Covid-19 Clobbered Manhattan. Lower Rents Could Seed Recovery.
Shutdowns and other changes brought on by the pandemic have bruised Manhattan’s economy. But because rents for storefronts, apartments and workspaces have been pushed down to their lowest levels in years, new small businesses and residents have moved in.
By Konrad Putzier | Photographs by José A. Alvarado Jr. for The Wall Street JournalMarch 26, 2021 1:12 pm ET
Yamoni Bari, a product manager in New York City, lost his job at a financial tech company near the beginning of the pandemic. So with his wife and brother, he decided to try his hand at starting a business.
The three of them set out to launch a food delivery service, a booming industry at a time when restaurants were closed. They looked at sites around Queens and Brooklyn. To their amazement, the best deals were to be found across the river, in Manhattan.
They spotted a location in the trendy Lower East Side neighborhood, where a ramen place operated before it closed early in the Covid-19 pandemic. The rent was so low that the Baris decided they could afford to run a sit-down restaurant rather than just delivery. They opened Meat & Bread in January, serving American fare influenced by New York’s diverse cuisines.
They still can’t believe the deal they struck with their landlord: a five-year lease with a monthly rent of $5,500. That was barely half what the previous tenant paid, and four months were free. “We were not expecting him to say yes, to be honest, with that location in Manhattan,” said Khadija Bari, Mr. Bari’s wife.
At the start of the pandemic, sky-high residential and commercial real-estate values had made Manhattan unaffordable for many. Three decades of rising prices for nearly every type of property had made the borough largely a place where big companies operated and wealthy people lived.
After a year of economic shutdowns and other changes brought on by Covid-19, rents for Manhattan storefronts, apartments and workspaces have been marked down to their lowest prices in years. That is already bringing in new small businesses and residents, and has the potential to change the character of the city’s most-exclusive borough.
Price declines are a symptom of economic stress, and they hurt the finances of New York, which depends on real estate-related taxes for about half its tax collections. Falling rental income, if sustained, leads to lower tax assessments over time.
The pandemic has hurt many of the city’s small shops and restaurants, forcing them to close. Manhattan businesses are also struggling with the steep loss in revenue from tourism, entertainment and workers in offices. Last year, between March 1 and Aug. 31 alone, 7,100 businesses in New York City closed permanently, according to Yelp Inc.
At the same time, new businesses have opened. New York state as a whole saw its highest number of new businesses launched last year since 2007, according to U.S. Census Bureau data compiled by the Federal Reserve Bank of St. Louis. New York City retail leasing by number of deals is still below pre-pandemic levels. But with landlords showing flexibility, the number of monthly deals in February was more than double the low of the previous spring, according to CoStar Group.
Average Manhattan apartment rents, meanwhile, fell 12% last year, according to Moody’s Analytics.
For years, the incomes of many families haven’t kept pace with Manhattan real-estate costs. The average Manhattan apartment rent soared by around 230% since 1990 to a peak of $4,751 in 2019, according to Moody’s Analytics. That dollar figure was triple the national average.
During that time period, median household income nationwide increased by 114%, according to Moody’s Analytics.
In 1990, Manhattan’s median household income was about the same as the national average. By 2019, it was about 40% higher, following years of rising white-collar wages and an influx of college graduates.
Pandemic shutdowns and job losses have pushed some Manhattan households into poverty, but in part due to federal aid, household incomes overall in Manhattan weren’t projected to register a fall in 2020, according to Moody’s Analytics.
The revival of big cities around the country in recent decades pushed up demand for Manhattan’s apartments and offices, while a lack of office construction in Manhattan following the savings-and-loan crisis kept supply in check, said Victor Calanog, head of commercial real-estate economics at Moody’s Analytics. That led to higher rents.
More recently, property developers built a succession of luxury condo towers across a midtown corridor known as Billionaires’ Row, altering the iconic Manhattan skyline and casting long, thin shadows across the southwest corner of Central Park. Many of these towers catered to wealthy out-of-towners, who in some cases left their apartments empty most of the year.
New York developer Related Cos. created Hudson Yards, a multiblock, city within the city development near the Hudson River that caters primarily to the affluent. It features multimillion-dollar residences, shops selling European luxury goods and a members-only food and wine club decorated with vintage Belle Époque prints.
The city’s high-end stores and restaurants have also suffered during the pandemic, as wealthy people left the city, and some luxury apartment towers have high vacancies.
New York “has gotten richer and richer and less and less interesting, particularly in Manhattan,” said Fred Wilson, co-founder of New York-based venture-capital firm Union Square Ventures. “Lower rents, particularly if they are sustained, will be terrific for street level retail and restaurants.”New York City’s new retail-lease signingshave started to recover from the worstmonths of the pandemic.Number of newly signed leases in the metroarea, change from the month’s average inprior three-year periodSource: CoStar Advisory Services%2020’21-80-60-40-200
It is possible Manhattan’s rental prices won’t remain this low for long. Many new retail leases include annual increases that will bring rents close to 2019 levels after a couple of years, brokers say. Some landlords are signing short-term leases or keeping space off the market, betting that they can find new tenants at higher rents after the economy recovers. Spectacular bargains on apartment rents may come from one-time concessions such as rent-free periods.
