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# 									2024 Wall Street Series: NYU School of Professional Studies (NYU SPS) Schack Institute of Real Estate							

FPC Briefing

Marc Norman, Associate Dean and Larry and Klara Silverstein Chair of the NYU SPS Schack Institute of Real Estate

Thursday, February 22, 2:00 p.m. ET

New York City

February 22, 2024

## 								Summary							

        -  In this briefing, Marc Norman, clinical professor of real estate, associate dean, and Larry and Klara Silverstein Chair of the NYU SPS Schack Institute of Real Estate, briefs on the current state of the U.S. real estate market and 2024 outlook.      

**NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR**

******MODERATOR:**  It’s a pleasure to welcome and introduce our briefer today.  We are joined by Marc Norman.  Mr. Norman is a clinical professor of real estate, an associate dean, and a Larry & Klara Silverstein Chair of the NYU School of Professional Studies and the Schack Institute of Real Estate.

Today’s briefing is part of our ongoing Wall Street series, which provides you with exclusive access to experts on the U.S. and global economies.  Dean Norman will brief on the current state of the U.S. real estate market and the 2024 outlook.  

My name is Daphne Stavropoulos; I’m today’s moderator.  I will help moderate the Q&A session.  Today’s presentation is on the record.  And as a reminder, our briefer is not a U.S. Government official and does not represent the U.S. – the official policy views of the U.S. Government.

And with that, it’s a pleasure to turn it over to Dean Norman.  Thank you, and welcome.

**MR NORMAN:**  Sure.  Thank you for having me today.  So I was going to sort of talk a little bit generally about the overall economy, but my sort of area of expertise is housing specifically.  So I thought after some sort of remarks about the entire economy, I would focus more on the housing markets, which are having a big effect right now, if that’s okay.  I’m happy to answer questions on anything.  And I hope none of this stuff is totally obvious, but stop me if it is.

But the U.S. economy specifically is doing very well right now.  By many measures, it’s the most resilient right now in the world, if we look at employment, if we look at productivity, if we look at GDP growth – seeing a 4.9 percent increase over 2023.  And then also a predicted recession which was supposed to happen last year, which many economists were predicting, which didn’t happen.  Also we are at historically low unemployment, so we’re at 3.7 percent.  

But of course all the things I’m saying are sort of nationalized for the U.S. economy; there are very specific nuances within different states and cities.  And as I always like to say from traveling a lot, the U.S. is in a lot of ways 50 countries.  Frankly, I’d even say if you boil it down to cities, we’re probably more like 300 or 350 countries, because while we have national policies, so much is set by states and localities.  And that’s truly things from health care policy, to housing, to zoning, to building code.  So they can change depending on where you’re living.

So I can talk specifically about New York; I can talk about California or Florida or other places.  But when I say some of these statistics, I’ll make sure to say I’m talking nationally or via state or via city, just to be clear, because they are so different.

So with this apparently great economy, one of the questions comes up is that consumer sentiment isn’t matching the state of the economy.  And we’re seeing that when you look at presidential polls or when you look at consumer sentiment indices.  And so that is one of the reasons why I wanted to talk specifically about housing today.

So consumer spending – incredibly strong.  Also because of the pandemic, we had a lot of what people were calling onshoring, or nearshoring.  So because of supply chain disruptions during the pandemic, both in legislation – the CHIPS Act, the infrastructure and inflation act – we started seeing local manufacturing coming back, or manufacturing and other goods and services come with our local partners.  And that’s reflected in the fact that now Mexico is our largest trading partner, followed by Canada, with China a distant third.  

And that’s significant in a lot of ways – in the way that that’s affected the economy, and that’s going to have long-term effects.  And so that affects exports, energy prices, which are down now.  Those kind of supply chains have been normalized in a way that have redirected them away from other places.  I think that stands out for the U.S.  Europe is a different story in terms of its supply chains and the crises in – with Russia, Ukraine, et cetera.  And so that has a very strong effect, that sort of onshoring and nearshoring.  

And also just the economic news has been pretty good across all fronts.  But one particular issue for us is interest rates.  And of course, that’s the case in many places; many places saw inflation.  And that’s easing, but one of the reasons that’s easing is because the Federal Reserve had some very rapid – some of the most rapid increases in interest rates over the shortest period in time.  And so I would say that, while we all think interest rates are incredibly high now, they’re high relative to what we had in the last 10 years – were historic lows, interest rates basically at 0 percent.

