New York by the Numbers: Monthly Economic and Fiscal Outlook No. 68 – August 8th, 2022

A Message from the Comptroller

Dear New Yorkers,

We got some rare good news from Washington yesterday, as the U.S Senate passed the Inflation Reduction Act.

The Act will invest over $350 billion in renewable energy infrastructure including solar and wind (with strong labor standards to ensure good jobs), provide incentives for making homes more energy efficient and purchasing electric vehicles, lower the cost of prescription drugs, and extend Affordable Care Act subsidies. The bill is not perfect, of course, and we still urgently need action on housing, child care, and strengthening our democracy. But especially coming at a moment when the prospects looked bleak for any federal action on climate, it is a big leap forward.

That good news comes as the economic horizon remains choppy. The economy is giving mixed signals, with negative GDP for the second consecutive quarter (traditionally a sign of economic downturn) and a declining stock market alongside strong job growth. Meanwhile, consumers continue to feel the effects of high inflation, still-climbing rents, and rising interest rates.

This month's spotlight takes a deep dive into changes to office occupancy in NYC due to the pandemic-driven rise in hybrid and remote work. We take a look at short- and long-term trends,and analyze survey data comparing employers' expectations and employees' preferences for the future.

This is a pivotal moment to begin to reorient our city to tackle long-term questions, as the ecosystem shifts away from a traditional 9-to-5, Manhattan-centric office model, with more flexible remote work and more precarious gig work. The Inflation Reduction Act and the Infrastructure Investment and Jobs Act are huge opportunities to make long term, job-generating investments in projects which will secure a thriving economy for the next generation. We'll need to match them with creative thinking and action locally if we want New York City to thrive amidst change.

Another good reason to keep watching the numbers.

Sincerely,

Brad Lander

The U.S. Economy

• Adjusted for inflation, U.S. Gross Domestic Product declined by 0.9% in the second quarter of 2022 following a 1.6% decline in the first.
• Nonetheless, U.S. employment continues to grow, with employers adding 528,000 jobs in July, led by 96,000 jobs in leisure and hospitality.
• The U.S. unemployment rate edged down to 3.5% in July, from 3.6% in June; and average hourly earnings in July rose 15 cents to $32.27, a 0.5% increase from June.
• In June, the Consumer Price Index (CPI) for all items rose 9.1% from the previous year, the largest increase since December 1981.
• To address rising inflation, the Federal Reserve increased the target Federal funds rate by 75 basis points on July 27^th, bringing the targeted range up to 2.25-2.5%. Robust jobs growth in July and continued high inflation mean that the Fed will keep on a path of higher interest rates.

NYC Inflation

• June consumer prices in the New York City area rose 6.7% from a year ago, driven by food and energy prices (Chart 1), but increased less than the record U.S. rate of 9.1% (see the spotlight in Monthly #65 for a discussion of the divergence between NYC and national inflation rates).
• Measured annual increases in rents (2.1%), and owners' equivalent rent of residences (2.3%), were modest because many renters have not yet been impacted by the recent surge in New York City asking rents (likely due to rent regulation).
• Rising interest rates will put additional upward pressure on rents by making purchasing homes more expensive, potentially driving New York City inflation higher going forward.[1]

Chart 1

SOURCE: Bureau of Labor Statistics

NYC Labor Markets

• On a seasonally adjusted basis, New York City added about 22,000 private jobs in June. Employment is now at 3.9 million jobs, about 185,000 (4.5%) below the employment peak of 4.1 million in February 2020 (Table 1).
• Employment in the Information sector is now 10,600 (4.6%) above pre-pandemic levels, and employment in Healthcare and Social Assistance 23,900 (2.9%) above pre-pandemic levels.

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

• Unemployment rates for Black and Hispanic New Yorkers remain above the citywide rate at 10.3% and 6.7%, respectively. (Chart 2).

