By: Don Driggers

JPMorgan Chase is investing around $3 billion to construct a new headquarters skyscraper at 270 Park Ave.

Nevertheless, a top analyst within the bank’s asset and wealth management division has cautioned against overcommitting to New York City. Michael Cembalest, the Chairman of Market and Investment Strategy for JPMorgan Asset & Wealth Management, conducted a comprehensive “forensic analysis” of the economic and real estate prospects of various U.S. cities.

The surprising findings of this analysis placed New York City behind 18 other U.S. cities. These cities included not only major markets but also second-tier locales like Boston, Seattle, and even Boise, Idaho. In this aggregate ranking, New York City ranked ahead of only Chicago, Detroit, and San Francisco. The ranking was based on post-COVID-19 conditions, such as downtown recovery strength, office vacancy rates, household tax rates, out-migration, violent crime, and municipal fiscal health.

Cembalest, a native New Yorker who has been producing the “Eye on the Market” reports for his division since 2005, conducted this study at the request of a client CEO. His recommendation to clients is to approach New York City with caution, much like an asset manager would handle a megacap stock in a diversified portfolio. He highlighted that the risks suggest that corporate or real estate entities should avoid over-concentration in the city.

While acknowledging New York’s unique advantages, such as its size, diversification across various business sectors, global financial dominance, high employment levels, and a surprisingly lower serious crime rate compared to other cities, Cembalest pointed out that the city faces challenges. These challenges stem from a weak economic recovery since 2019, structural issues related to business conditions, and fiscal health concerns.

Specifically, Cembalest noted the following key issues:

• Mass transit use at 73% of 2019 levels is unsustainable, given the associated capital and operating costs.
• Office vacancy rates at 18% are the highest since the early 1990s.
• Conversions of office space into residential units are unlikely to significantly reduce the stock of underutilized office space due to cost and complexity.
• Zoning restrictions are particularly burdensome at a time when flexibility is crucial in a post-COVID world.
• A substantial influx of asylum seekers threatens to impair the city’s financial situation, precisely when significant reinvestment in infrastructure and housing is needed.
• The city’s electricity prices are high due to low regional wind and solar capacity factors, and the city is increasingly exposed to natural gas prices with the closure of Indian Point nuclear plant

Cembalest also stressed: Zoning needs an overhaul. NYC ranks second worst of 44 major US cities according to Wharton’s Residential Land Use Regulation Index, and dead last in University of Arizona’s survey of 83 US cities on zoning rules. There’s a lot to be gained by changing that. Research from USC and the Department of Transportation analyzed “upzoning”, which refers to relaxation of zoning restrictions. They found that upzoning can substantially increase output per worker, increase mean wages and decrease commuting times (particularly for people forced to live far from where the jobs are due to the cost of real estate)2. The authors also found that upzoning was a much more powerful tool than simply investing in more public transit or road infrastructure.

When asked whether the bank had any regrets about the amount being spent on its new headquarters in light of Cembalest’s findings, JPMorgan’s spokesperson, Michael Fusco, emphasized the bank’s long history in New York City and its substantial contribution to the local economy as one of the city’s largest employers.