And so the lingering effects of inflation are still with us, right.  The Fed – many people thought that the Fed was going to start lowering interest rates at a relatively rapid pace, because it seems like we’ve moderated inflation.  But in reality, that hasn’t really come to pass.  And that’s because there’s still some headwinds there.  So that’s one of the reasons why I wanted to focus sort of on the housing markets, because some of the consumer sentiment, some of the kind of general economic I would say malaise has to do with problems in the housing market.  

So the rapid rise in interest rates from the Fed affected mortgage rates, so they more than doubled.  And in addition to that, it makes the cost of buying supplies, building, and loans that much more expensive.  So we had this double-whammy of an increase in interest rates on the consumer level, so homeowners, but also for the builders and for the developers.  So what that meant was the supply went down.  People just couldn’t make their deals pencil out.  They couldn’t make the numbers work to build more housing.  So we have significantly less housing being built over the last three years while we also have higher interest rates.  

And I would say that’s a specific issue in the U.S., that’s not – of course, it’s an issue everywhere, but in the U.S. very specifically 60 – almost 60 to 65 percent of American households are homeowners.  And most of those homeowners have 30-year mortgages.  Ninety percent of those homeowners have mortgages with locked-in interest rates – 90 percent – before the interest rate rise, which means:  Will you move?  Because if you move, you’re not going to get a larger house for the same price, and you’re going to have an interest rate twice as high. 

So just as an example, if you had a $500,000 house in 2021, your interest rate was probably 3 percent, locked in for 30 years.  Right now, that number might be 7-7.5 percent, which means that that same house at that same price is $1,500 more per month.  So that creates a problem with people moving, so a lack of mobility, a lack of supply because we haven’t kept up with the demand for housing, because of that cost of labor, the cost of materials, and the interest rates on loans for builders.

And so the Joint Center for Housing Studies at Harvard came out with a report just last month about the current state of the housing markets.  And I would say that’s one of the reasons for a lot of pessimism, because prices are up.  It’s harder to move; it’s harder to buy.  And that puts pressure on rental housing as well, because if I’m not going to buy, then I’m going to have to rent.  But there’s pressure in that market too.

So rents are up historically, year over year.  They also are not getting the upgrades that they necessarily need, because the cost of upgrading also is tied to the cost of borrowing.  And that’s creating a real supply constraint.  The other thing is that people at higher incomes are renting at higher rates.  So instead of buying, they are renting.  That’s also putting pressure on the rental markets.  And so the sort of luxury market is actually pushing down to what we would have called the middle market before.  So people that might have had a $7-, $8-, $900,000 house are now renting a $6-, $7-, $8,000 apartment.  And we’re seeing that higher numbers of higher income people renting, which is putting pressure on lower income renters.  

The result of that has been that in New York City, for example, the vacancy rate is 1.4 percent, historically low.  That basically means there’s almost no availability.  And if there is, it’s at a much higher price point than your average New Yorker could afford.  And that’s a problem across the country.  

It also means that we have a market in which the joint center report said 50 percent of Americans that are renting are cost burdened, meaning they’re paying more than 30 percent of their income for housing.  And that’s also at a historic high.

Additionally, homelessness is at a historic high too.  And when I say homelessness, sometimes that means people actually living on the street.  Many times it means people that can’t find housing that would allow them to move to get a house for the size of their family that’s required.  It means that they might be doubling up, meaning living with family members or living on a couch.  So there’s a kind of hidden housing crisis that we don’t see, because people that are rent burdened and can’t move because of rent are finding different ways to live.

And so one of the reasons why I say we’re, let’s say, 50 countries or maybe 300 countries, is that it’s a hard problem to solve on the national level.  So what we’re seeing is cities and states trying to solve this housing crisis in the midst of inflation, in the midst of figuring out the supply chains, and the supply crisis, the lack of housing.  

And so one of the things that’s happening here in New York is there was a legislation to help get housing built.  It was called 421-a.  It was basically a tax incentive for developers to build market rate but also affordable housing within their developments.

