LMDC’s Residential Grants = ‘Unfair, Unstable’ Downtown
Although there was much fanfare over the programs designed to boost residential occupancy in Lower Manhattan, particularly the Lower Manhattan Development Corporation’s Residential Grant Program, these attempts, at least as currently structured, will cause far more harm than good. Indeed, they have already created market conditions that are unhealthy, unfair, unstable, and unsustainable.
In the period leading up to the approval of the Residential Grant Program, downtown groups expressed a fair amount of concern regarding price inflation by landlords, which would effectively wipe out any advantage gained by leaseholders. Indeed, the program would then, in all essence, become a subsidy for landlords and management companies rather than a boost for residents attempting to establish or re-establish communities in Lower Manhattan. Unfortunately, this inflation already has become the case.
Take, for example, 50 Murray St., a new luxury renovation of an office building formerly occupied by the IRS. The building’s management began to show spaces in the building roughly one week before the LMDC program was approved. One week after the approval, the price of a one bedroom loft increased by $600/month, more than offsetting any advantage gained by potential lease-program residents. When I asked about this rather extraordinary jump in prices, the managing agent chalked it up to huge demand—even though the building would not be ready for occupancy for another three months, the lobby and common areas were construction sites, and the spaces were already at a premium compared to other local prices. By the LMDC’s simple grant implementation, Lower Manhattan rents came in line with other Manhattan market rates and even, in some cases, exceeded them.
The unfortunate aspect of this correction is that artificial or contrived market stimuli are only viable and effective as long as those stimuli are sustained. Remove the stimuli and, without any counterbalancing force, you at best revert back to original conditions; at worst, you create a whiplash effect, moving far past the starting point and into the opposite direction. Therefore, one can only sit back and hope that once the artificial stimuli are removed (the monthly LMDC Residential Grant payments), another force of equal or greater impact will compensate. Yet false hope makes fools of us all.
We currently have in Lower Manhattan a mix of residents who were here before Sept. 11 and some who moved in afterwards. As the grant incentives are phased out, this mix will become increasingly unstable for numerous reasons:
First, since grant applications are now closed, all new Downtown residents must pay market rate. As long as residency levels remain high, landlords and managing agents will have no incentive to drop prices to compensate for these lost grant incentives; in fact, the buildings’ economies of scale even allow the residences to remain profitable despite a certain number of empty units. As a result, rents will remain at these higher, artificially contrived levels. Fewer potential residents will choose to pay a premium to live Downtown, in neighborhoods where there is constant construction, few and inconsistent local amenities, and daily crowds of commuters and tourists, when cheaper spaces in more settled neighborhoods exist.
Second, in the next 9-12 months, the first LMDC residential recipients will start to lose their supplemental grant incomes. Unless these residents are able to find the extra $500 or so a month from another source, they will be forced to look for new places to live. Given that the majority of new Downtown residents are younger professionals and/or recent college grads, demographics that tend to be more mobile and transient, as they have fewer family and neighborhood ties, expect a continual exodus of the “new blood” from the area.
Third, the general economy is weak, which does not bode well for tenants hoping to find new sources of income to replace bygone LMDC subsidies. Over the last century, no economic recovery that has followed two or more years of recession (our situation right now) has lasted even two years; furthermore, each of these recoveries has been followed by another trough. Based on this history, another extended bull market does not look likely. A sluggish economy will make it difficult for current grant recipients to compensate for their lost subsidies, and thus they will have to move.
Perhaps these viewpoints are pessimistic, but being faced with the same predicament as many others in the LMDC grant program, I see no reasonable path except one that leads out of Lower Manhattan.