Do the Math | Our Take June 2024

Now’s the time for big thinking about the Big Apple’s future. [Click here.]( to view with images. To ensure delivery to your inbox, please add [CBRE Group Inc.](mailto:Capitalmarkets@cbrecommunications.com) to your address book. [OurTAKE logo] Expert perspectives on what matters most in commercial real estate June 2024 This month, Mary Ann Tighe writes about building for the future of New York City. Do the Math [Author Photo]( 6-min read By [Mary Ann Tighe]( Chief Executive Officer, New York Tri-State Region [Leave It to the Experts] Now’s the time for big thinking about the Big Apple’s future. We’re living through an evolution of our urban environments, as many cities grapple with the impact of hybrid working and the changing needs and desires of their residents. But despite the frequent headlines to the contrary, I can assure you that [cities aren’t going anywhere](. At their best, cities are places where ideas morph into actions, cultures mix and influence one another and opportunities are in the air. Cities, now and in the future, [drive the global business]( and cultural conversation. And in the pantheon of cities, New York stands out. The largest city by population in the world’s No. 1 economy, New York has long been in the vanguard of finance, business, media and culture—America’s quintessential gateway. The city is a symbol of ambition, a hub of innovation and diversity and a testament to a collective will to survive and thrive—[constantly building and rebuilding itself](. At our best, New Yorkers show a fierce commitment to evolve that also makes the City the ultimate incubator for testing what works, what’s next and what’s best. But when it comes to building for our future—to getting down to the basics—we’re not always at our best. Case in point: trying to do big, consequential real estate projects. The math of real estate is simple, but immutable. You cannot finance a project that pencils out at a loss. If a developer can’t make the math add up, the project won’t happen. It’s that simple. And when you tally up all the costs and impediments to build here in New York, you can start to see how the math simply doesn’t work. Construction costs, timelines for zoning and permitting, labor contracts and taxes are part of the equation everywhere, of course. In New York, however, these are anything but straightforward calculations, with complexity layered upon complexity. Let’s start with zoning. When I was chairman of the Real Estate Board of New York, we prioritized the rezoning of Midtown East. Why? The 1961 code had inadvertently downzoned that submarket, New York’s most valuable office district, making it impossible to tear down a building because you could never rebuild to the same size. Consequently, the average age of a Midtown East office building was over 70 years. Fast forward to today and we have [successful rezoning]( that encourages new towers to rise on the sites of old, often obsolete properties. It took years to get where we are now. The rezoning of Midtown East was first proposed near the end of Mayor Bloomberg’s final term in 2013. Ultimately, it was passed during Mayor de Blasio’s administration in the summer of 2017—and just in the nick of time. In the years since, the market has effectively told us how desperately we need new office buildings—a need [accelerated by the pandemic](. Today numerous development sites are being positioned to launch. Absent this rezoning, a critical segment of New York City’s central business district would not have been able to meet the market. But do note: The first tower won’t be finished until 12 years after the initial proposal. And the second tower is expected to open 20 years after the proposal. Also noteworthy is recognizing that when the rezoning was promulgated, there was an underappreciation for the need to [repurpose old office buildings]( and to create a truly mixed-use community. Consequently, the rezoning offers little for urgently needed residential development. If you have a full blockfront—a big if—and can get your project past City Planning, all you get is 250,000 sq. ft. of new housing, which in the scheme of things isn’t going to make much of a difference in Midtown. There are other hurdles, too. New York has an entitlement process that is nothing short of labyrinthine. After you’ve passed through the gauntlet of an environmental impact study, approvals from Community Boards and City Council and Article 78’s inevitable interest group-initiated lawsuits, you’re looking at four to five years at minimum to get approval. And the increased requirements for special permits are a further drag on the development time clock. But even when fully entitled after years of struggle, developers are still left with the one big question around the pro forma for any new building: What are the taxes? You can’t know until you get your temporary certificate of occupancy, and it will be another three years until there is certainty. This is of course important everywhere, but in New York, if you’re building an office building of, say, 1.2 million sq. ft. (an average new office tower in Midtown), your taxes are likely to be between $40 million and $50 million a year. And if you’re building rental residential, taxes will eat up one-third of your effective gross income. Simply put, we make it too hard to get big things done. And yet, given the scale of New York, you can’t move the needle here unless you go big. It’s the only way to have any meaningful impact. New York depends on the built environment for all the services we provide. New York City is highly dependent on real estate, which generates about 49% of all the tax revenues the City collects. Despite that fact, we’ve made it very hard to build anything under the fallacy that if a developer receives a discretionary tax program, somehow the City is losing money. Not true. I like to give the example of the New York Times headquarters on Eighth Avenue. Prior to building this 1.6-million-sq.