So if you look out the window across the river, when you see those towers, most of them have 20 percent of those units at below market rent.  And in exchange for that, the builders got a tax break for 10 – or anywhere from 10 to 30 years.  That expired and wasn’t renewed.  Advocates saw that as a giveaway, and when it expired it wasn’t renewed.  But what we’ve seen is housing production almost stop in New York because of the loss of that tax break because it happened at exactly the wrong time.  It happened when inflation was high, interest rates were higher, land costs were higher, and supply was lower.  

And so New York City is trying to figure out how do we get the supply built again, because builders aren’t going to do it.  The numbers aren’t going to work.  It costs about $600,000 per unit to build a new housing unit.  So if you calculate what the income required for that would be – this is before profit – you’re talking about people at $150- to $160,000 a year.  Many New Yorkers don’t make anywhere near that, so you need some incentive, some government incentive, some tax incentive, to get that housing built and make it affordable to the majority of New Yorkers.  It’s a problem being faced all over the country, of course.

But one of the things that is happening is that cities and states are trying to get innovative.  Most of the U.S. is single family, and even the New York region outside of New York City is mostly single families.  So in many cities, 70 percent of what can be built is only single-family housing.  So cities and states are starting to say this is where we should have an increased supply, this is where we should have more building, this is close to jobs and transit, and they’re preempting localities to say you have to allow the building of new units in traditionally single-family neighborhoods.  

That’s a fight that’s going on right now.  And what they’re doing also is saying that if we let you build that housing, if we change the rules to let you build denser housing in single-family neighborhoods, you also have to include more affordable units.  And so we’re seeing that in California, so legislation has passed that says that you can build one to four units in single-family neighborhoods and the city doesn’t have a say anymore because the need for housing is so great.  Existing residents, of course, don’t always like that.

In Florida, they passed legislation called Live Local, which says that no matter what the town says, the state says that you can build if you provide 40 percent of your units as what we call workforce – so affordable to people at certain income bands.  So what that means is you can propose a denser, higher building with that and forego what the city or the zoning says.

And in California, there’s something called Builder’s Remedy, which means that if cities don’t meet a certain number of units that are affordable in a given year that builders can propose housing that has to be approved and has to be built.

So this is all new.  This is coming out of this crisis that we’re in.  It used to be really in cities like San Francisco, Los Angeles, New York.  We’re seeing it all over the country – the shortage of housing, the affordability crisis of housing, and some of these other things.  And so there’s really probably about 30 to 40 different experiments going on in different jurisdictions, and it’s something that can’t really be solved at the national level.  It’s being solved at the local level.

You’ve probably also seen that in New York and other cities there’s a lot of talk about, for example, conversion of office to residential – not as easy said as done.  A lot of people talk about it, but if you notice there aren’t a lot of conversions being done.  Part of that is the cost.  Part of that is also goes back to the zoning.  So we have over the last 60 years said office districts have offices, residential districts have houses, business districts or commercial districts have manufacturing hotels, and we separate those things.  So we have a problem that the office buildings that are now sitting empty, we have 19 percent office vacancy in New York, San Francisco is more like 30 percent vacancy in office buildings.  They’re in districts that don’t allow the conversion to residential.

So cities are now trying to figure out ways to change that.  But even if you change that, it means that you have those same issues of creating housing, that it’s too expensive.  So in most cases, conversion of office to residential is just as expensive as building a new building.  So if we take a building like this, you have windows on the exterior and you have the elevator and everything else in the interior, not a great place for a bedrooms, not a – and then let’s think about how many new bathrooms we have to put in this office building that now has one at the core.  All of that – right – new plumbing, new electrical, more elevators, cutting a core into the building so you get light into the middle is all very expensive.  So there was actually a study done in New York that of all the buildings we have, there are probably 100 that should be or could be converted efficiently, and so that leaves a lot out.  But then of those, if you have 19 percent vacancy that means you have 79 percent occupancy, right?  So it’s bad to have 19 percent vacancy, but where do the other tenants go?  

