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New York City Market Highlights


While the United States in general and the real estate market in particular are currently reeling from the economic recession, pundits such as Robert Sammons and Robert Knakal report an unrealistic picture in the most recent issue of THE NORTHEAST REAL ESTATE BUSINESS. They are ignoring reality by publishing articles that depict a rosy picture for Real Estate in 2008.

Sammons and Knakal should read THE ECONOMIST (“Foreclosures in America”) for a reality check. Indeed, in the March 13, 2008 edition of the Wall Street Journal, the majority of leading economists finally coronated our latest recession. Unfortunately, many in the real estate community are not willing to face up to the fact that this recession is going to be difficult for our industry.

If you are in a purchasing mood, wait until the end of 2008 to buy any more real estate. Prices will come down in 2008.

If you are a commercial landlord, rent your space as quickly as possible. The market will suffer a 5-10% drop later this year, and into 2009. --Edward E. Klein

Northeast Real Estate Business

Multifamily Market

With a vacancy rate of less than 1 percent, how can you say that the market is not fantastic? The appetite of investors for multifamily product has never been higher and these buildings are the easiest to finance. Private investors, institutional investors and foreign investors are attracted to the artificially low rents created by rent regulation. Cap rates have stayed well below borrowing rates for years now, and there is no sign of a change in this dynamic. There has been tremendous activity on all of the multifamily portfolios and all of the multifamily properties that we are marketing today. These assets are viewed as the most risk-free assets in the marketplace. So risk free, in fact, that their cap rates are sometimes lower than U.S. Treasuries. Demand seems insatiable and the outlook is great.

Interest rates and spreads are always significantly important and should always be watched. One particular indicator that needs to be looked at very closely in 2008 is employment data. For much of the past 18 months, unemployment was at a cyclical low, running at about 4.5 percent too 4.6 percent. Lately it has been inching up and is currently sitting at 4.7 percent. A recent study by Goldman Sachs shows that unemployment is projected to reach 5.5 percent by the middle of 2008. This would have significant implications on the New York City building sales market. As jobless benefit claims rise, it will exacerbate the reduction in consumer confidence and consumer spending. If unemployment rises and layoffs continue to pick up, spending and confidence will continue to be reduced, the foreclosure rate will increase and office space needs will be reduced.

That being said, New York City is as highly sought after as it ever has been and the fundamentals in the market remain excellent. The residential vacancy rate is minuscule, office vacancy rates are extremely low and there is relatively little speculative construction on the horizon. There remains tremendous demand from both local, domestic and international sources and it is important to note that billions of dollars of wealth have been created with the surge in building sales prices over the last 6 or 7 years. The continued malaise in the national economy will keep downward pressure on interest rates, which should keep debt flowing into our markets, but overall 2008 will be a very solid year for commercial real estate activity in New York City.

— Robert Knakal, Chairman and Founding Partner of Massey Knakal Realty Services.

Office Market

Defying many naysayers, the 2007 Manhattan market closed in solid shape with a Class A vacancy rate of just 5.3 percent along with a record high average asking rent of $85.69 per square foot. It is agreed that the market pulled back slightly toward the end of the year (the Class A vacancy rate was up from the post 9/11 low of 5.1 percent set in August 2007) but this additional availability had little to do with specific layoffs and more to do with several buildings added to availability that have not been included in the past. More to the point is that sublease space, which generally goes hand in hand with layoffs continued to fall through December to 3.0-mm-sf, the lowest figure since the 2.5-mm-sf recorded in March 2001.

Layoffs have thus far been slow to come to New York City though it is universally anticipated that the city will not escape without a rather significant number of them. The difficulty is in forecasting exactly how many jobs will be lost. In Manhattan, the expected range is between 25,000 and 50,000 office layoffs in 2008, which could result in a full year net job loss for the overall private sector.

But if every layoff resulted in 250 square feet per employee returned to the market, then at 50,000 losses it would add roughly 12.5 million square feet to availability and raise the overall vacancy rate, currently at 7.3 percent, just under 300 basis points to approximately 10.2 percent. However, this is an unlikely scenario because most financial firms and economists see the downturn as somewhat short-lived, three to four quarters and not very deep.

If New York City firms believe the downturn will be abbreviated then many will not place space on the market for sublease as they won’t want to be forced to lease it back at potentially higher rents than they’re paying now. Of course, on the plus side, additional space added to the market, direct or sublease, could be beneficial to tenants now in the market, and there still are plenty of tenants now in the market, as it would hold prices flat or even slightly lower — something that could keep a tenant in Manhattan rather than relocating or expanding outside the city. The future should be made much clearer by the end of the first quarter as firms, especially financial service firms, announce specific New York City layoffs.

— Robert Sammons is the managing director of research at Colliers ABR.

Copyright Northeast Real Estate Business 2008

By: Brian J. Markowitz
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By: Brian J. Markowitz
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