A New York Story: Real Estate And Credit Quality

By Stephen Cowie

Bottom-up municipal research can often help find clarity amid negative sector news.

Despite the continued headlines about recession risk and its potential impact on government finances, we believe the investment landscape for municipals is constructive with many solid opportunities—take New York City, for example.

Much has been written about the negative impacts of the new hybrid working environment on the Big Apple’s office sector and overall financial position. In particular, officials have warned that vacancy rates in Manhattan are likely to exceed 20% for most of this decade, far above the sub-11% level seen for decades. However, it's important to note that while NYC’s offices account for 20% of its property tax revenues and, ultimately, 10% of its overall revenues, the slowdown in the city’s finances may not be as acute as the headlines imply. In fact, our analysis of the size of the potential revenue loss and its overall impact on the city’s $100+ billion suggests that the impact will likely be manageable.

Looking at comments from City Comptroller Brad Lander, a worst-case scenario for the city would likely be a 40% decline in the value of office properties from 2023 to 2029, which would result in a $322 million revenue shortfall in 2025 and a $1.1 billion shortfall in 2027. Although these sound like large numbers, the latter would only amount to 1.4% of city tax revenues, which could be covered by additional revenue sources or expenditure reductions. As a result, we continue to favor New York City general obligation debt for suitable clients.

More broadly, we remain constructive on municipal credit across the U.S., given the sector’s overall financial strength and its ability to withstand an economic downturn. States and cities, in particular, have various tools in their arsenal to adjust revenues and expenditures for any material challenges. For example, we are seeing many states and local governments adjust their fiscal 2024 budgets to better reflect a slower economic environment, while often prioritizing continued rainy day reserve funds. A case in point: New York City’s fiscal 2024 budget of $107 billion includes a reserve fund balance of $8 billion, which could aid the city during financial downturns that may emerge in the coming years.

In other words, a dichotomy between perception and reality may exist in New York City, or any other locality that issues bonds—reinforcing the value of credit research in finding opportunity across the municipal landscape.

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