So if we look at actually a building at – downtown owned by Silverstein Properties, they’re converting an old 1960s office building.  They moved – they have a portfolio of buildings.  They have buildings all over New York.  They have moved the existing tenants left in the building to one of their newer building with better amenities, better office space; emptied that building, they’re cutting in light wells down the middle, and they’re converting it to residential.  But will that be affordable?  No.  (Laughter.)  It will be very expensive.  And if you look at the buildings that have been converted in New York, in Los Angeles, and in other cities, they’re typically luxury apartments.  So if you go downtown and you see 1 Wall Street or 40 Wall Street, those buildings are luxury rental buildings.  They’re also the perfect skyscrapers.  The 1920 skyscrapers were very narrow and very tall so great views, great windows, easy to convert.  So there’s just a – there are buildings that work and there are buildings that don’t work. 

The way New York incentivized conversions in the past after 9/11 when nobody thought people would come back downtown was to give that tax break and special financing to convert buildings.  So if that’s going to happen again, we’re going to need that same sort of legislation and will to basically give subsidies to builders to convert those buildings.  So that’s been a big issue.  

But I might have been talking too much so —    

**MODERATOR:**Not at all.

**MR NORMAN:**Okay.  But so there are a lot – there a lot of different things happening, but we’re seeing crises that we hadn’t seen in the rest of the country now in most parts of the country – lack of supply, big increase in prices, and not keeping pace with wages.  So that’s – you see increasing numbers of homelessness in cities all across the country and this supply constraint all across the country.  

One of the ways that – not the jurisdictions but investors and developers are doing some of these things is converting those single-family houses that used to be for sale to rental.  So there’s a whole market now in single-family rental housing.  And some people will build – not just buy houses and then rent them, but actually build new single-family houses for rent, because in this interest rate environment it actually is cheaper – it’s still expensive but cheaper – to rent a house if you want a house and a backyard and a pool and a certain neighborhood, to rent that house rather than buy it, potentially waiting for interest rates to come down at some point.  

We are also seeing a kind of smaller interventions.  So in California now and in Oregon and some other states, if you own a single-family house, you’re allowed to build other dwellings on the site – ADU – so accessory dwelling units.  So we’re seeing that really go up.  So you might have your single-family house and a garage and a backyard.  Now you can build three units on that site.  So you could keep your existing house and build apartments over the garage or build a new house, a smaller house in the backyard, or you can tear down that house and build three or four units on that lot.  So we’re also seeing legislation pass that lets that happen, and we’re seeing that as one way of increasing housing supply.  You already own the land and you’re making the land more efficient.  So that’s also one thing we’re seeing.  

But I’m happy to take any questions, if you’d like, on the economy or on housing. 

**MODERATOR:**Sounds good.  So if you have a question, please raise your hand, and as a courtesy, share your name and your outlet when you’re called on.  

Go ahead. 

**QUESTION:**  My name is Tomomi and I’m from JiJi Press, Japanese media agency.  And my question is slightly off-topic, but about housing and it’s about multifamily apartment program in New York.  I think in 2019 the world changed —

**MR NORMAN:**  Yes. 

**QUESTION:**  — and too, the rent stabilized (inaudible) apartment.  The rent can barely go up and the landlords can’t really make money from it.  So there is one bank based in New York that’s in trouble by that program, and I’ve been wondering if that program can – is going to be just contained to that bank or it could be contagious to other — 

**MR NORMAN:**  I mean, it’s a problem.  So the issue that she’s talking about is that New York and other cities have rent stabilization – or rent control sometimes they call it – which means that there’s a board that determines how much rent can go up in any particular year.  And in New York before 2019, you could – if the rent achieved a certain level or if the person living there’s income got high enough, then that unit you could raise the rent more than the board said.  And they stopped that, and it seems like a good thing.

But at the end, if the building, the units needed repair and you couldn’t raise the rents enough to cover those repairs, then you either wouldn’t repair the unit or you wouldn’t re-rent the unit when somebody left.  And what we’re seeing now is that there are a number of building owners that can’t make those repairs because this also happens right before the rise in interest rates, the increase in labor costs and supply costs.  And so that’s one of the – that’s another reason why building of units is so down in New York.  And so when you do see a crane, it’s usually a building that started before 2019 or 2020.

