Gray Paper - Why is New York City so Expensive?

I think it is safe to say that the average cost of living in New York City is fairly ridiculous. I refer to the average cost because some have found ways to run around the gauntlet instead of having to run through it. It is one of the greatest cities in the world, in a generic, platitude sense, but this does not excuse the exorbitant prices frequently encountered. In fact, if you have lived in New York City at any length and perhaps worked in Midtown, the Financial District or a similar neighborhood, airport prices will no longer seem so ridiculous as one becomes used to paying them on a daily basis. As a man with no training in economics, finance or any other money-related discipline, and not having done any research, I have come up with three reasons why this is the case.  I present this as a layman with no research.  Commence the inaugural Gray Paper.

One of the facets of life that makes the cost of living expensive is housing. Rents and purchase prices are something approaching insane. During the course of my secular employment, a possible reason for this has started to become clear; construction costs.

New York City labor has to be some of the most expensive anywhere in the universe. Let me give a few examples from experience and prevailing wage worksheets provided by the New York City Comptroller (ok, so I did a little bit of research):

 • A carpenter working in a commercial building is scheduled to earn $52.50 per hour in addition to $46.28 per hour in benefits.  One carpenter working an eight hour day, which probably includes a paid lunch hour, a coffee break and potential other concessions, will cost somebody $790.24.  Assuming no overtime and 22 work days a month, one carpenter on a three month project costs $52,155.84.  This is not including multiple workers, the other trades, the cost of material, profit for the employer and so on.  Just for the sake of comparison, a carpenter in the 90th percentile in the rest of the country will earn $32.00 per hour.

• A laborer (most of the work done can be classified as unskilled) doing foundation or concrete work is scheduled to earn $41.00 per hour in addition to $38.63 per hour in benefits.  One laborer working an eight hour day, and my goodness don’t let there be overtime, will cost somebody $637.04.  Taking the same assumptions as the previous bullet, over three months one laborer will cost $42,044.64.

• A brush and roller painter is scheduled to earn $42.50 per hour in addition to $26.62 per hour in benefits.  One painter working a seven hour day (eight hours will be overtime) will cost somebody $483.84.  Over the course of three months, one painter will cost $31,933.44.

• An electrician, at least one of the many designation on the prevailing wage schedule, is scheduled to earn $54.00 per hour in addition to $51.86 per hour in benefits (whatever you do, do not give an electrician overtime).  One electrician working a seven hour day will cost somebody $741.02.  Over the course of three months, one electrician will cost $48,907.32.

• As a final total, if you have a three month project with one carpenter, one laborer, one painter and one electrician at the above rates and conditions, it will cost you $175,041.24.  I would like to reiterate that this assumes only one worker from each trade, assumes there is no overtime, does not include the cost of equipment and material, does not include profit, does not include overhead, does not include permitting, does not include a safety supervisor… I think you get the point. 

 

I don’t think it takes much imagination to realize how quickly these numbers can add up.  Granted, there has seemingly been a rise in privately funded work that pays considerably less than prevailing wage, but historically the higher prices have held sway. 

I would be negligent if I failed to mention the influence that unions have had on construction costs… Or, without euphemizing, the influence that strong-arming by the unions and their representatives has had on construction costs.  I am all for everyone being able to make a fair, honest living, and even being able to live comfortably, but some of these collective bargaining agreements lie on the very outskirts of reality due to all the strange stipulations and caveats contained therein (not to mention the resistance to any overlapping of work that would prevent another union member from getting a job at a particular site).  Corruption within unions and affiliation to organized crime have been factors as well, but even without the direct influence of these latter elements, the spirit of extortion is still present.  (There is much more history involved as I recently found out after doing some reading recently, but I will stay at the surface of the problems for now)

How does this lead to an ever more unaffordable New York City? Once a developer, the catch-all phrase for the purposes of this writing, has spent boatloads of money building a structure or developing a piece of property, the only way to break even (getting filthy rich is more realistically the goal) is to charge incredible prices to recoup the money spent.  And as stated, the money spent can be considerable.

