Will Congestion Pricing Be the Final Nail in Manhattan’s CRE Coffin?

New York’s long-awaited congestion pricing plan has been implemented. Stakeholders in the commercial real estate (CRE) market are now watching with a mix of anticipation about what the fall effects it will have on the Big Apple.

With its goal of reducing traffic and funding public transit, congestion pricing has the potential to completely reshape the city’s economic and geographic dynamics.

But will it be the tipping point for a city already grappling with economic challenges, high office vacancy rates, and shifting work trends?

While congestion pricing could bring benefits, such as improved air quality and reduced congestion, it also risks exacerbating existing challenges within Manhattan’s Central Business District (CBD). Let’s examine the potential impacts. Read on to learn:

• Whether Congestion Clean will Clean Up NYC
• Will Congestion Pricing Push Businesses Outside the City?
• How Long Will Congestion Pricing Last?
  

The Potential Upside: A Cleaner, More Desirable Manhattan?

Let’s start with the good side. Drawing parallels from London’s experience, congestion pricing has historically delivered positive outcomes in other global cities.

In London, property values within the congestion charge zone increased by 3.68% due to improved air quality and reduced traffic, making central locations more desirable for both businesses and residents. NYC’s plan could theoretically yield similar results by making Manhattan’s streets safer and more pleasant.

However, the context in New York is vastly different. Let’s be realistic. The city is already grappling with rising crime rates, economic decline, and an office vacancy crisis.

Can reduced traffic and cleaner air offset these deeper systemic challenges? Or will businesses and residents simply take their investments elsewhere, opting for the lower costs and incentives offered by neighboring regions?

Money Moves Outside the City

On the negative side of things, the introduction of a $9 toll during peak hours could deter those on the fringe from regularly entering Manhattan. 

Then again, it’s New York—already one of the most expensive cities in the world. For many, an extra $9 might not be a dealbreaker. But truthfully it depends on the income level. For some New Yorkers, this added cost could be the final straw, pushing them to reconsider whether working in the city is worth it, given the crime, high living expenses, and daily commuting grind.

Declining Property Values

With retail vacancies already at historically high levels, further declines in demand could lead to long-term underutilization of key commercial corridors like Fifth Avenue and Broadway.

If congestion pricing reduces demand for office and retail space, property values in the CBD may fall further. Landlords with significant debt loads may struggle to refinance, leading to a rise in building defaults. This could trigger wider financial instability, particularly in the already-stressed CMBS market.

Any more strain on commercial property tax income could plummet the city into further disrepair. 

The Writing’s on the Wall

Without bold action or equally enticing counteroffers, Manhattan risks losing its crown as the commercial heart of the tri-state area. The question is no longer if many businesses will leave—it’s how soon they’ll pack their bags.

Commercial vacancies in the core urban area are likely to increase even further when those leases come due.

Activity is gravitating toward outer boroughs and nearby suburbs, where businesses are reaping the benefits of spillover. Neighborhoods like Jersey City, Westchester, and Stamford are becoming economic hotbeds, while Manhattan's prime commercial spaces are left grappling with rising vacancy rates.

And this is already happening... Neighboring states like New Jersey are capitalizing on NYC’s congestion pricing to lure businesses across the Hudson River.

Programs like the NJ RISE initiative offer $20 million in grants to New York-based companies that allow New Jersey employees to work remotely or from local satellite offices. This strategy not only helps employees avoid congestion fees but also positions New Jersey as a more affordable and business-friendly alternative to Manhattan.

For companies already eyeing decentralization, these kinds of incentives are like throwing gas on the fire. Suddenly, downsizing that Manhattan footprint or shifting operations across the Hudson doesn’t just make sense—it feels like the smartest move in the room.

Funded Commutes: A New Cost for Employers?

For commuters already dealing with high transportation costs, an added toll could tip the scales.

Employers looking to attract and retain talent may feel compelled to subsidize these costs to stay competitive. This could increase operational expenses, further straining businesses that are already navigating high rents and inflation in NYC.

