Pinsky says the city attracts talent globally but is not creating enough space for all the talent.

(Second of two parts)

NEW YORK CITY—Focusing on his new role of EVP at RXR, Seth Pinsky, who was president of the city’s Economic Development Corp. for 10 years under Mayor Bloomberg, tells EXCLUSIVELY about what areas present exciting opportunities for CRE—spoiler alert: they’re not in Manhattan—and why the city’s office stock is in trouble. From an RXR standpoint, what unheralded parts of the city are of interest to you?

Pinsky: At RXR, I have been asked to help launch a strategy focused on emerging sub-markets throughout the New York City region. We believe these submarkets are poised for significant growth due to two complementary phenomena. The first is a “push phenomenon” whereby, as New York City continues to attract talent from around the globe, prime locations are becoming more and more pricey, driving many people to look to formerly peripheral areas for more affordable space.  At the same time, many of these areas are also benefitting from a “pull phenomenon” whereby, due to changes in work culture and lifestyle, people are increasingly looking to walkable, diverse and “interesting” areas in which to live, work and play. 

These two trends benefit areas throughout the region that may once have been out of favor with the market but which have strong underlying fundamentals, including proximity to population and employment centers, together with good infrastructure. 

Going forward, we see opportunities in two categories of emerging sub-markets.  One is emerging urban areas—that is, up-trending geographic areas of the city, especially outside of Manhattan, such as St. George in Staten Island and Jamaica in Queens. We also believe that emerging urban opportunities exist in asset classes with favorable supply-demand characteristics in more established areas of the city, including office space along the Brooklyn and Queens waterfront and in Downtown Brooklyn, where we have been active acquirers in recent months.

The second category of emerging submarkets on which we are focused is urban-suburban markets. These are traditional suburban downtowns that, in many cases, suffered from disinvestment over many decades as suburban populations shifted their business to shopping malls and looked to establish white picket fence lifestyles. However, given the lifestyle preferences of the millennial generation and retiring baby-boomers, we believe  these suburban downtowns—where the right infrastructure and a collaborative local government can be found—offer attractive opportunities. 

Places on which we are focused include Glen Cove, Huntington Station and Hempstead, Long Island, where we have been named, as part of a joint venture, as a master redeveloper; and on cities like New Rochelle and Yonkers. While you’re clearly a fan of progress and the city’s recovery, you’ve stated publicly that the trend toward converting office space into residential property is worrisome. Why is that the case?

Pinsky: The fundamental obstacle to the city’s continued prosperity is that we are becoming more of a magnet for talent from around the world, achieving record highs in population and employment, but are simply not creating the space for all of that talent at a commensurate rate. The result of this imbalance—which is caused by a host of issues, ranging from the high cost of construction in New York to the density of existing uses in the city and to our zoning policies—is that both residential and commercial real estate prices are spiking.  Because residential real estate tends to be the most profitable type in most places, this imbalance is leading to a crowding out of other uses across the city.

Something like 15 million square feet of class B and C office space been converted in the past decade or two, and that isn’t being replaced. That means the creative businesses, like technology, that have been fueling our economy, don’t have a lot of options in affordable buildings at the level of quality they need.

Another impact of this imbalance is that use types which are less profitable than residential use—including hospitality, retail and office—are being forced to look to areas that were formerly reserved for uses that are even less profitable, including industrial. 

The net effect of this, I fear, is that industrial businesses are simply going to be forced out of the city altogether. This is problematic because industrial businesses are critical to the functioning of and any modern city. If we can’t get cement to our construction sites or food onto our tables, we will find ourselves in an unsustainable situation. 

Also, industrial businesses are important because they tend to employ people with less formal education and training at comparatively better salaries. In an era where we, as a city, spend a lot of time focusing on “the tale of two cities,” if we do not figure out a way to relieve the pressure on the industrial sector, we surely will fail in our goal of creating greater equality across our population.