The second reason for the extreme and rising cost of living in New York, which is at least somewhat related to the first, has to do with covering losses caused by vacancies. During a booming economy, expensive property, particularly in New York City may still do well, but the economy is cyclical. When you have busts, in particular all-time busts such as took place in 2007-08 and which spilled into the following years, the market for overpriced homes will suffer (I guess the marker for middle of the road homes will suffer as well).  Add to this what has happened recently; the most populous city in the country and one of the most populous in the world has done nothing but build more unreasonably priced residential space at an ungodly pace.  There are probably an incredible number of vacant apartments in the city and more soon to be vacant apartments currently being constructed.  Vacant apartments don't make money. So, how do developers stay on top, or at the very least avoid losing the shirts off their backs? Overcharge for the apartments that are not vacant.  In short, we the customers are being fleeced and in a growing number of cases are covering for the lack of other customers.  

In some cases the fleecing is not so direct.   The “deals” developers make with the city and state may also end up subsidizing their costs (I hope to touch on “Affordable Housing” at some later point in time).  The city and state are not entities earning their own money; they use citizens’ money.  Hence, more cost to the average tax payer.

Recently, and call this research if you want, I read that landlords and leasing companies are offering all types of weird concessions to get people to take apartments off their hands, the only concession not offered being lower prices.  I would imagine that the real estate powers-that-be are afraid of letting the word out that it is more of a buyer’s market than the facade may actually reveal.

Another issue which is a more recent phenomenon, at least as far as I can tell, is that many of the residences going up are being built in conjunction with an unruly stepchild, commercial real estate. My goodness is commercial real estate suffering!  It would only make sense that these commercial spaces are built with the intention that they will generate revenue and private jet wealth. Some of the commercial spaces that I have seen with my own eyes have been empty for years. And thanks to Amazon and companies of similar ilk, the likelihood of these spaces ever being home to profitable retail establishments is slim to none (not to mention that the health of the economy is not what data-heads may purport them to be). 

What does this mean? To keep from losing the shirts off their backs yet again, in addition to developers having to charge and maintain unreasonably high prices to cover construction, which is incredibly expensive, they also have to cover these no-income generating empty spaces that were imprudently built since no one wants, needs or can afford them. (Even a Charter School, another fleece machine, located on 125th Street was built with attached commercial space for lease… Is that legal?).

Lastly, there is something about New York State that I have never quite understood; why are taxes so high? The revenue base from which taxes could potentially be collected is enormous. Wall Street is located here, correct?  Salaries are on the average higher here, no? If the investment banker, CEO, COO, bond analyst and union plumber were taxed at the same rate I am, New York would be paving the streets in cash.  Something is amiss with the income tax system here, or, the amount of money being wasted or stolen is a number too staggering to fathom.  Oh, and let me not forget to mention the fact that sales tax here is one of the highest. Real estate tax is high.  I may keel over in distress if I think too hard about how ridiculous the tolls are.  And I am sure there are a dozen or so other instances of unusually high taxes or fees charged by the state that could be listed here.  Somewhere, math and a dose of reasonableness has gone awry.

I am no economist, but it seems that New Yorkers should get a break as do residents of other places with an industry that provides a lot of income for its state (Florida, Texas and Nevada which have the theme parks, oil and casinos, respectively, come to mind). This is not the case and in fact the opposite is true. No doubt the abundance of social programs that give money away have added to this issue.  The number of people illegitimately or unethically on public assistance would be an interesting number to see.  As stated earlier, I don’t have all these numbers in front of me, but I feel comfortable saying that even those factors do not quite explain it.  So somewhere, due to ungodly incompetence, perfidious grafting, or an egregious combination of the two, everything touching New York has an inflated price.  Perhaps it is just the tax of living in the “Greatest City in the World”.