Jerry Bowyer | On July 20, 2020

One World Trade Center, New York, New York City
(Photo by Joe Mabel) (CC BY-SA) (Resized/Cropped)

Large coastal cities with high population density are under tremendous pressure from recent crises. In fact, they were already under significant pressure due to changes in the tax code, which took effect in 2016 and significantly reduced the tax deductibility of state and local taxes, taking away a federal benefit for high tax states and local jurisdictions. Cities such as New York had been under significant outmigration pressure even before 2020.*

Are there implications for publicly traded real estate investors? The answer is probably yes.

Let’s take a look at a cap-weighted approach to managing REITs, which is the way most such money is invested. The regional allocation of capital is determined by the value of publicly investable real estate in that region. In other words, if you add up all of the office buildings in the New York metro area which are available for the general public to invest in, and you decide to invest your real estate money based on that, that’s cap-weighting.

For example, according to one well-known approach (there’s slightly different ways to do this), the value of all of the publicly investible office space in New York metro is roughly a quarter of all of the publicly investible office space in the United States. So, a cap-weighted portfolio index would dedicate roughly a quarter of the portion of the portfolio to office space in New York metro.

Let’s take a look at what that does on a national scale:

(Source: Vident Financial, S&P Global, as of 2/3/2020)

The height of each bar is determined by the share of the office portion of the portfolio invested in that particular part of the country, like we discussed above, with New York getting a little more than 25%. As you can see, there is a very heavy concentration in big cities with large, dense populations, mostly on the coasts. These allocations tower over ‘Flyover’ America.

It’s not a matter of how economically productive these cities are — they are clearly highly productive, but their share of cap-weighted REIT money is lower than their share of national economic output.

For example, the New York metro area produces a little less than 8% of GDP (Gross Domestic Product, the most widely recognized measurement of economic production). That’s a lot for one city, but it’s not 25%, which is the share of office space investment in the cap-weighted index.

This is a large ‘overweight’, which means the investment bet is larger than one based on the economic output. A lot of this is a matter of judgment, not pure math. Does New York metro strike you as a place with a risk profile which justifies such an outsized bet? Or does it seem more prudent to diversify things a little more, reallocating some (not all) of those big New York, Boston, and LA bets across the rest of the country?

* CNY Central, Study: New York ranks in top 3 most moved-out-of states for 7^th year in a row

Originally published on Townhall Finance.

Jerry Bowyer

Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.

Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.

Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.

Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.

Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.

Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.

Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.