But the new popularity of remote work might help sustain lower commercial and residential rental rates. Many companies say they need less office space, while more households are open to moving farther away from Manhattan.
In the meantime, price markdowns are attracting new residents, while enabling existing ones to trade up for more space and better amenities. In February, new residential lease signings in the borough were the highest for that month since Miller Samuel Inc. started tracking them in 2008, the real-estate appraiser and consultant said.
Ashley Veli is one of the newcomers. A general manager for the furnished-apartment company Zeus Living, she and her husband left Queens and moved in with her parents in New Jersey after Covid-19 struck. “We were there for a couple of months and really missed the city,” Ms. Veli said.
When the couple went house hunting in Manhattan, to their surprise they found a two-bedroom apartment in the Upper East Side for $4,015 a month, only $100 more than the rent on their previous, smaller apartment in Queens. “We were, like many people, floored by the prices we could get in Manhattan,” she said.
A subway ride downtown from that neighborhood, the Swiss investment adviser Alpha Leonis Partners AG is opening a New York office ahead of schedule, in part to take advantage of inexpensive real estate.
“It just accelerated and kind of caused us to say, OK, now’s a good time to do it,” said the company’s chief executive officer, David Pinkerton. The company is close to signing a two-year lease for a small space near Union Square at a rent below pre-Covid levels.
A number of Manhattan’s big-box retailers have opted to close, scarred by sales losses during the pandemic and, in some cases, high rents from the leases they signed in the past.
Luxury department store Neiman Marcus shuttered its glittering Hudson Yards flagship location as part of its bankruptcy proceeding. Designer discount retailer Century 21 last year said it would close all its stores. Bed Bath & Beyond pulled out of a location on the Upper East Side.
Agnes Kanga, a former partner at a clothing manufacturer, started searching for a space for her own clothing boutique last year. In October, as rents fell by as much as half, she opened a shop on the corner of Lexington Avenue and East 70th Street on the Upper East Side, one of Manhattan’s wealthiest neighborhoods.
With department stores closing, Ms. Kanga said she hopes that will enable small shops like hers to thrive. “I think the boutiques, they will come back to life,” she said.
She considers her $3,500-a-month rent for the first year a bargain, especially after securing an $80,000 pandemic-relief loan from the Small Business Administration. Ms. Kanga signed a two-year lease, an unusually short period, which she wanted. Her broker James Famularo of Meridian Capital Group said landlords would never have made a deal like this in 2019. “They would have thought it was a waste of time,” he said.
Mark Bucher has been trying to break into the Manhattan restaurant market for a decade. The co-owner of Medium Rare Restaurant Group, which owns three steak-frites eateries in the Washington, D.C., area, said he was priced out of the borough. “There was a point where certain parts of New York just became…it was insanity,” he said. “And there’s just no way any smart business person would open up a business paying $150, $200 a foot in rent. You can’t survive.”
Now Mr. Bucher is scouring attractive and reasonably priced spaces in Chelsea, Greenwich Village and Midtown for his Manhattan outpost. Building owners are offering concessions such as two years free rent on 10-year leases, and in some cases effective rents are around 50% lower than before the pandemic, he said.
Less expensive real estate is also rescuing longtime Manhattan tenants whose days in their neighborhoods looked numbered before the pandemic struck. Over in Midtown’s garment district, an influx of tech companies helped drive up rents and pushed out many of the neighborhood’s trademark clothing manufacturers. In what had become a familiar scenario, an investor group in 2019 bought a 100-year-old building occupied by dozens of garment firms, who mostly used their spaces as showrooms. The new owner told them their leases wouldn’t be renewed to make way for a redevelopment.
“It was very difficult to find a new home for these folks, because rents in the area were much higher than what these people were accustomed to paying,” said their real-estate broker Evan Margolin of Savills Inc.
Yet over the past year Mr. Margolin has been able to find new spaces close to their old location for a number of the garment companies—in some cases at rents more than 25% below pre-pandemic levels.
For the family running Meat & Bread, the new business reminds them of a time when Manhattan was more accessible. Mr. Bari and his brother, Azizul, immigrated as children with their family from Bangladesh and grew up in the Lower East Side in the 1980s before they moved to the Bronx, where housing was cheaper.
After signing the restaurant lease, Mr. Bari showed his wife where he went to school and the park where he used to play. “It just gave another layer of meaning,” Ms. Bari said, “to be back, again a part of the community.”
Write to Konrad Putzier at firstname.lastname@example.org