Healthy Competition Will Define A Strong 2018 In NYC
Want to get a jump start on upcoming deals? Meet the major New York City players at one of our upcoming events!
Whether it is apartment developers competing for renters, investors competing for buildings to buy, office landlords competing for tenants or companies competing for employees, a growing New York City economy will feed the frenzy of forces fighting to gain ground in the country's biggest real estate market.
Investment sales dropping off was one of the big stories in New York CRE in 2017, but what buyers are willing to pay and what sellers are willing to take have finally come close enough together to start making deals happen.
Meridian Capital Group Senior Executive Managing Director Helen Hwang said the last two months have been twice as active as the first three quarters of 2017 for investment sales, a trend that should continue in 2018. Sellers are becoming more reasonable, she said, after 18 months of hearing buyers say the prices they paid in 2015 are not coming back.
"There’s a ton of capital on the market, there’s something like $250B of private equity capital standing on the sideline, that’s more than ever," Hwang said at Bisnow's 2018 NYC Forecast event in December. "Real estate allocation has increased over 10% for the first time in history. So there’s more money flowing into real estate, which means the buyers just have to suck it up and find something they can make sense of."
Domestic institutional investors, spooked by high prices in Manhattan, fled for cities like Charlotte and Atlanta to chase yields, Hwang said. But as the cycle grows ever longer, the institutions have come back to New York City, choosing security of capital over long-term yield, she said.
While they were gone, long-term local owners were able to make a dent in the New York office market, along with foreign buyers. Compounding the dearth of institutional money was a dip — but not disappearance — in spending from China after the country's government put restrictions on international spending. Hwang said NYC in 2018 will see more activity from China alongside the domestic institutions, crowding the playing field even more.
"Chinese investors, despite all the regulations back in Beijing, they were still active," Hwang said. "I think a lot of the regulation gets lifted in the second half of next year. We should see a lot more activity coming from China."
RXR President and Chief Financial Officer Michael Maturo said the stalemate caused by the bid-ask spread has led values to drop more than 10%, which will benefit the investment sales market next year. Investors from Southeast Asia and the Middle East, who have helped RXR raise more than $8B in the last 10 years, remain bullish as ever on owning New York real estate.
"I think it'll come back next year, we’ll see more activity," he said. "But we’re probably going to work off of that 10% to 15% [value decrease]. As more transactions get done, we’ll start to creep back up."
For the office leasing market, 2017 saw an exodus of Midtown tenants to the Hudson Yards district and Lower Manhattan. RXR owns millions of square feet in Midtown, and Maturo said the submarket was feeling some pain. But New York's magnetism gives him optimism that it will benefit from the next cycle.
"There’s a lot of discussion about what’s going on in Midtown, as many tenants are moving over to the West Side. I think it’s a cycle, and it’s basically a good thing," Maturo said. "While I think Midtown is suffering a little bit through some of the supply, I think over the long term it’s going to be good."
The supply that has been luring tenants from the once-vaunted Midtown Class-A buildings is all predicated on the same model: build a 21st century office that appeals to young workers, and the companies trying to hire them will follow. That is what RXR did in its transformation of 75 Rockefeller Center, and that is what other owners of Midtown properties — like L&L's successful repositionings of 390 Madison Ave. and 425 Park Ave. — must do to make sure the cycle tilts back their way.
"The talent is here, and it's all about talent," Maturo said. "It’s a real competitive race for talent, and if you can deliver product, good space, with amenitized, good locations, good transportation, I think it’ll be a good cycle. Next year, I think we’ll continue to have expansion of office companies in New York City looking for that talent."
New York City is also in the midst of the peak of a multifamily supply boom spurred by the 2016 expiration of 421-a. A record number of construction permits for apartment buildings were requested just about two years ago, which means every new buidling is competing with tens of thousands of other apartments all over the city.
StreetEasy has been the great equalizer in the rental market, GreenOak Real Estate partner Mark Van Zandt said. Landlords can no longer hope renters will decide not to shop around — they always do now, and they are comfortable negotiating on their own.
"I think StreetEasy has largely — and no offense to any residential brokers in here — it’s slowly killing the residential broker business, and what it does it it’s really opened up the city to renters," Van Zandt said. "They're shopping. I think that means you’ve got new product, vacant product ... you’ve got to compete for them."
The competition means concessions. The standard for GreenOak's portfolio, Van Zandt said, is two months free on a 14-month lease. But while that seems like thousands of dollars lost from the budget, net effective rents are still running at about $80/SF, numbers landlords in other U.S. markets would clamor for.
Despite the concession environment, most importantly, vacancies are filling up. Renters are forcing landlords to work for them, but buildings are not going into foreclosure for failure to lease up.
"New York City multifamily is arguably one of the more resilient asset classes in the country ... you’ve got a market that hovers 1.5% to 2% vacant throughout the cycle," Van Zandt said. "I think there’s been a lot of attention paid to the new supply, but I think despite it being pretty competitive right now to lease, it is getting filled, and that’s been the most encouraging thing that we’ve seen."
The resiliency has surprised some of the top-ranked economists at commercial real estate firms in the country. Cushman & Wakefield Chief Economist Ken McCarthy told Bisnow before the event he believes this cycle will break the record for the longest in U.S. history, and CBRE Chief Economist Jeffrey Havsy said from the stage he has been impressed at the economy's ability to "separate the signal from the noise," and not dive or boom in reaction to global events.
"One of the big surprises is how strong the New York real estate market has been," McCarthy said.
In 2018, he said it should be even stronger. With tax reform passing, all signs are pointing to a busy year in all sectors of New York's real estate industry.