New York City may soon become a poster child for pandemic-related abandonment. For months, residents have been staging a mass exodus to the nearby suburbs in the wake of the coronavirus outbreak, and many retail chains have similarly left the city. But now, Manhattan is threatened by yet another mainstay itching to depart: financial firms.
Recently, Goldman Sachs (NYSE: GS) began exploring its options for moving its asset management division to South Florida -- specifically, to an area north of Miami. And if the investment banking giant goes through with it, it won't be the first player in the financial field to ditch New York City in favor of warmer, cheaper, and tax-friendler pastures.
Elliott Management, a hedge fund valued at $41 billion, announced plans to relocate its headquarters from New York to Palm Beach County. And Blackstone, a well-known investment management firm, is staging a similar exit. If Goldman Sachs opts to set up shop in Florida, it could drive many more financial firms to follow suit. And that could, in turn, really leave Manhattan real estate investors in the lurch.
Why are so many companies heading south?
The coronavirus pandemic has done a number on New York City, and the loss of financial companies could be catastrophic. But when we think about the benefits of relocating a business to Florida, it's easy to see why even major players in the financial field are looking to do so.
Florida is one of several states that doesn't impose a state income tax. As such, it's a great place for wealthy executives to call home. Furthermore, office space is a lot less expensive in Florida than it is in Manhattan. In New York City, commercial tenants will easily pay $70 per square foot on average, and in some prime areas, a lot more. Meanwhile, commercial tenants can expect to pay more like $43 per square foot, on average, in Miami's Central Business District. That's a huge gap -- and a significant amount of savings.
Furthermore, as more companies shift to long-term remote work, they may seek to unload upgraded office space in favor of more modest setups. And while New York City certainly offers a wide range of buildings and associated amenities, generally speaking, it's a lot cheaper to lease space outside of Manhattan than within the confines of the island.
A blow to real estate investors
Office buildings are already grappling with the potential for widespread vacancies as remote work becomes a permanent fixture and companies seek to downsize or give up their office space altogether. If Goldman Sachs sparks a major trend, New York City commercial landlords won't just lose tenants -- they'll lose high-end, high-paying tenants they might struggle to replace.
Investors in Manhattan office buildings, or real estate investment trusts (REITs) that derive a lot of their revenue from those office buildings, could be in for a serious blow if the city ceases to become the epicenter of all things financial. And unfortunately, that's a reality they may now need to brace for.