New York City's real estate slump: A service economy on the skids

According a recent report released by Prudential Douglass Elliman Real Estate, Manhattan apartment sales have dropped by 50 percent over the past year, and the average price of a city apartment has fallen by up to 24 percent. While apartment prices have risen slightly in the last quarter, it seems likely that they still have a way to go before they catch up to the realities of New York's modified recession.

While New York's real estate woes are somewhat reflective of national trends, there are many ways in which the city's housing problems are sui generis. Since World War II, New York has increasingly moved from manufacturing jobs to service-related white collar jobs. In the process, it has tied its real estate values -- and tax base -- to the continued health of a few professions. When those sectors, particularly banking and finance, did record business, their employees brought home record salaries and paid record rents. At the same time, the blue-collar workers who once populated the city left it in droves.

Today, most blue-collar workers can hardly afford to rent, let alone buy, property in Manhattan. In June 2009, the average rental for a studio apartment was $2,334, and three-bedroom apartments ran $7,344. Purchase prices for apartments in the city average $1.3 million; while a big drop from last year's average of almost $1.7 million, these prices leave little room for anyone but highly-paid professionals.

One of the best examples of this trend is probably the Stuyvesant Town and Peter Cooper Village housing development, which was built in the late 1940's to house middle-class workers. In 2006, the owner, MetLife, sold the properties for $5.4 billion to real estate developer Tischman Speyer, who then doubled the rents and attempted to force longtime residents out.

While high rents reflect an industrial shift in the city, they have also inspired a major demographic change. The writers, artists, and musicians who once placed New York at the head of the cultural vanguard can no longer afford to live in Manhattan. To the extent that the city still has a cultural scene, it has largely moved to Brooklyn or the South Bronx. In a broader context, however, creative types have moved to other cities, where it is possible to pursue an artistic career on a workingman's salary.

Now that the financial market has fallen, the city finds itself searching for other options to fill the huge tax hole that Wall Street has left behind. The trouble is, there is no way to rectify the city's high cost of living with the salaries available to people who aren't financial professionals. Today, the city's armies of maids, chefs, barristas, waiters, teachers, police, and firemen largely live in a few north Manhattan neighborhoods, the outer boroughs, or the distant suburbs. Healthy industries rely on a steady supply of workers; unfortunately, that is economically impossible in New York.

With cheap rent-controlled and rent-stabilized apartments disappearing in the city, New York's problems are likely to get worse before they get better. New York's process of ridding itself of city-controlled properties made economic sense when bonus-bloated bankers were fighting for their second and third city apartments. However, with the financial sector trying to recover, it is becoming increasingly apparent that a city cannot survive on bread alone.
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