Chart 2

SOURCE: Current Population Survey

NYC Real Estate & Housing

• Second quarter data from Cushman & Wakefield shows a continuing recovery in Manhattan's retail sector, with availability declining from the first quarter in most major submarkets (Chart 3).
• The greatest exception is the Herald Square/W. 34^th Street submarket, where availability has increased steadily from 23.7%% in the third and fourth quarters of 2020 to 42.4% in the second quarter of 2022.

Chart 3

SOURCE: Cushman & Wakefield

• Data from Streeteasy shows median New York City residential asking rents jumped again to $3,500 in June, up from $3,325 in May, a 5% increase in a single month, and from $2,600 in June of 2021, an annual increase of almost 35% (Chart 4).
• The Streeteasy data reflect primarily apartment listings in Manhattan and Brooklyn, and to a lesser extent Queens, but rents are likely increasing in other areas of the city as well. Many non-regulated renters who found bargains during the pandemic are facing steep rent increases when renewing leases.
• The number of apartments listed as available rose to 30,221 in June, up from 28,768 in May, but remains well below the 51,996 in June 2021.

Chart 4

SOURCE: Streeteasy.com

• The number of people in families with children residing in New York City homeless shelters rose to 30,366 on July 31^st, up from lows close to 25,000 earlier in the year (Chart 5). The recent rise of almost 5,000 is earlier and already larger than seasonal increases of 2,000-3,000 in 2018 and 2019, increases that have typically begun in summer, but continued well into fall.
• The arrival of migrants seeking asylum from border states to New York City is a factor driving shelter demand.
• Looking ahead, spiking rents and the continued arrival of asylum-seekers are likely to further accelerate the need for shelter.

Chart 5

SOURCE: NYC Department of Homeless Services, via Opendata

New Yorkers' Mobility

• Weekday ridership on MTA subways, buses, and commuter rails dropped slightly from the June, with subway ridership dipping to 56% and bus ridership falling to 62% of pre-pandemic levels.
• Subway ridership on the weekends is much closer to pre-pandemic levels (67-68%) than on the weekdays (54-58%), reflecting the decline in office occupancy (Table 2).
• Weekday subway ridership by the day of the week follows a similar pattern to office occupancy (see the Spotlight) with estimated subway and bus ridership on Mondays and Fridays somewhat lower than Tuesdays through Thursdays, both in total and relative to pre-pandemic levels, though not as significantly.
• Bus ridership shows much less variance by day of the week, relative to pre-pandemic levels (61-63%).

Table 2: Subway and Bus Ridership by Day of the Week

SOURCE: Metropolitan Transportation Authority, Day-by-Day Ridership NumbersNOTE: Excludes federal holidays.

City Finances

Hotel Occupancy Tax Revenue

• New York City hotel occupancy tax revenue, which collapsed at the height of the pandemic, recovered significantly in the second quarter of 2022, more than quadruple what it was in the second quarters of 2020 and 2021, and 88% compared to 2019 Q2. 2021 Q3 revenue was affected by a tax program (Chart 6).
• A recent CBRE report highlighted that the relative strength in the recovery of leisure versus business travel has contributed to stronger hotel performance in southern markets relative to northeastern and west coast markets that rely more on corporate travelers.

Chart 6

SOURCE: FMS

Cash Balances

• The City's central treasury balance (funds available for expenditure) stood at $10.7 billion as of Wednesday, August 3rd compared to $11 billion at the same time last year.
• 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. On August 3rd, we updated our June 1st forecast to incorporate several changes in the Fiscal 2023 Adopted Budget Agreement from the City's Executive Plan which had implications on the year-end Cash Balance.

Spotlight

Office occupancy in New York's market: what do we know?

The Covid-19 pandemic prompted a major shift in the organization of work, as office workers shifted dramatically to remote and hybrid schedules. The data suggest those changes are here to stay, but the impacts of these shifts are only beginning to be felt. We don't yet know to what extent office-using businesses will reduce their per-worker footprint, how a structural shift in demand would affect office vacancy rates and rents, or how owners and tenants might repurpose vacant space through "adaptive reuse." These shifts, of course, will affect transportation needs, commercial and residential land use patterns, tax revenues, and many other aspects of the City's economy.

