In the most recent figures available, New York City reported that unemployment has reached 9.8%. The number struck me, especially when compared with the national average of 8.2% unemployment, making New York City a major outlier from national trends. The confusion gets compounded when analyzing the demographics of New York City -- a highly motivated, talented, and educated workforce, whom you would expect to either gain employment in NYC or go elsewhere.
As you can see in this chart, after the past three periods of high unemployment -- 1992, 1998, and 2002 -- NYC economy bounced back and had more normal levels of unemployment. In the most recent wave from 2002-2008, NYC consistently sustained unemployment numbers around 5%, much lower than the current 9.8% figure.
In addition to this historical/technical analysis of NYC unemployment, the NYC Independent Budget Office said they expect NYC to add 435,000 jobs between now and 2016. Considering the NYC labor market has 4.21mm participants, and only 3.87mm of them currently have jobs, the addition of 435,000 jobs to the labor force will release a lot of the current pressure in the labor market. Assuming no growth in the labor market, with the addition of 435,000 jobs NYC would have a zero unemployment rate. Obviously, the labor market will increase between now and 2016, but it seems obvious that these additional jobs will more than cover the new entrants into the labor market.
In short, we see from these two very compelling sources, that NYC will experience tremendous growth in its labor market over the next five years. The question then turns to you, as an investor, how can you play this theory effectively.
In this article I will outline the main strategy to play this theory -- Office REITs. Obviously an increase in hiring will cause a decrease in vacancy, and an increase in rents. The question then becomes which REITs have the most/best exposure to the NYC market that will allow investors to see the most upside from this theory.
An Overview of NYC REITs
Office REITs will obviously largely benefit from the uptick in employment. Most of the major Office REITs have large NYC exposure, but some have a larger exposure than others.
Name of REIT
Total Office Portfolio (in thousands)
NYC Portfolio (in thousands)
Percentage of Portfolio in NYC
SL Green (SLG)
Boston Properties (BXP)
As you can see from this table, SL Green has by far the most of their office space in NYC. However, in addition to their space in NYC the balance of their portfolio is in the greater NYC MSA, which will see a direct effect from the improvement in the NYC market. Out of the three other REITs Brookfield and Boston Properties don't have a significant enough of a New York City presence to see a lift in cash flow from major gains in NYC projects, but Vornado seemingly does offer investors a large exposure to the NYC office market. However, upon closer examination, we see that Vornado has other issues that mask its true NYC office exposure.
In short, while Vornado offers a large NYC exposure, both in the office and retail markets, but it has too many other assets that mask their true exposure. Namely, besides for their large NYC and Washington DC office space exposure they have an array of disparate Real Estate businesses, which dilute the effect that you will see from an uptick in NYC employment. The following table lists these businesses:
Name of Business
Retail Properties and Merchandise Mart
30mm square feet
JC Penney (JCP)
Toys R Us
Lexington Realty Trust (LXP)
11.90% of common equity
26.20% of equity
I don't want to spend too much time in this article unpacking the complexities of the above table. But in short, VNO has some NYC exposure within the above categories -- Merchandise Mart has a major NYC location, some of the retail properties have NYC MSA locations, Alexander's has some major NYC locations (most notably Bloomberg Headquarters), and Lexington Realty also has some NYC MSA exposure. However, none of them give you a pure play in NYC office space, and most importantly could dilute the true effect that could have on the company's bottom line, and therefore the upside for you the investor.
Digging A Little Deeper
When considering which company to invest in, we must not just look at the portfolio exposure, that will give us a good hint on where to invest, but will not give us a proof positive identification. What do I mean? Even if SL Green has the largest NYC exposure, maybe they won't recognize the upside of future employment rates because their portfolio will not have any vacancies at that time -- i.e. over the next five years. Therefore, if we want to see who will benefit the most from the future employment gains, we must see who will have the most vacancies, and therefore, the most upside.
Please see here for a detailed spreadsheet of future vacancies for the above REITs, what follows is a summary of that spreadsheet.
Average Percentage of NYC Portfolio Coming Due Between 2012-16
Avg Percentage of total portfolio coming due Between 2012-16
From the above, you can see that Vornado aside from the other elements of the company that dilute the upside in NYC employment, has a lower portion of its total portfolio with large NYC vacancy exposure. Boston Properties, as well, has a fairly small portion of its portfolio coming due in over the next five years. SL Green, and Brookfield, however, have about the same amount of space coming due over the next five years. The question then turns to which companies has a better position to take advantage of this upswing.
In my opinion, Brookfield has better opportunities than SL Green. Firstly, Brookfield has a much higher quality institutional level portfolio. Most of its tenants have large blocks of space, and they have deeper relationships with institutional quality tenants. Secondly, and this might shock you, but my predictions might not come true. Shocking, I know! If I am wrong, you will want to spread the vacancy risk over many cities, to shield yourself from a continued downturn in NYC. Brookfield gives you that, SL Green does not.
In a previous article, I wrote about the Empire State Building IPO, and why I thought investors shouldn't invest. In short, I thought, that because of the large amount of development activity -- some 20mm square feet -- The Empire State Building could not compete and lure tenants to their NYC buildings. If so, then the above REITs will also have trouble filling their buildings because they will compete with new developments. While you should carefully consider this point, I have come off it somewhat, mainly because projects currently under development (as opposed to those that have not started actually building the buildings) stands at around 6mm square feet. Therefore, I might have overstated the risk presented towards Empire State Realty Trust.
This brings me to my last point. While in the above mentioned article, I voiced some skepticism about the ability of Empire State Realty to succeed, I think because of the future employment growth they will see more upside. I don't want to go into the specifics of their portfolio, because they have yet to go public (but they recently settled lawsuits with some investors, which should pave the way for a soon to come IPO), but if they do I will try to spill some ink on the topic.
In sum, despite new development risk, I think Brookfield gives investors an effective way to take advantage of the unique economic conditions in NYC. Their high quality buildings, and exposure to other markets gives investors both the exposure and a hedge for future NYC and worldwide growth.