The Impact of the Economic Crisis on NYC Business
Speech to the Greater Harlem Chamber of Commerce
August 6, 2009
Kathryn Wylde, President & CEO
Partnership for New York City
Today's economic and fiscal crises are best understood in historical context. Those who are old enough to remember the 1970's will recall how the city came close to bankruptcy, losing half its Fortune 500 headquarters and much of its middle class to suburbia. During that decade, Central Harlem lost 40% of its population and as many as 15,000 apartments a year to fire or abandonment. By the 1980's, two-thirds of the real estate in Central Harlem was in city ownership as a result of tax foreclosure and condemnation. Crime was high, drugs were rampant and the subways were falling apart. Urban America - the so-called inner cities of our country - was largely written off.
A combination of federal intervention and global economic forces contributed to the renaissance of New York City and its communities. By 2007, New York City's population reached an all-time high of 8.2 million. The regional economy grew to over $1 trillion, making this the 12th largest economy in the world. In less than three decades, New York went from a city on the brink of disaster to the world's leading center of global business and finance. In Harlem, brownstones were selling for more than a million dollars. It seemed too good to be true. And it was.
In 2008, it suddenly became clear that real estate values were inflated well beyond what they were worth. In less than a year, 40% of the world's wealth evaporated. The crisis started in housing markets of places like Las Vegas, Florida and California. It spread to Wall Street, as banks and investment houses got caught short with potential liabilities they took on during the boom years that turned out to be far greater than their liquid assets. It looked like the whole system was going to collapse as panic spread among investors and consumers. That is when the crisis spilled over into all sectors of the economy.
Governor David Paterson was among the first to call this the worst crisis since the Great Depression, and he turned out to be right. Like the 1970's, this is both a crisis in our economy and also a fiscal crisis for the budgets of city and state government as tax revenues fall and demand for public spending increases. But this time, it is not just America's cities and the poorest communities that are in trouble, but the entire world.
Where are we today?
The city's private sector has lost about 100,000 jobs in the past year. The biggest losses are in financial and professional services, media and advertising, retail and entertainment, travel and tourism. All are key contributors to the economy of the city and to Harlem. The only job growth has been in health and education - sectors which depend on increasingly scarce public dollars.
New York has been hardest hit in financial services. In less than a year, many of our biggest employers and taxpayers were lost or severely damaged in the financial crisis - Bear Stearns, AIG, Lehman Brothers, Merrill Lynch, Citi, Wachovia, Washington Mutual. Those that survived did so because the federal government came in with huge investments and provided protection against a run on the banks. As a condition of providing rescue funds, federal bank regulators increased the requirements for bank capital - in other words, no more making loans that exceed bank reserves by 20 or 30 times. The consequences of federal restraints and a failing economy is the credit crunch, in which banks have to hang on to their cash and loans are unavailable to consumers and small business. This makes economic recovery all the more difficult. The government is now working on a variety of programs to get credit flowing again, and banks certainly want to be in the lending business for their own survival, but the balance is not easy and it will take time.
The traditional media industry was already suffering from loss of customers to online competition, before their advertising revenues dropped by 20-30%. The industries that typically buy the most ads are automobile makers, banks and pharmaceutical companies - all of which have been big losers in the current recession.
Retail sales in the city are down 8-10% from this time last year, with high end retailers suffering even greater losses. Tourism visits are off 6%. Hotel occupancy is down only about 5.5%, but hotel revenues have fallen 35-40 % since a year ago. The Greater Harlem Chamber reports that over 35% of Harlem's small travel- and tourism-related businesses have closed or gotten into serious trouble in the last year.
Real Estate is the other big loser. The Class A office vacancy rate in midtown is over 12%, the highest in 12 years and almost double where it was just one year ago. Residential sales in the city have fallen 50% in the past year. Construction has come to a grinding halt. And there are more problems to come. The Partnership has been looking at the situation of multifamily apartment buildings that were acquired during the housing boom but are no longer worth what their owners paid for them and are going into receivership or foreclosure. It is estimated that there are at least 70,000 apartments in this situation in the city that present a serious threat to tenants and neighborhoods across the five boroughs.
