London, New York Stand to Suffer
Frangos, Lazarus, Dougherty, WSJ, Sep 16, 2008
The blast furnace known as the finance industry that has stoked the economies of New York and London for decades is rapidly cooling. Both cities have relied heavily on the securities industry for jobs, taxes and a prosperity that has lifted restaurants, stores, auto sales, fashion, entertainment and a wide range of other businesses. The future of that largess is in doubt a year into the credit crunch, with the bankruptcy filing of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch & Co. adding to the thousands of jobs already lost — and the likelihood that more will come. At the Thomas Pink store on Wall Street, where men’s shirts can cost as much as $450, Abby Kuskin, a sales associate, said she expects business to get worse. But “maybe they’ll be buying more interview shirts,” she said. New York developer Mario Procida is also concerned; he’s about to open a luxury condominium building overlooking Brooklyn’s Grand Army Plaza — charging an average price of $1.9m for units. “There has to be kickback in the marketplace across the board,” he said. Even before the weekend, the financial-services industry had shed more than 11k jobs in New York and 20k in London. Lehman has about 25k employees, a majority of them in London and New York. Thousands more positions are expected to be cut through the acquisition of Merrill Lynch by Bank of America Corp.
Jobs in financial services tend to be more important for the overall economy. About 5% of New York City’s jobs are in financial services, but they account for about a quarter of wages, some $60b in 2006, according to the New York Office of the State Comptroller. That same year, personal and corporate taxes paid by the securities industry accounted for about 10% of the city’s tax revenue. Every economic downturn has spawned doom and gloom in the world’s financial centers. But this one brings concern that the financial-services industry won’t be the same economic engine it has been in recent years. “These are very uncertain times right now,” said Stacey Pecor, owner of the Olive and Bette’s chain of boutiques in New York, whose regular customers include many in the investment banking world. “I think the shopper’s going to look at her wardrobe and she’s going to keep everything. “
Some thought the financial industry was due for a contraction even before the credit crunch started last year. In 2006, financial services accounted for about 8.3% of the US economy — higher than at any point in history — compared with 7.3% a decade ago. The finance industry, much like the automotive industry, still may have more jobs than the economy can support. “Just how many investment bankers does the economy need?” said Thomas Philippon, a finance professor at New York University. Some Merrill Lynch executives were no doubt asking themselves that question yesterday as they strolled through the Aston Martins, Bentleys, and Bugattis parked outside of their offices at Motorexpo, a high-end auto show with unfortunate timing. One representative for a luxury brand said he got a few “you picked an odd day” comments. New York City Mayor Michael Bloomberg said at a news conference Monday that the city is partly cushioned from the expected blows from Wall Street thanks to growth in industries such as media, fashion, tourism and bioscience.
London’s commercial real-estate industry is more vulnerable than New York’s because it has seen more building of office space in recent years. More than 8m sq. ft. are being built in London’s financial district. About 80% of that is considered “speculative,” meaning the developer hasn’t signed leases for it yet. In London, Lehman leases a 1m sq. ft. building in Canary Wharf and occupies 80% of that space, subleasing the rest. Lehman officials haven’t announced plans for those offices. In New York, by contrast, there are only a handful of speculative office buildings. Still, stocks of companies that own Manhattan real estate were hammered. Merrill’s biggest landlord in New York, Brookfield Properties Corp., saw its stock plummet 18% to $17.40 Monday as of 4 p.m. In bankruptcy-court protection, Lehman’s leases could be canceled, leaving landlords on the hook for gobs of space as job growth contracts. If Lehman gives up three-quarters of its roughly 2.7m sq. ft. of office space, the New York office vacancy rate would rise from the current 8.5% to 11.5%, a level not seen since the period after the Sept. 11, 2001, attacks, according to an estimate by Peter Riguardi, the New York president for real-estate brokers Jones Lang LaSalle. Lehman owns its headquarters at 745 Seventh Ave., near Times Square. It purchased the 1m sq. ft. building after the Sept. 11 attacks, when the firm fled the area near the World Trade Center. It paid $650m for the building, which would be a source of revenue for creditors if sold in bankruptcy.