In order to bring some data to these critical questions, in this spotlight we look at the current state of Manhattan's office market. In section 1, we summarize relevant trends in the past 30 years. In section 2, we look at effective office occupancy over the past 2 years. In section 3, we consider the impact of office occupancy on economic activity by geography. In Section 4, we analyze survey data from the Partnership for NYC and WFH Research to assess employers' and employees' preferences about future office use.

Section 1: Jobs and Vacancy Rates

In Chart S.1, we plot Manhattan office vacancy rates (left axis) and office-using payroll jobs.[2] We define office-using jobs as those belonging to office-intensive industries: Finance & Insurance, Real Estate, Information, and Professional & Business services. There are three distinct periods:

1. 1990-2011: periods of job growth correspond with declines in the vacancy rate, and vice versa (as would be anticipated based on simple rules of supply and demand). In this period, the vacancy rate averages 11.4% and has a standard deviation of 4.2 percentage points.
2. 2012[3]-2019: the vacancy rate remains approximately constant while office-using jobs grow significantly. In this period, the vacancy rate averages 9.6% and its standard deviation is 0.8 percentage points.
3. 2020-present: hybrid work schedules prompted by the pandemic introduce structural changes in the office market. Office-using jobs peak at nearly 1.5 million in the first quarter of 2020, drop to 1.35 million in the second quarter and third quarter of 2020, and start recovering thereafter with an average quarterly gain of 19.3 thousand jobs. Office-using jobs are only 12,000 short of their peak in the second quarter of 2022 but the vacancy rate is 21.5%, nearly double the 11.3% rate in the first quarter of 2020.

Chart S.1: Office-using jobs and Manhattan's office vacancy rate

SOURCE: Cushman & Wakefied, NYC OMB, NYC Comptroller's Office

To show structural trends, in Table S.1 we compare office-using jobs, office inventory, and space demanded per job[4] at the beginning of the three periods and in the second quarter of 2022. There are three takeaways:

1. 1990 Q1 - 2012 Q1: jobs, inventory, and space per job remained relatively constant;
2. 2012 Q1 - 2020 Q1: jobs grew by 22.3% (+272 thousand), net supply increased by 3.5% (+14 million square feet), and space per job declined -17.5% (-51 square feet). In this time period, the growth in office-using jobs and the reduction in space per job was remarkably linear and steady at 8.8 thousand jobs per quarter and -1.5 square feet per quarter, respectively.[5] In other words, instead of being reflected in lower vacancy rates, job growth after the Great Recession resulted in the densification of office space through open-plan configurations, smaller workstations, and shared desks.[6]
3. 2020 Q1 - 2022 Q2: at the end of this period, jobs had declined by -0.8% (-12 thousand), net supply increased by 1.6% (+7 million square feet - msf), and space per job declined -9.3% (-22 square feet). Of note, is the strength of completions, with large buildings such as One Vanderbilt (1.75msf) and 50 Hudson Yards (2.9msf) coming online during this period. A total of 13.3msf is estimated to be under construction as of the second quarter of 2022. In this period, the decline in space per job accelerated despite the near complete job recovery due to the significant increase in direct and sublease vacant space. Space per job increased only temporarily at the beginning of the pandemic but resumed its decline soon afterward.

Table S.1: Office-using jobs, inventory, and space demanded per job

SOURCE: Cushman & Wakefied, NYC OMB, NYC Comptroller's Office

Section 2: Effective office occupancy in NY

We use Kastle System data[7] and Google's community mobility reports[8] to show how office attendance has evolved in the past 2 years, and how it affects economic activity in the New York City metro area. We start with office attendance data, which reports the percentage of swipes into buildings served by Kastle Systems relative to the pre-Covid baseline.[9] We will refer to this measure as "effective occupancy." Daily data are available for the 10 largest metro areas.[10] While there is no specific information on where buildings are located in the metro area, office space is disproportionally concentrated in Manhattan and the Kastle data track well with the surveys conducted by the Partnership for NYC (PFNYC), which are discussed in the next section.