-ft. tower, there were 10 smaller buildings on the site, collectively paying $900,000 in taxes per year. In its first year under the Times’ generous discretionary tax package, the new building paid $13.5 million. Nevertheless, there’s an impulse to be punitive toward development, as if it’s an activity without risk and somehow every developer is going to hit the jackpot. Moreover, many public officials want us to believe that every new building should check every box across every dimension of social need—from sustainability and diversity to higher wages—thereby increasing the length and cost of projects. Again, all while paying full taxation. It’s no wonder that few developers are willing to engage. Of course, real estate has a role in creating a more equitable environment on a community level. At our best, real estate professionals are stewards of our City who can help drive meaningful change and deliver enduring benefit to the people and businesses that call New York home. But let’s disabuse ourselves of the notion that every building can solve every problem. Imagine what we’d be capable of achieving if we had the engine of government behind us, instead of trying to appease every interest group as it uses its leverage to stop, stall or reimagine nearly everything. Imagine what we would build if we could move beyond hyper-local resistance to a City-wide perspective on development and reinvention. But the good news is that we know we’re capable of doing big things. Just look at what we’ve achieved in Downtown Manhattan. We were faced with rebuilding an entire neighborhood in the aftermath of 9/11. Two-plus decades—and a lot of grit, patience and public and private dollars later—[Downtown Manhattan is a market reimagined](. How did we get here? Certainly not by thinking small. In the wake of that attack, we had a real coming together of public policy, political support and great planning, and look what we got: We brought in new digital infrastructure and upgraded the grid all throughout the district. Today, the technology that exists in every office, café, retail space and home is of the highest quality. We strengthened physical connectivity. Amid the tangle of 13 subway lines and the PATH that move through the district, we created the Fulton Transit Center and the Oculus at the World Trade Center—anchored around a user-friendly design that makes the area easier to navigate. We started converting old, obsolete office buildings to residential and created a healthy market mix of rental apartments and condos. The influx of residents in turn brought neighborhood-type dining and retail. Look at the falling crime statistics, at the influx of daily-needs retail and services, at the lifestyle amenities—and consider that we’re on track to hit nearly 70,000 residents by 2025, up from 13,000 in 2000, and over 12 million sq. ft. of new, modern office space—and you can start to understand the ingredients that have led to Downtown Manhattan becoming, in so many ways, a kind of optimal, dynamic urban environment. This is what you can actually do when you bring forces together—and focus those forces on doing big things. Now we have to do it again—only bigger. We have to do it again not as a result of a terrorist attack but of a terrible need to house people at all economic levels, to deal with New Yorkers who have mental health issues, to meaningfully address the migrant crisis, to address the misalignment between office supply and demand. We have to do it again to [build for our future](. And it’s going to take an apolitical approach to get our policies right. We should champion the [initiatives being led by Mayor Adams]( including streamlining approval processes, bolstering neighborhood retail and developing more affordable housing. And let’s build on the alignment between the Mayor and Governor on the [“New” New York Panel]( and its recommended initiatives across a range of needs. We know what works. We need to have the will to do it. People come from all over to live and work here—attracted by the energy that emanates from every part of our City. Companies want to be here because there's something wonderful about the depth and diversity of the talent that exists and the work ethic that’s a hallmark of how New Yorkers engage in business. Plus the cultural and recreational amenities that draw people to the City are, in so many ways, [without peer](. Still, [New York is facing a host of challenges]( that require action, ideas and policies that lift restrictions, speed processes and support the financial realities of development. We need to get our public officials to understand that they can dream all they want for a new and better New York, but if the numbers don’t work, it’s all just noise. Don't Miss Out Was this newsletter forwarded to you? [Subscribe]( Know someone who would benefit from Our Take? [Share]( Get the content most relevant to you by [managing your preferences](. 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