New York has dominated past surveys of the most appealing global cities for business, and its workforce has recovered to pre-pandemic levels. But a new study finds that the largest U.S. commercial property market still faces major financial challenges.

For one, New York’s office vacancy rate of 18% is the highest since the early 1990s, according to Michael Cembalest, the chairman of market and investment strategy for J.P. Morgan Asset & Wealth Management. The percentage of space that's leased but underutilized remains as high as 35% on some days when work is still being done from home, he said.

New York is “still a very difficult place to do business,” as its zoning restrictions are “particularly burdensome at a time when flexibility is paramount in a post-COVID world,” Cembalest said in his "Eye on the Market" commentary.

In a composite index measuring a variety of issues including post-COVID urban recovery, commercial real estate, mass transit, crime, outmigration, work-from-home trends, and tax rates, the study found New York in aggregate fares only better than Chicago, Detroit and San Francisco among a total of 22 cities examined. And that list of cities varies to include Seattle, Los Angeles, Charlotte, North Carolina; and Boise, Idaho.

On the zoning restrictions front, New York, for instance, ranks last among 83 cities in the University of Arizona’s zoning regulation index, according to the report. The city’s current zoning, for instance, forbids new apartment buildings to be built in parking lots while some streets preclude development of new housing even along streets adjacent to public transit, the study said.

City officials recently proposed zoning and rule changes citywide they argue can help create 100,000 housing units in the next 15 years. On that front, the city seeks to end what it called “decades-old regulations” that require certain fixed numbers of parking spaces to be built alongside new homes that drive up costs and make many projects unfeasible.

New York’s residential floor-area ratios, or FAR, in many locations are too low to permit apartment buildings, even in places well served by public transit and where low-intensity businesses could be located on the ground floor of new multistory mixed-use buildings, the J.P. Morgan study said. It added that the vast majority of land in boroughs outside Manhattan is zoned only for one- and two-family homes.

“The best way to deal with the ‘office apocalypse’ is to encourage development of more housing stock, which would bring down real estate prices and encourage in-migration of employees and firms that would eventually fill some of the vacant space,” the study said.

The report also found some positive points, such as its tourist and job recovery from the pandemic, diverse businesses and highly talented workforce, but the focus was on challenges to be addressed.

The city’s household tax rates and “very low” home affordability are among factors that may “partially explain” why New York has had one of the highest net outmigration rates in recent years, according to Cembalest.

New York state trailed only second to last, just behind Alaska, among all U.S. states from 2011-2021 regarding outmigration of both the number of taxpayers and their earned income, according to the study. Meanwhile, the city’s influx of migrants from the U.S. southern border “threatens to substantially impair the city’s financial situation,” the study said.

“In a city that’s already a difficult place to do business, a combination of fiscal pressures, outmigration of the tax base and high tax rates lead politicians to raise taxes further, fueling a decline in investment and more outmigration,” according to the study. “This is the story of Detroit, whose decline was exacerbated by high auto sector concentration of its employment and tax base. NYC is way more diversified and economically sound than Detroit in 2013, but this is a very low bar.”

Among some of the policy recommendations besides zoning changes is the city negotiating so-called payments in lieu of taxes to help shore up a loss of revenue from tax-exempt real estate. Those property owners include hospitals, universities and their medical centers, museums, and religious institutions. The study pointed to many universities having “technology transfer offices to privatize and profit from federally sponsored research,” in the process “collecting millions in tax-exempt royalties.”

It mentioned that Columbia University is now New York’s largest landowner and that its property tax savings are 50% larger than those given to Yankee Stadium. That's greater than the tax incentives for Citi Field and Madison Square Garden combined.

“The situation gets worse every time Columbia expands, since it takes over previously taxable real estate,” the study said.

The school owns more than 320 properties, with a combined value of nearly $4 billion, according to the New York Times. As Columbia bulked up its real estate footprint, it’s also “become more of a drain on the city budget” because of the more than 200-year-old state law that allows universities and other nonprofits to pay almost no property taxes, the Times reported in September, adding the law saves the school more than $182 million annually.

New York University, meanwhile, had property tax savings of $145 million this year, the Times reported. Columbia University didn't immediately respond to a CoStar News request seeking a comment.

The city also will do well to improve its relationship with the business community as New York ranks next to last in the city peer group regarding “ease of doing business,” the study said.

“Most cities that are easier places to operate have seen faster economic and demographic recoveries since 2019,” according to the report. When it comes to policy options, there are “no magic bullets, only a few ideas to increase efficiency/productivity and tax revenues.”

To be clear, New York still scored some major points in the report.

The city ranks above the U.S. median when it comes to “high frequency measures of urban recovery” from the pandemic such as restaurant visits and airport utilization.

It also has unique advantages such as its business sector diversification and global financial sector dominance, according to the study.

The study pointed to various global surveys that show New York ranking either No. 1 or among the very top when it comes to areas such as its corporate talent.

For instance, "the 2022 Global Cities Report" by consultancy Kearney ranked New York at the top above London, Paris, Tokyo, Beijing, Los Angeles, and Chicago among a slew of other major cities when it comes to its "competitiveness, market dynamics, human capital and political engagement."