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4 Things NYC Developers, Landlords And Brokers Think You Should Know Going Into 2019

It has been a year of milestones for New York City’s commercial real estate market. Coworking entered into unprecedented territory, with WeWork now the biggest private tenant in Manhattan. Amazon caught the industry by surprise, announcing in mid-November that it would bring its HQ2, and 25,000 jobs with it, to the Long Island City waterfront. Many are continuing to work out what kind of impact opportunity zones will have on the market.

Around 300 people gathered at Bisnow’s New York City State of the Market event at 866 United Nations Plaza Thursday to talk about the year that has been — and what's in store for 2019.

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AmTrust Title's James Cosolito, Kushner Cos.' Laurent Morali, Muss Development's Jason Muss and Sage Realty's Jonathan Kaufman Iger

Retail In The City Is A 'Disaster' And Rents Need To Come Down

Globally, the retail industry is scrambling to adjust to the ways people now shop, and in New York City, where landlords have demanded sky-high rents in recent years, is no exception. Kushner Cos. President Laurent Morali told the audience he has yet to see a workable answer to the problem.

“Retail right now is a disaster … There are so many retail stores that are vacant. I have not seen yet a solution for how we are going to be able to deal with this," he said. “I’ve seen some retail stores turn into office space or storage. But I have not seen a real big-scale solution for this.”

In Manhattan, 15 corridors have experienced an average rent decrease of 25% since 2015, according to the Real Estate Board of New York.

Brooklyn, however, is not seeing the same rate of rental decline with asking prices for available ground-floor retail space increasing year over year in seven of the 16 top Brooklyn retail corridors.

Sage Realty Corp. CEO Jonathan Kaufman Iger said it is time for landlords to adjust their asking rents and face reality.

“The vacancy isn’t because of a lack of consumer demand, the vacancy is because we want too much money,” he said, adding that, in the Meatpacking District, many started believing they could get much higher rents because of other landlords’ success in previous years.

"We see what Taconic and Thor were able to accomplish with what is now Samsung. They put in a store that doesn’t sell anything. It’s truly experiential retai," Iger said. “Other investors looked to that and thought, ‘Oh my God, they got $600 per SF.’”

He said there are now more than 10 owners on 14th Street who want more than $600 per SF, pushing vacancy to 48%.

“I guarantee you, if you were to take $200 per SF … that’s going to work,” he said. “As landlords, it’s time to reset expectations.”

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Avison Young's James Neslon, TerraCRG's Ofer Cohen and Himmel + Meringoff Properties' Leslie Wohlman Himmel

Opportunity Zones Are Already Boosting The City’s Investment Sales Market

Although investors and developers are being told there is no point doing a deal based on a possible tax break, panelists said there is mounting proof that people will consider paying more for a property if it falls within a qualified opportunity zone

“I got a call from a private guy who is worth $100M … literally told me on the phone last week that he is willing to pay more for an asset," said TerraCRG founder and CEO Ofer Cohen, adding that he is expecting a pullback on the multifamily market next year.

But, in Brooklyn, he believes the effects of Amazon HQ2 and opportunity zones could offset the slowdown in momentum.

Meridian Capital Group Managing Director David Schechtman believes prices are being artificially inflated in the zones.

“It’s a boondoggle,” he said.

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CohnReznick's Ronald Kaplan, Silverstein Capital Partners' Michael May, AFIAA's Dino Christoforakis and Pender Capital's Zach Murphy

Ground-Up Construction Is Facing Major Headwinds

In the last two years, the city’s luxury condominium market went from swarming with buyers to oversupplied. Nevertheless, construction costs in the city remain the highest in the world.

“Rates have gone up. Taxes are getting worse … I’m seeing more inventory loans than I ever have. Construction costs haven’t moved,” said Silverstein Capital Partners President Michael May. “You got a ton of headwinds, but this is still an incredible market.”

Silverstein Properties expanded into debt last month. May said the first loan it provided was a $240M mezzanine loan on a 1,000-foot-tall, ground-up mixed-use building, reported to be JDS Development’s tower at 9 DeKalb Ave. in Brooklyn.

He said Silverstein is cognizant of the fact that condo sellouts take longer, but relied on its market knowledge to underwrite deals it is confident in.

“We want good sponsors … [But] we care more about quality and location,” he said.

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Olshan Frome Wolosky's Nina Roket, Newmark Knight Frank's David Falk, WeWork's Granit Gjonbalaj, Oxford Properties' Adam Frazier, Colliers International's Michael Cohen and Vornado's Glen Weiss

Landlords Will Keep Leaning On Concession Packages To Get Leases Signed

Office property landlords have been relying on concession packages and tenant improvement allowances at record levels this year, and with more space due to hit the city’s market over the next two years, competition will only increase.

“I hate the TIs. But that’s life,” said Vornado Executive Vice President Glen Weiss, referring to the tenant improvement allowances. “The TIs are here … It’s OK, we will live through it, and that’s the game today.”

Those types of concessions are part of getting deals done in an environment where rents average more than $70 per SF, and over $80/SF for Class-A space. Despite the TI race to the top, he said he has not seen this number of tenants coming to New York City in his career.

Colliers International Tri-State President Michael Cohen has also seen concession packages balloon, but noted rents have also jumped significantly.

“Concession packages have ballooned by any measure, but one has to remember once upon a time when we were renting space for $35 to $40 a foot ... now we are renting for $75 to $100 a foot,” he said.