taxable billable drops sharply from $57.15 to $47.25, as shown above.

This sudden drop and flipping to the lower actual AV is what happened to most office buildings in FY 2022 as shown in Chart S.2 below. Office market values plummeted by 16 percent. While in FY 2021, 95 percent of office properties had billable AV corresponding to transitional AV, by FY 2022 the share had shrunk to 15 percent as the drop in market values “blasted through” the pipeline.

 Chart S.2

 Source: NYC Comptroller

Taxable billable AV jumped back to the transitional AV for 40% of office properties in FY 2023, indicating that some pipeline has been restored. However, the majority of office properties (60%), still have an actual AV below their transitional AV. This indicates the potential for tax revenue upside is limited (because of the 5-year phase-in), while a drop in market value estimates could more directly and immediately decrease the tax levy.

To assess the downside risk associated with the fact that 60% of office properties still have an actual AV below transitional and no pipeline to mitigate a market value decline, we compare our current baseline forecast for the FY 2023 Executive Budget[6] with alternate scenarios. Our baseline assumes that office market values will be essentially flat in FY 2024. Office vacancies peak in early 2022 and begin to decline by the end of the year ending slightly lower than in CY 2021. In the “soft-landing” economic scenario (in which the Fed is able to bring down inflation without pushing the economy into recession) that underpins the forecast, office employment growth moderates but remains positive.

However, the risks to the office market are both macro-economic and specific to the transition toward hybrid work schedules, which could lower demand structurally, even if job creation continues.    As an alternate scenario to this baseline, we simulate what would happen if market vacancies did not improve by year-end in CY 2022.[7] We simulated two scenarios. The first is based on the direct vacancy rate remaining 5 percentage points higher than in 2021, driving a 5% decline in estimated market values for FY 2024. The second scenario assumes a sharper 10% drop in market value stemming both from a higher direct vacancy rate and declining rents. The comparison of these downside scenarios to the baseline are shown below.

Table S.4: Office Property Tax Levy Baseline vs Downside Scenarios

Source: NYC Comptroller

Given the current post-pandemic starting point, a decline in market values would now cause property taxes to decline immediately with little offsetting effect from the pipeline, with a 5% drop in market value estimates resulting in a 4% drop in corresponding office property tax levy, or $200 million. A more severe downturn in market values of 10 percent would cause the office property tax levy to decline almost exactly by 10 percent, or $600 million. Property tax revenues are typically associated with stability and have helped in previous recessions to offset declines in other more volatile tax categories, such as income taxes.  However, given that the protective pipeline for the office market was significantly diminished during the pandemic, that stability does not describe office-specific property tax revenue in this period.

These risks are one more reason why the Mayor and City Council would be wise to deposit an additional $1.8 billion into the Rainy Day Fund, bringing this year’s total contribution to $2.5 billion (50% of the amount by which this year’s non-property taxes exceed the average of the past 6 years), and bringing the total amount in long-term reserves to 10% of City revenues, enough to weather nearly 2 years of the next recession, whenever it comes, without major cuts to essential services.

Sincerely,

Brad Lander