And so that’s a big problem.  I think it could be a little bit contagious, as you say.  Another thing that’s happening is people just aren’t putting units on the market.  So it’s a guess, but some – by some estimates, there are between eight and fifteen thousand units that just aren’t being leased, and maybe in the hopes that the legislation gets changed or something else happens or the building gets sold.  But unfortunately, it’s having the opposite effect.  The effect – the intent was to have people’s rents be stable.  But the effect, unfortunately, is that a lot of units aren’t getting leased because the owners are saying: if I lease them and the rent can only go up 1 or 2 percent a year, then it’s not worth leasing it.  

**QUESTION:**(Inaudible)?

**MR NORMAN:**Correct.  Correct.

**QUESTION:**And you say it could be contagious, and the beginning it – it now happened outside of New York or — 

**MR NORMAN:**Well, so I think one of the issues you’re talking about is if these buildings have loans from banks, and if you bought the building assuming that rents would go up at a certain level, and now all of a sudden they’re not going to go up, then the question is can you pay back the loan and do you have enough cushion to the weather this storm of higher interest rates and higher labor costs and everything else.  And some people can’t.  

So we see that with office buildings.  Some owners are just turning the keys back to the bank.  And that is happening with some rental – multifamily rental buildings as well, where they’re like, we can’t make this work anymore.  You can – like, the keys go back to the bank, and then it’s the bank’s problem.  And it probably then sells for much lower than it sold for in 2019.

**QUESTION:**I think that’s happening to one bank based in New York.  I think it’s called New York Community Bancorp.  

**MR NORMAN:**Yes.

**QUESTION:**  And I don’t – that’s the bank that is doing that business.  Are there other banks that is going into that market as well? 

**MR NORMAN:** I mean, we had a banking crisis a little over a year ago, where Republic Bank and Signature Bank basically were dissolved and sold to other entities.  I’m not saying that was the major problem, but that was one big problem was these kind of middle-sized and community banks have a lot of loans on multifamily buildings and on office buildings in New York.  So people are watching very carefully what happens over the next couple of years.  

Yes.  

**QUESTION:**My name is Soo, from Donga Ilbo newspaper, South Korean media.  And I’m really curious about your – you mentioned that – I mean, where are all U.S. consumers spending power from?  Because you mentioned that, I mean, the Fed tightening affected housing market or higher rents and (inaudible) eating up their income.  How can U.S. people can, I mean, spend strongly?  

And another question is about San Francisco because – I mean, with office vacancy affected New York and San Francisco, but I’m curious why San Francisco is more affected by COVID  – I mean, post-COVID – I mean the office vacancy.  Because U.S. media – I mean, they suggest that San Francisco has already entered, like, urban doom loop. 

**MR NORMAN:**(Laughter.)  Yes.

**QUESTION:**I’m not sure it’s true, because I — 

**MR NORMAN:**Yeah. 

**QUESTION:**Yeah, but I’m curious what’s the difference between New York and – yeah – San Francisco.

**MR NORMAN:**Yeah.****So maybe the first question first.  

**QUESTION:**Yeah.  

**MR NORMAN:**So on consumer spending, I think it’s – it is very important to understand that our home ownership rate is very high.  And when you think about – so if – and most of those people have 30-year fixed rate loans, which means that their rent is never going up, right?  While they have that mortgage, you lock in whatever your rate is forever, or for 30 years.  And so that means that if you own a house, and you bought it before the inflationary period, you actually have additional income, right, because you – everything else is going up, and your biggest cost – the cost of your house – is staying the same.  So that actually provides quite a bit of, I would say, savings in a sense.  If you were renting, you don’t have that same benefit, because your rent is going up every year.  So that’s one element.  The other is we spent as a country a lot of money on COVID relief.  And we still see some – I mean, that’s over, but we still see some of the effects of that.  So what we called PPP loans, also support for families, so a lot of that created additional spending power.  Some people blame it for the rise in inflation as well, but that did create a kind of cushion during the pandemic.  

So I don’t know all of the answers, but those – I think those are two big reasons why consumers are spending.  Also, I mean, wages are going up, so there is pressure on wages, and they have been going up.  They haven’t been keeping pace with housing costs, so I think that’s also why you see a rise in homelessness but also a rise in consumer spending.  Some people are doing very well and some people are doing very poorly.  

