New York City’s Most Important Election Is Yet To Come
As I have stated many times in these pages, since late 2007 the relationship between politics, economics and real estate has never been closer.
The outcome of the presidential election last November has had a tangible impact on our commercial real estate market. The tax policy endorsed by the current administration and passed by Congress has impacted market participants’ behavior, as it always does. The anticipated increases in capital gains taxes this year led to a record year for property sales in the Manhattan submarket last year, with a turnover rate of 4.2 percent of the total stock, the highest rate ever recorded. The previous high was 3.9 percent in 1998, the year when the Clinton administration lowered the capital gains tax rate from 28 percent to 20 percent. The fourth-highest turnover rate occurred in 1986, spurred on by the Tax Reform Act of 1986. This set of facts contradicts those who say that tax policy does not impact behavior.
The federal elections have also impacted the economy by continuing a policy of unclear rules, unprecedented government intervention, and health care and financial reform laws that we are only beginning to realize the impact of. These have all led to uncertainty, the magnitude of which is slowing down the velocity of money, leaving risk-takers, who normally stimulate the economy, timid. The result is sluggish growth and a rate of new employment well below the long-term trend, both of which profoundly impact the underlying fundamentals of commercial real estate.
While the federal elections were impactful, of far greater importance to many sectors of our commercial real estate market locally will be the result of our upcoming mayoral election.
Overwhelmingly, market participants feel that a candidate from the Republican field would be the best choice, purely from a business/real estate perspective. Unfortunately, they also overwhelmingly agree that the chances of a Republican winning this fall are very slim.
On the Democratic side of the slate, the candidates are almost unanimous on the two issues most important to the business and commercial real estate communities: taxes and housing.
Regarding taxes, there are two areas to consider: personal taxes and real estate taxes. On the personal tax side, taxes will certainly increase. Whether it is for folks making over $1 million, $500,000 or $250,000 per year, personal taxes will go up on some segment of the population.
One of the most significant tasks for the next mayor will be negotiating municipal labor union contracts, all of which have expired. The issue of retroactive pay increases is a critical ingredient in these negotiations, and estimates of the cost, if these are granted, have ranged from $3 billion on the low end to as much as $10 billion. The catch is that there is no revenue in the budget to pay for this. In the various forums they have participated in, all of the candidates have ducked the question of whether they support retroactive pay, saying they “won’t negotiate in public,” but truthfully, they are all seeking union support and endorsements and wouldn’t dare say anything to jeopardize that potential support. If the next mayor comes from this group, it is likely the retroactive increases will be granted and will be paid for with large increases in real estate taxes. On the real estate tax front, New York City properties already bear the most onerous burden, as a percentage of revenue, in the U.S., so any increases would only exacerbate that problem.
On the housing front, the outcome, if a Democrat is elected, could be far worse. Each candidate supports an affordable housing program that would dictate that all construction be done by union contractors, pursuant to project labor agreements that the candidates naïvely believe will be negotiated at nonunion wage rates. It is tough to get concession in a negotiation when a counter-party knows you have to deal with them.
On the rent regulation front, all but one of the candidates is advocating for a rent-increase freeze on regulated units. The candidate who indicated that modest increases were necessary to protect small owners had his campaign swiftly announce that his position was “mischaracterized.” We have already had clients selling regulated properties in anticipation of an extraordinarily pro-tenant administration next year.
If the majority of political pundits are correct, we will be moving into a period in which the private sector will have much less incentive to invest in upgrading the housing stock, we will have fewer desperately needed affordable units built, ever-increasing personal taxes and soaring real estate taxes.
Pass the Alka-Seltzer!