Effective office occupancy has accelerated and peaks on Tuesdays and Wednesdays. In Table S.2 we summarize effective occupancy in NY in the second quarters of 2020, 2021, and 2022, by day of week. As it is well known, effective occupancy dropped dramatically after the stay-at-home orders in March 2020 and was just 6.0% of baseline in the second quarter of 2020. Occupancy was uniformly distributed over the workweek. By the second quarter of 2021, effective occupancy had risen to 17.9%, with peaks above 20% on Tuesdays and Wednesdays. In the second quarter of 2022, effective occupancy reached 38.6% and hybrid schedules are in starker display with occupancy peaking around 47% on Tuesdays and dipping to 34.6% on Mondays and 21.2% on Fridays.[11] Year over year, effective occupancy accelerated significantly except for Fridays.

Table S.2: NY's effective office occupancy 2020 Q2 - 2022 Q2

SOURCE: Kastle Systems, NYC Comptroller's Office.

NY is closing the gap in effective office occupancy relative to other metro areas. Not only did NY gain effective occupancy, but it considerably narrowed the gap with the average of the other nine markets which opened up at the beginning of the pandemic, when New York was hit much harder by Covid-19 than other cities.[12] Table S.3 shows that NY's gap went from 13.5 to 5.0 percentage points in the second quarters of 2020 and 2022, respectively. Moreover, the gap went from being distributed quite uniformly across workdays in 2020 and 2021 to being concentrated on Mondays and Fridays. In June 2022, the Tuesday-Thursday gap was essentially eliminated.

Table S.3: NY's effective occupancy gap relative to the US metro area average

SOURCE: Kastle Systems, NYC Comptroller's Office.

Section 3: Impact of office occupancy on economic activity by geography

To show how office occupancy affects the level of economic activity, we merge Google's community mobility reports to the Kastle data. Google's data provides the percentage of visits at workplaces and retail and recreation establishments relative to the pre-Covid baseline established between January 3 and February 6, 2020.[13] The reports are available at the county level, and we divide NY's MSA in four areas: Manhattan, rest of NYC, inner MSA counties, and outer MSA counties. Inner MSA counties are New York State and New Jersey counties that have higher pre-Covid commuter flows into the City and are generally geographically closest to NYC.[14]

Table S.4 provides summaries for the NY MSA geographies and shows several trends.[15] First, visits to workplace, and retail and recreation establishments have increased over time in all geographies. Second, visits to retail and recreation establishments recovered more than visits to workplaces. Third, with the exception of retail and recreation in outer MSA counties, the recovery remains incomplete as of the second quarter of 2022. Finally, Manhattan consistently trails the other geographies, due to the concentration of office space and workers.

Table S.4: Effective occupancy and NY metro regions mobility indicators

SOURCE: Google Community Mobility Reports, NYC Comptroller's Office.

An increase in NY office occupancy reduces retail and recreation activity outside of Manhattan. In Table S.5 we report the correlation between a 1 percentage point increase in effective office occupancy in the NY metro area and the mobility indicators across geographies within the NY MSA.[16] The table shows that in Manhattan a one percentage increase in effective occupancy is correlated with a 0.42 percentage point increase in visits to workplaces and 0.28 percentage point increase in visits to retail and recreation establishments. In the other MSA regions, the correlation with visits to workplaces is weaker (0.09 to 0.14 percentage points), as to be expected from the concentration of office space in Manhattan.

Furthermore, a one percentage point increase in NY effective occupancy is associated with a decrease of between 0.07-0.19 percentage points in retail and recreation activity in the other MSA regions. When Manhattan office workers are working from home in areas outside of Manhattan, they are more likely to frequent retail and recreation venues in those areas. This is consistent with our discussion in last month's spotlight of the shift in new business establishments from Manhattan to the outer boroughs (especially Brooklyn).

Table S.5: Change in workplace and retail/recreation activity associated with effective occupancy

SOURCE: NYC's Comptroller Office.