Finally, philanthropy in support of charitable institutions is down 25-40%. Endowments that many of our cultural institutions and universities depended on for operating support are down at least this much or more. Just look at institutions in Harlem ranging from the Apollo to Harlem Children's Zone that got huge contributions from Lehman Bros, Merrill Lynch and even the sponsorship of Harlem Week from Washington Mutual. These sources of support and relationships that were cultivated over many years are gone.
Most experts say that we are at the bottom -- that unemployment will continue to rise for the next few months, probably going from the current 9.5 % in New York City to just over 10 %. Unemployment rates in Harlem are typically double the city's average. The official numbers have reached 18.7 percent in Community Districts 9 and 10 and 17.1 percent in District 11 in 2008, but the real numbers of people out of work in this community are much higher.
We are told that the trillion dollars that the federal government has committed to various stimulus and investment programs is kicking in and the national economy will level off and start improving in 2010. But in New York, it is likely to take several years to see much improvement and we are in for a very difficult period. Our taxes are the highest in the country, and all levels of government are threatening to increase them even further. Financial services generated about a quarter of our economic output in recent years and 20 to 30 per cent of our tax revenues. Bonuses and executive pay packages that the rest of America complains about brought billions in taxes to the city and state every year. Trying to make up these tax losses from other sectors of the New York economy will only weaken the economy further. It is not a solution.
What comes next?
New York and Harlem are in far better shape to deal with these problems than we were thirty years ago. The federal government has stepped up quickly to help. Many banking institutions that agreed to take federal funds to prevent a collapse of the financial system are profitable again. Goldman Sachs, BONY Mellon, JP Morgan Chase, Morgan Stanley and American Express are institutions that have fully repaid their federal TARP money with a profit for the taxpayers and have returned to profitability. Community and regional banks, like Carver and Capital One North Fork, are doing well as individuals increase their savings and keep their bank relationships close to home.
The Governor and Mayor are undertaking a number of initiatives to make sure New York City and State come out of this recession with a stronger and more diversified economy. An important component for Harlem is the focus on small and neighborhood-based businesses. Just this week, the Mayor announced a kitchen incubator opening in Harlem to provide facilities for aspiring food preparation companies. This follows similar projects announced by the city Economic Development Corporation to encourage start up companies and small entrepreneurs in financial services, media and technology. It has been clearly recognized that big corporations and real estate development are not the most promising source of new jobs and that New York needs to shift its focus to entrepreneurial ventures.
The FY2010 New York City budget included changes to the city's unincorporated business tax that would reduce the tax burden for 17,000 small businesses. The changes fully exempt UBT payers who earn less than $100,000 a year and provide a partial credit for those making up to $150,000.
Governor Paterson has formed a Small Business Task Force that is working to improve access to capital, reduce regulation and enhance state support for small business. As a member of that Task Force, I urge you to share your ideas and proposals. Similarly, State Comptroller Tom DiNapoli has initiated efforts to make state pension funds more available to venture capitalists that fund technology business ventures in the state.
At the federal level, Congressman Rangel championed an expanded tax credit for employers that hire and train unemployed workers - including the young people who are disconnected from school and the job market. He also helped insure that New York got a major share of federal stimulus dollars that helped to close a $6 billion gap in the state budget this year and next, as well as funding education and health care deficits. Council Members Dickens and Mark-Viverito have been working to make sure stimulus dollars are targeted to minority-owned business.
At Columbia University we have one of the city's greatest investments in economic growth with the development of the West Harlem Manhattanville Campus and the extraordinary commitment that Columbia has made to local and minority contracting and employment. Columbia is also working with the Department of Education on a new model for career and technical education that will help young people make the transition to a technology-based economy.
For small business, the recession will be a difficult trial, but it may turn out to provide the wake up call that New York City and State needed to support the entrepreneurial companies that were formerly overlooked and to provide a more competitive environment for business investment and growth. Small businesses need to engage in a public dialogue, bring their issues to the attention of government and forge partnerships with the corporate sector. The Governor has announced that, after closing a $11B budget gap in April, he must call the legislature back to find another $2 billion in savings. That means severe cuts or more tax increases. The voices of small business - those who create most of the jobs and survive on the thinnest margins - must be heard.