But with San Francisco – also, it’s just very interesting.  I was in – I was in Seoul over the summer, and the office vacancy rate I was told was 1.5 percent.  (Laughter.)  Okay.  Yeah.  And I think that is a really interesting contrast because employers wanted to keep employees.  And once again, every state set its own policy on COVID, on pretty much everything related to the pandemic.  The federal government never mandated specific things.  So California was much stricter; Florida was very lenient – whether it be masks or travel or work or other things.  And in addition, San Francisco had really – its office market was really overweighted towards technology companies.

And so what that meant was those are highly coveted employees, and they’re already relatively – like, you don’t need to be necessarily in an office, right.  You’re not an electrician or a plumber or a cleaner.  And so in order to keep those employees and also recognizing that they could work from home, the companies said go wherever you want.  And because they were so overweighted in technology companies that really affected the office market.  And California was very strict with its COVID policies.  So I think it was the double whammy of those things.  And now it’s suffering the consequences because those workers were a big driver in the economy, in spending, in addition to office buildings.  So it’s very tough now, I think.  

I wouldn’t necessarily call it a doom loop.  Like there – we are already seeing things getting better in San Francisco, and people are talking about AI.  And a lot of office space now in San Francisco is being leased by these new AI companies and startups that are getting a lot of venture capital, so people are seeing that as a bright spot.  If you ask me, they’re once again overemphasizing technology, because it’s – that technology companies and economy can be very up and down.  

**MODERATOR:**All right.  Go to there. 

**QUESTION:**David McClure with NHK News.  Just a quick question coming back to New York.  New York City is attempting to kind of thread the needle and address two problems with the lower valuations in commercial real estate and the office; then you also talked about conversion.  

**MR NORMAN:**Yeah. 

**QUESTION:**Is the – I guess first question:  Is converting from office to multifamily or to residential a feasible way to address the enormous lack of housing here in the city?  And then what is necessary – what kind of policy is going to be necessary from the city and then the state as you talked about the – how the 421-a tax abatement program went away.  We didn’t see any kind of legislative action from the state legislature in this past year.

**MR NORMAN:**  Right. 

**QUESTION:**  What needs to be done on the state level to help kind of address these problems, because there’s only so much that New York City can do itself?

**MR NORMAN:**  Yeah.  Conversions aren’t going to solve any problems.  It’s a nice thing when it happens, but it’s certainly not going to solve an affordability problem because they’re just as expensive as new construction and have the same problems with the legislation like 421-a, right?  If you don’t get the tax break or some other incentive, it’s just not going to happen.  And also, we don’t have a lot of 100 percent vacant office buildings.  

So one thing that people say is if I’m an office owner, I own a 40-story office building, and it’s 50 percent occupied – okay, so I’ll spend two years emptying the building.  So all the income I already have, I’m going to get rid of so that I can empty the building so that I can then spend $300 million to convert it to residential.  That’ll take one and a half to two years.  So in – it’s 2024 – in 2029, I’ll start trying to lease this not new building, this converted office building, which I’ll need some of the highest rents in the city for in order to make the numbers work.  So I have to get a lender that believes in me.  I have to have enough in the bank to make it work as I empty the building of the tenants I have.  

And so one of the things that we’re seeing in New York is you have a choice, right?  If 20 percent of my tenants aren’t here anymore and 30 percent aren’t happy but they’re still with me, and 30 percent are happy, then do I spend five years converting the building or do I spend $20 million on a new lobby and a coffee bar and ping pong tables?  And many office building owners are making that choice.  Like, I’m going to upgrade my building.  Because when we talk about office vacancy, class A office, the newest office buildings, are doing just fine.  They’re leasing up, and they’re leasing up at some of the highest rents in the world – over $200, $250 a square foot.  And that’s One Vanderbilt, that’s Hudson Yards.  They are doing fine.  

And so it’s the older buildings that haven’t been upgraded that are really – and that’s the majority of New York City buildings.  And so it’s, I think, just an easier calculation to say, if I make a better building, I’ll either keep my existing tenants or I’ll get some new tenants and build this little gap, or relatively little gap, rather than spending five years – and most people that own office buildings aren’t residential developers.  So it’s like then, okay, I’m going to learn the residential market – I’m going to convert this building and learn the residential market.  If I sell the building, it’s going to sell for much less than what an office building would sell for.  