Section 4: Projected effective occupancy based on survey data

The Partnership for NYC (PFNYC) started a survey of employers to gauge office occupancy in 2020. In October 2021 and April 2022 the survey asked for the average daily occupancy among the surveyed firms, the breakdown of in-person attendance (0 through 5 days per week), and employer's expectations a few months ahead.[17] As of the April 2022 survey, 78% of the respondents indicated the intention to adopt a hybrid office model post-pandemic, up from just 6% pre-pandemic.

Additionally, we draw estimates from the WFH Research survey microdata to estimate employees' post-Covid desired workweek schedule.[18]

Short-term employers' expectations suggest a gradual increase in effective occupancy. Employees' preferences are close to current effective occupancy levels. Table S.6 shows that average in-person days per week grew from 1.4 (28% average effective occupancy) to 1.91 (38% average effective occupancy)[19] between October 2021 and April 2022. The largest contributor was a 26-percentage point reduction in the share of fully remote workforce. Between October 2021 and April 2022, employers' short-term expectations stabilized around 49% average daily effective occupancy. The median schedule moved from zero days in October 2021, to 2 days in April 2022, while employers' expectations remained anchored at 3 days for one third of the workforce. In April, employers' expectations shifted to fewer fully remote (14% vs. 21%) and fewer full-time (9% vs. 13%) schedules, and more 1- and 2-day schedules (collectively 32% vs. 22%).

The WFH Research surveys ask employees for their desired post-pandemic work schedule and we report responses given in the second quarter of 2022 for those in office-using industries in New York State and New Jersey.[20] This survey suggests that employees' preferences are on average not far from current effective occupancy levels, at around 2 days per week. There is a meaningful gap at the 3 day a week level: employer's report that 17% of their workforce worked at this level in April (up from 12% in October 2021), not far from the 14% of employees who say they prefer it; however, employers projected that 33% of workers will be at this level within 5 months of the survey (September 2022), the same percentage projected in the prior survey).

Table S.6

SOURCE: Partnership for NYC, WFH Research, NYC Comptroller's Office.

Some Tentative Conclusions

Attendance in NY's offices has improved markedly since the start of the pandemic and has reached approximately 40% in the second quarter of 2022, comparable to the average of other metropolitan areas as tracked by Kastle Systems data. However, based on current data, employers' expectations, and employees' preferences, these rates have largely stabilized and appear unlikely to rise quickly in the coming months.

Meanwhile, the vacancy rate for office space in Manhattan in the second quarter of 2022 was 12 percentage points above the 2012-2019 average (21.5% vs. 9.6%), or close to 50 million square feet. Whether this remains the amount of excess supply in the market will depend on how hybrid work schedules will settle in the long run, and how office employers adjust (and potentially reduce) their space-per-worker as their leases expire. Some estimates project that demand for office space will decline by about 10%[21] but these estimates rely on average occupancy of about 3.5 days per week, well above either employers' projections or employees' preferences in recent surveys.

Spotlight Prepared by: Francesco Brindisi, Executive Deputy Comptroller.

Endnotes

[1] https://finledger.com/articles/rising-mortgage-rates-continue-to-fuel-rental-demand%EF%BF%BC/

[2] Office market statistics are from Cushman and Wakefield's Manhattan Marketbeat reports, the latest of which is available here: https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/new-york-city-area-marketbeats. Jobs data are payroll jobs in NYC and are benchmarked annually to the Quarterly Census of Employment and Wages (QCEW), which includes all employers subject to contribution to NYS employment insurance system. We use quarterly averages of monthly seasonally adjusted data released by the NYS Department of Labor. Seasonal adjusted data are published by NYC OMB and are available here: https://www1.nyc.gov/assets/omb/downloads/csv/nycemploy-sa06-22.csv.

[3] We chose 2012 because it is the year when job growth (jobs reached a cyclical trough in 2009q4) stopped being reflected in a lower vacancy rate.

[4] Space demanded per job is given by total office demand in square feet (inventory minus direct and sublease vacant space) divided by office-using jobs.

[5] These coefficients were derived from separate regressions of office-using jobs and square feet per job on a linear time trend and a constant. The trends fit most of the variation in the series.

