How Congestion Pricing Could Impact Commercial Real Estate

New York City is expected to follow in the footsteps of London, Stockholm and Singapore with a new, long-awaited measure this month: a congestion fare targeting drivers passing through its central business district, stretching from the tip of Lower Manhattan through Midtown to 60th Street.

The issue has sparked bitter debate in and around the city. Some say congestion pricing will harm small businesses, adding to woes for contractors working across the city and resulting in even higher prices for consumers. New Jersey Gov. Phil Murphy voiced his opposition this week, saying it will place an undue financial burden on commuters from the Garden State.

But leaders in CRE believe that the tolling, which could be as high as $23, will pay off in the long term for the city's environmental goals, quality of life, and for property types from aging office buildings to retail corridors. It could also have an impact on where companies lease space and shift the way e-commerce companies lay out their distribution networks in the city.

“The money that will be raised from this initiative is so important to supporting our public transit infrastructure,” said Nicole LaRusso, CBRE's senior director of research & analysis in the Tri-State region. “I think that everyone will benefit.”

Some smaller property owners told Bisnow that they are concerned about the tolling's potential impact on their businesses, which have struggled to regain their footing since the pandemic.

“It’s rising costs to me, which is rising costs to my tenants, so there's a real ripple effect here,” said Ann Korchak, who owns two small multifamily buildings on the Upper West Side. “It's one more headache for anybody trying to operate in New York City.”

The city hopes to reduce the number of vehicles stuck in traffic on the roads through congestion pricing, improving travel speeds and reducing vehicle emissions in one fell swoop. The funds collected through the fee will be funneled to the Metropolitan Transit Authority, which is facing a $2.5B budget deficit and fears of a fiscal cliff.

The MTA held several public hearings during the final days of August — the first of which lasted almost seven hours — attended by zealous advocates, angsty opponents and New Yorkers unclear about exemptions. The public comment period is in effect until Sept. 9, after which the MTA is expected to present a clear-cut final version of its congestion pricing policy.

Public confusion hasn't been helped by the fact that the MTA has yet to announce exactly how much drivers will pay, which vehicles are exempt and what times the tolls will be in effect. At present, exceptions are in place for a select few vehicles: emergency transportation like ambulances, vehicles transporting people with disabilities, and vehicles belonging to residents in the CBD earning less than $60K, The City reports.

Industry insiders told Bisnow congestion pricing is likely to benefit CRE owners regardless of asset class, although it could give a distinct advantage to office buildings close to a variety of transit options. 

“I think the thinking was: If we're going to have an office in Manhattan, and we're drawing from the regional labor force, we want to give our employees the best possible experience when they come into the office,” LaRusso said. “That starts with the commute.”

Midtown neighborhoods, filled with aging office buildings, have struggled to retain tenants as employers fill up shiny new properties on Manhattan's Far West Side. But congestion pricing could provide a boost to Midtown, Marx Realty CEO Craig Deitelzweig said. 

“There’s folks that might decide to [go to an] office in a location that's more transportationally central. That's why Midtown has historically been Midtown — because of all the great public transportation there,” Deitelzweig said. “I think that will become even more important when you're being charged X amount to get into the city by car.”

While it could prove yet another hurdle for employers struggling to entice workers back to offices, most Manhattan workers commute via public transit anyway, and the policy is unlikely to discourage commuters who were already planning on driving to work, LaRusso said.

“I think for people driving into Manhattan, it's always been an expensive proposition, and so it's never been for people who are particularly price-sensitive,” LaRusso said.

Pushing New Yorkers to return to the subway — where ridership is still hovering at less than 70% of pre-pandemic levels on weekdays — will boost MTA revenues, resulting in improved experiences on public transit and for pedestrians in Manhattan, JLL Senior Director of Research for the Northeast Region Phoebe Holtzman told Bisnow. 

“It's easier for people to get around if you have less congestion and if you have better public transit,” she said. “If you look at some of the experiences that people have when they're shopping or walking in streets with a lot of traffic, reduction in traffic makes for a better retail experience.”

Manhattan’s retail corridors — some of which have had depressed rents after a decade of e-commerce competition and two years of a pandemic-induced drop in foot traffic — could get a boost as a result, even with higher costs to transport goods into stores, Holtzman said.

Some deliveries, particularly in the retail and e-commerce sectors, could follow industrial and shift to overnight deliveries as owners seek to keep costs lower by delivering outside of regular business hours, JLL Research Manager for the Northeast Industrial Region Alex Kachris said.

Additionally, he said, congestion pricing presents an opportunity for industrial and e-commerce to streamline fulfillment processes. Whereas industrial users right now use a mix of truck sizes and sprinter vans, while a few use bicycles, Kachris thinks street couriers could be a more regular piece of the last-mile supply chain. 

"The other possible knock-on effect is maybe delivery stations within the CBD corridors, bringing in goods at night, similar to retail, and then in the mornings or during the day, having those shipments sent out from these delivery stations embedded within the CBD area," he said.

"I can definitely see that happening from a big e-commerce player," he added. "But you know, the bodega that needs apples midday is probably going to accept that and the cost of apples may go up."

Some retailers — particularly smaller ones — will pass the cost onto consumers. Jan Lee, who is a small-business owner, a third-generation small property owner based in Manhattan’s Chinatown and a member of the Civic Center Residents Coalition, said congestion pricing could hurt businesses in his neighborhood substantially.

Lee told Bisnow that two of his tenants are popular eateries, but that Manhattan’s Chinatown faces competition from Chinatowns in the outer boroughs, where many of the neighborhood’s other restaurants and grocery stores often have duplicate outfits. Lee fears that dynamic, coupled with low margins for Chinese restaurants could distress businesses in his neighborhood.

“All of our produce, all of our meat distributors, all of our fruit vendors, all of the wholesalers, they're coming from outer boroughs, they're going to be charged. Now they're charging that to the restaurant. The restaurant can't raise his prices anymore, because he's raised it for Covid already,” Lee said. “It will devastate this community.”

Lee is also concerned about congestion pricing increasing costs for his home improvement business. He drives his equipment using a commercial truck from his workshop in Brooklyn’s Carroll Gardens neighborhood, often to clients’ homes all across the five boroughs — and feels he will have little alternative than to pass the cost of the tolls on to customers, which raises the cost of housing.

Korchak, who is president of Small Property Owners of New York, said higher costs for contractors may hurt multifamily property owners and tenants. Although SPONY has not yet reached an official position on the tolling, Korchak said she doesn't think it's a good idea.

"Most of the contractors and vendors that are working for me are also small businesses, they're all coming either from Long Island, New Jersey, or from the outer boroughs," she said. "My electrician or my plumber can't just show up on a scooter, they've got a lot of tools, a lot of equipment, and this is going to impact them."

The short-term pain for businesses operating in the affected area is outweighed by the overall positive impacts of the fees, industry leaders maintain. The Real Estate Board of New York supported congestion pricing when it got state approval in 2019, it said in a statement.

“Our mass transit system is the cardiovascular system of the city and region," the real estate lobbying group said through a spokesperson. "It is critical to New York’s long-term economic health. Along with generating a new and sustainable revenue stream for our mass transit infrastructure, congestion pricing will reduce traffic and air pollution."

For cities like London and Singapore, JLL researcher Holtzman said congestion pricing has paid off as an economic and environmental measure.

“You haven’t seen a decline in the retail cores of London, you haven’t seen a decline in tourism, you haven’t seen a decline in leasing activity,” Holtzman said. “What we've seen in some of the other, large global cities that have done this is that it’s not necessarily a burden that has been felt by the average Londoner.”