Workers who aren’t receiving financial support to cover congestion tolls may be less willing to commute into the office, increasing demand for flexible work arrangements.

And businesses facing rising operational costs may not contest, instead encouraging employees to work from home more frequently, reducing the need for centralized office space.

Consider that a recent survey by Kastle Systems revealed that office occupancy in NYC remains stuck at under 50% of pre-pandemic levels, reflecting a persistent shift toward remote work.

Other ways NYC businesses may be affected: 

• Lower in-office attendance rates: Employees may push back against rigid return-to-office policies if they are financially penalized for commuting.
• Talent competition: Companies offering remote work or hybrid options may have a competitive edge in attracting top-tier talent.

While hybrid work may reduce immediate costs for businesses, it further undermines Manhattan’s office market, where many properties remain underutilized or vacant. This could deepen the cycle of economic decline already gripping the CBD.

Will Congestion Pricing Last?

Congestion pricing has already sparked significant debate, and its future is far from guaranteed. Political opposition, legal challenges, and public resistance could derail the plan, particularly given the broader economic and social implications it carries.

Political Pushback

New Jersey Governor Phil Murphy has directly appealed to President Donald Trump, urging a reevaluation of the federal approval granted to New York City’s congestion pricing plan. Murphy has criticized the tolls for unfairly targeting New Jersey commuters, who already face some of the highest transportation costs in the country.

• According to AAA, New Jersey drivers entering Manhattan via the George Washington Bridge or Lincoln Tunnel already pay up to $16 in peak tolls, making the additional congestion pricing fee particularly onerous.
• Over 400,000 New Jersey residents commute to New York City daily, many of whom rely on vehicles for their jobs.

Trump has called congestion pricing a "disaster" and pledged to overturn it, calling into question whether the federal government might intervene to halt or suspend its implementation.

And while NYC Mayor Eric Adams continues to push for congestion pricing, he might soon find himself stuck in a different kind of gridlock...He's still awaiting trial after being indicted by a Manhattan grand jury on 16 felonies, including conspiracy and taking bribes. But if the mayor can’t clear his own legal mess, how’s he supposed to clear the streets?

Legal and Public Resistance

Beyond political opposition, the program faces legal challenges from stakeholders who argue that congestion pricing is an unfair burden.

• Lawsuits: Several lawsuits have already been filed, with arguments ranging from the tolls' disproportionate impact on low-income drivers to claims of insufficient environmental review.
• Public Opinion: A recent survey by Siena College found that 57% of New York residents oppose congestion pricing, with concerns over its fairness and potential economic consequences.
• Advocacy Groups: Groups like AAA Northeast and local business coalitions have raised alarms, stating that congestion pricing could discourage tourism and harm small businesses in Manhattan.

Economic Viability

The plan’s economic sustainability is also being questioned. While NYC anticipates raising $1 billion annually from congestion pricing, which is earmarked for transit improvements, critics warn that:

• Falling commuter numbers due to remote work and resistance to the tolls may undermine revenue projections.
• High implementation and enforcement costs—projected at $200 million per year—could cut deeply into expected profits, delaying transit upgrades.

Impact on Manhattan's Recovery

The political uncertainty surrounding congestion pricing creates ripple effects for Manhattan’s already fragile recovery.

If the plan is rolled back, it could ease financial pressures on commuters and businesses but would also limit NYC’s ability to reinvest in transit infrastructure—a crucial factor for long-term economic growth.

In the end, congestion pricing’s survival hinges on whether it can overcome these political, legal, and financial headwinds. Its success—or failure—will have profound implications for New York City's future, potentially shaping the fate of its commercial real estate market, public transit system, and economic vitality.

Many of these challenges—political uncertainty, dwindling reinvestment, and financial strain—are symptomatic of the post-apocalyptic office market engulfing Manhattan. As congestion pricing’s fate hangs in the balance, the ripple effects threaten to deepen the city’s commercial real estate crisis. If you want to know how to protect your commercial portfolio in this environment, download Surviving the Office Apocalypse. Uncover strategies for navigating this chaos and securing your footing in an uncertain market!