So it’s a tough situation, and I don’t know enough about the global markets to know if the numbers work in other global cities.  But I don’t know that we see a lot of conversion.  Most people that can afford expensive apartments like a new apartment.  Most people that like and can afford an office like a new office.  So I think you run towards those people rather than guessing whether other people will do the thing that you want with your old building.  Just my opinion. 

**QUESTION:**  So it’s kind of a half measure in a way, like, not really addressing either problem like the lower CRE office valuations or the housing issue? 

**MR NORMAN:**  Yeah.  

**QUESTION:**  And then if you have anything about, like, legislative action, things that would be necessary to make any kind of conversion, like, feasible?  Like, what would need to happen in all of those cases?

**MR NORMAN:**  Well, I mean, so we have the example of post-9/11, it really worked.  I mean, downtown had, I think, 4,000 residents and now it has over 30,000 residents (inaudible).

**QUESTION:**  (Inaudible.)

**MR NORMAN:**  And it was – but it was perfect in many ways, and it had the tax incentives.  So, I mean, that is – that is one example.  Los Angeles did it as well with its old historic district.  But those all – also, those buildings were perfect for conversion.  So I think Midtown Manhattan is harder.  

**MODERATOR:**  You had a question. 

**QUESTION:**  I am Sin Young Park from The Korea Economic Daily, from South Korea. 

**MR NORMAN:**  Yeah. 

**QUESTION:**  I would like to ask about WeWork.  Does it affect to real estate markets still?  

**MR NORMAN:**  Yes.  (Laughter.)  You want a longer answer than that.  I just – yeah, that – it’s interesting because we have all of these issues, and we work already – we knew that the problems were coming, and after the pandemic, and people working from home made it worse.  But they leased.  They didn’t own most of their buildings; they leased them.  So I think in some ways it was a hidden problem because buildings had all of these leases, but a lot of them were with WeWork.  And it’s not like if I have a company that leases a building, then I worry about the health of that company, but if WeWork is leasing in 40 buildings and something goes wrong with WeWork, then that 40 buildings have a problem.  And so I think that’s contributing to our issue, and they had a lot of space in New York.So we’ll see what happens.  

I mean, one of the things that happens with office buildings is if I’m, let’s say, Facebook – and actually Facebook is doing this now – they leased a lot of – tech companies were leasing a lot of space in New York, Hudson Yards and the west side.  During the pandemic, they were signing leases for new space, and then they decided, oh, we don’t need all of this space, so then they put it on the sublease market.  So they’re like well, we have this lease for – usually commercial leases are seven to 10 years, and you’ve signed a guarantee saying you’re going to pay that.  So Facebook, Twitter, Google got way too much office space in the west side of Manhattan, and so now they’re putting that on the sublease market.  So, like, they still have the lease, but they’ll say, like, hey, other company, can you please lease it?  It’s probably less than they’re paying, so they’re losing money.  But they don’t want to get sued, and they need to run out their lease.

And so with the WeWork space, they started to do that.  But then, if they go bankrupt, then the space goes back to the owner.  So we’re in a moment where we’ll see what happens.  There’s way too much space on the market already, so it’s not clear who would absorb the WeWork space and whether WeWork tries to sublease the space or whether it goes back to the owner.

**QUESTION:**  And if some building owner want to upgrade their building, it means they believe some kind of tenant will come back.  So I think does it – is it possible, because if I were them who is doing remote work, I don’t want to go back to office.  I want to work in my home, at my home.

**MR NORMAN:**  Yeah.

**QUESTION:**  So I want to ask:  Is it possible to keep the customer or tenant to some new upgrade building?

**MR NORMAN:**  So right now I think there’s a particular issue, which is unemployment’s very low, and that’s hurting the ability for people, employers to say you have to come back in the office three – I mean, three days a week, four days a week, certainly not five.  I – there’s probably a study, but there’s a certain kind of company that says two days a week; some say three days a week.  Some just realized they’ll lose their best employees if they say any days a week.  

So I feel like until we have a labor shortage and if – so what has to happen is really unemployment has to go up.  People have to really be looking for jobs, because one of the things that will happen if that happens is I’m living on a farm, working remotely on my computer, and I lose my job, right.  (Laughter.)  So when I apply for that next job and I say I want a high salary and I also want to live on my farm, the employer’s going to say no thanks, there’s 20 other people that want that job.  But we’re not in that economy now, but when we are, I think that’s the moment where employers will say, if you were hiring, this job is fully in person.  But right now, I don’t feel like most employers can actually say that, which is going to hurt the office market.