[6] QCEW data by county shows that Manhattan's share of NYC office-using jobs was 82.7% in 2012 and 82.8% in 2019. Because office-using jobs grew in Manhattan and in the other boroughs at the same rate, the trend of square feet per job is a good proxy for Manhattan office space densification. The densification trend is not unique to NYC [SOURCE].

[7]Kastle Systems - Data Assisting in Return to Office Plans

[8]COVID-19 Community Mobility Reports (google.com)

[9] According to Kastle Systems, the data are from 2,600 buildings and 41,000 businesses across 47 states (https://www.kastle.com/safety-wellness/getting-america-back-to-work/). In the analysis, we show that the NY sample appears to conform to data from other sources and surveys.

[10] The markets are: Austin, Chicago, Dallas, Houston, Los Angeles, New York, Philadelphia, San Francisco, San Jose, and Washington DC.

[11] The data excludes holidays. Seasonal variations are accounted for by comparing the second quarter across years.

[12] It should be noted that the three markets in Texas (Austin, Dallas, and Houston) have consistently higher effective occupancy than the average. On the other hand, San Francisco and San Jose show the lowest effective occupancy.

[13] The mobility reports include indexes for visits to workplaces, retail and recreation (restaurants, cafes, shopping centers, museums, movie theaters, etc.), grocery and pharmacy, and transit stations. Workplaces include offices as well as others not captured by the other indexes.

[14] The geographies are from NYC Planning (2019) The Ins and Outs of NYC Commuting, https://www1.nyc.gov/assets/planning/download/pdf/planning-level/housing-economy/nyc-ins-and-out-of-commuting.pdf.

[15] The Goodle community mobility data are restricted to days when Kastle System data are also available.

[16] The coefficients are obtained from regressions of daily attendance at workplaces and retail/recreation establishments on NY effective occupancy, day-of-week and quarter fixed effects, the increase in the time spent at home relative to pre-Covid baseline (also provided by Google's community mobility reports and included to control for overall - not necessarily workplace-related - mobility in the geographical area) and, in the case of Manhattan, the percentage of visitors to transit stations factor in activity driven by visitors and tourists (which have been concentrated in weekends during the recovery). Workplace regressions include workplace attendance in the US (minus NY MSA) to control for the general increase in economic activity. For the same reason, retail/recreation regressions include US (minus NY MSA) attendance at those establishments. All reported coefficients are statistically different from zero.

[17] The survey results are available at https://pfnyc.org/research/survey-of-employers-november-2021/ and https://pfnyc.org/research/return-to-office-survey-results-may-2022/. Roughly 50% of the sample is composed of firms in financial services and real estate.

[18] Data are available here: Data | WFH Research. The project is ongoing and originally published in Barrero, J.M., Bloom N., and Davis S.J. (2021) "Why Working from Home Will Stick," National Bureau of Economic Research Working Paper 28731.

[19] PFNYC survey results are close to the monthly averages in Kastle Systems' data: 30% in October and 36% in April.

[20] We interpret the response "Rarely or never work from home" as 5 days in the workplace. We limit the tabulations to those that answer the question and report having an employer.

[21] See https://www.cbre-ea.com/publications/deconstructing-cre-post/deconstructing-cre/2021/03/18/remote-work-implications-for-office-sector-forecasting, and https://www.cbre.com/-/media/project/cbre/shared-site/insights/briefs/ea-featured-brief/us-future-in-focus-q2-2021-office-sector.pdf.

Contributors

The Comptroller thanks the following members of the Bureau of Budget for their contributions to this newsletter: Andrew McWilliam, Director of Economic Research (we're grateful to have you back, Andrew); Selçuk Eren, Senior Economist; Steve Corson, Senior Research Analyst; Steven Giachetti, Chief Economist; Irina Livshits, Chief, Fiscal Analysis Division; Marcia Murphy, Senior Economist; Eng-Kai Tan, Bureau Chief - Budget; Krista Olson, Deputy Comptroller for Budget; and Francesco Brindisi, Executive Deputy Comptroller.

Central Treasury Cash Balances Past 12 Months vs. Year-Ago