**MODERATOR:**  We’ll take a question in the back, and I just wanted to say if there’s anyone online that wishes to ask a question, please go ahead and raise your virtual hand.  But we’ll go in the back.

**QUESTION:**  I’m Jukka Lehtinen.  I’m working for the news press paper Kauppalehti from Finland, and I really would like to ask a big – bigger pictures.  What is the scenario and then what will happen if we have this kind of a housing crisis going on and also the office space is – seem to be in big problems?  How this is going to – forward what’s going to happens and what is the worst-case scenarios?

**MR NORMAN:**  It’s a good question that I think about, and when I think historically about when we’ve had real crises, things really have to fall for certain things to happen.  So this is very New York-centric, but if you think about SoHo or Tribeca, those were manufacturing centers in 1800s, early 1900s, and then manufacturing went away.  I’m sure those landlords would have loved to have more tenants, but there were no tenants, so they started renting – the values came down so low that the owners either walked away from the building or stated saying, oh, this artist – just pay the heat and you can stay here and use it as your studio, right?  But the values – right, that was a 30-year process.  And then more artists came, and then people like artists and people like coffee, and artists started living there.  But that was a 30-year process of the buildings losing value, losing value, losing value, and then losing value to the point where anybody living there would be okay, right.  Any money coming in, enough to, like, pay the electricity and the taxes.  

So I hope we don’t get that far down, and SoHo is great, but I don’t want to wait 30 years – (laughter) – for that to happen.  But that is kind of, like, when I think about historical precedence of, like, these problems that don’t get better – many cities have that situation where it’s like, something happened – air travel, or other things that just completely changed an industry or a neighborhood or a city, and then it became a whole different thing, but it took decades.  

**MODERATOR:**  Oh, Ozzy, please go ahead.

**QUESTION:**  I’m Chun-Chieh from Taiwan Central News Agency.  My question is related to housing inflation.  This is quite a puzzle to some Fed officials, because the private numbers shows that the housing inflation is moderating right now, but it’s not reflected on the average number, and it takes longer time to happen, perhaps.  So do you have any answers to this puzzle?

**MR NORMAN:**  The housing inflation question?

**QUESTION:**  Yeah.

**MR NORMAN:**  I mean, I think it’s supply, but we just haven’t gotten the supply.  Which is why I think you see the state of Florida, state of California, the state of New York trying to take action to increase supply.  Because without that, you just – there isn’t enough housing at the levels at which people can afford it, and so it’s going to – right, scarcity makes the prices go up, which I guess is good for existing homeowners but bad for the overall economy.  And so I think what I see is people trying to increase supply in any way they can.  So there kind of isn’t one solution; it’s like multiple solutions will have to be used to get that supply up.  Because otherwise that – right, it’ll keep inflating.

**MODERATOR:**  So I don’t – go ahead.  Please, please.  We have time for another question.

**QUESTION:**  I asked you a question about the housing inflation.  (Laughter.)  You mentioned that with the supply – the supply shortage, do you expect the housing inflation to come down this year?  I’m just wondering.

**MR NORMAN:**  Oh, like, will prices come down this year?

**QUESTION:**  Yes, how – how the – yes, interested if housing —

**MR NORMAN:**  I don’t think so.  I mean, I – this would just be a guess on my part, but I don’t see enough supply happening that prices go down.  And even – it’s interesting because in New York and California, they talk about out-migration – so, like, population not increasing where – as much as states like Florida or Arizona, Nevada.  But we weren’t building enough housing even before the pandemic.  So I think the problem is – certain things can moderate it, right, like less people live here or less people want housing.  But we didn’t have enough to start out with.  And we weren’t cheap five years ago in terms of housing, and we weren’t producing enough housing at – for people of various income levels.  So I don’t really see that moderating at the rate we need it to to make a difference.

**MODERATOR:**  If there are no other questions online or in the room, I just want to take the moment to thank you, Dean Norman, for sharing your time and your insights with us, participating in this series.  We really appreciate it.  

Today’s briefing was on the record, and we will share a transcript with you as soon as it’s available.  And that concludes today’s briefing.  Thank you.

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