As we enter the New Year, real estate and business leaders, as well as economists, are asked to provide their prediction for the next 12 months. This is indeed a difficult task especially when many unexpected events took place in 2014.
Interest rates which were near record lows on 1/1/2014 as the benchmark 10-year Treasury note was at 3.04%. Economist expected rates to rise, yet as we begin the New Year, the 10-year Treasury Note is yielding 1.90% — far below the expectations of a year ago.
A number of hedge funds and investors took major hits on their investment portfolio with oil and natural gas energy prices having fallen by more than 50%, helping to increase consumer purchasing-power confidence. While these indexes are significantly lower than a year ago, prices for commercial real estate has risen to its highest levels since 2006-2007.
In less than 12 months, prices for prime development sites in Manhattan and the boroughs reached record levels. Very few if any individuals expected the price of developable land to exceed a $1,000 per square foot in Manhattan, as well as $325 in Brooklyn, or as high as $250 per foot in Queens.
Foreign investors continue to be bullish on U.S. investments especially in New York City. The Association of Foreign Investors in Real Estate (AFIRE) recently released its 23rd annual survey, reporting that New York City ranks number one as the most favored global and U.S. city for investment. These investors ranked multifamily as the preferred property type followed by industrial, office, retail and hotel.
Properties with prime retail components reached record levels in 2014. In December, it was announced that Jeff Sutton and General Growth Properties entered a contract to purchase the Crown Building at 730 Fifth Avenue at 57th Street for $1.75 billion.
Bloomberg reported that the price of $4,375 per square foot sets a new world record for the price of an entire office building. The 400,000 square foot tower includes 50,000 square feet of retail space.
As I reported last July, retail properties, especially on Fifth Avenue in the Plaza district and SoHo, are fetching record prices. In the summer, Vornado Realty Trust, in partnership with Crown Acquisitions, announced that they entered into an agreement to acquire the retail condominium of the St. Regis Hotel at the corner of 55th Street and Fifth Avenue, and the adjacent retail townhouse. The property leased to the Gucci division of Kering (17,100 square feet) for its Bottega Veneta brand through January 2016 and to LVMH (7,600 square feet) for its DeBeers brand through January 2019. The purchase price is approximately $700 million or $28,340.08 per square foot, one of the highest prices paid per square foot for retail space in New York City. Swiss luxury retailer Richemont had purchased the space in October 2012 for $380 million, forming a partnership that included Crown Acquisitions, the Feil Organization and Goldman Properties. This private investment group paid $117 million, or approximately $4,736.84 per square foot, for the luxury retail building from Starwood Hotels & Resorts Worldwide.
Sales of hospitality assets reached record levels in 2014 with selling for more than $2 million dollars a key. Foreign investors especially from the Middle East and China were actively seeking hospitality assets in New York City. Late last year, Chinese insurance company Anbang Insurance Group agreed to pay $1.95 billion for the Waldorf Astoria New York City, the most expensive single hotel ever sold in the U.S.
Needless to say, 2014 was a fantastic year for commercial and residential real estate in the region and now it is time for the real estate experts to provide their thoughts for the new year.
The New York City Market:
Robert Knakal, Chairman New York City investment sales at Cushman & Wakefield noted, “Midway through 2014, the question I was asking was whether 2014 was going to be a repeat of 1988 or 1998. Both of those years were cyclical peaks in sales volume. After 1988, the market crashed. After 1998, although many folks expected the market to crash, it ran for another nine years. While I don’t see another nine year run on the horizon, I do think 2014 is more like 1998 than 1988. Counterintuitively, I expect sales volume to be off by about 20-25% from a number of buildings sold perspective, but expect dollar volume to increase over 2014 totals as excessive demand will continue to expect significant upward pressure on property values. Also, many larger transactions will help fuel dollar volume. Sales like the Crown Building will just be the tip of the iceberg for the trophy market. Provided interest rates don’t rise sharply or tax reform upends the market, the next couple of years should be very robust for investment sales.”
Joseph Harbert, President, Eastern Region, Colliers International, said “The market continues to be vibrant. Buoyed by the emergence of the so called technology sector (which in fact has now encompassed what used to be called publishing and entertainment) we now have a market where the traditional industries are emerging from the cocoon of recession. Financial and legal firms are again on the move. Despite some upward pressure on rents the market is still reasonable provided people and businesses are reasonable about where they want to be. Those that insist on being in the hot midtown south neighborhoods are paying these prices one time. Those more flexible are finding niche locations in the garment center, in side street buildings and in the more traditional markets of grand central third avenue and Avenue of the Americas where there are still relative bargains to be found. Tourism is driving retail and rents have gone skyward. Retail specialists tell us, nonetheless, that we are “under-retailed” and finally there is so much money and so much optimism chasing so few properties that the prices have risen beyond where the fundamentals would dictate. Everyone talks about and wonders whether we are in some kind of bubble. Bubble schummble. There is no end in sight.”
Norman Sturner President and Chief Executive Officer of MHP Real Estate Services feels the New York City market is and will continue to do well. He makes the following points with regard to the market:
- New York City is not even in the top 15 priciest office markets on the planet.
- We will have the least expensive operating energy cost for 2014/2015 from the previous seven years.
- There is an abundance of long term fixed rate inexpensive debt.
- There is a high entry barrier to acquiring property in Manhattan.
- There is a worldwide crisis in politics and economics in Europe and Asia.
- We have the most negotiable, transparent, free marketplace on the planet.
- Our economy is on the upswing for GDP, employment and manufacturing.
“There are probably more reasons to be optimistic about 2015 and in conclusion we believe in New York City and the commercial real estate economics for the foreseeable future.”
Another leader who is optimistic of the market is Peter Von Der Ahe, First Vice President, Investments, Marcus & Millichap. “We still see an abundance of capital in search of a limited number of opportunities. While the pace of price appreciation slowed in 2014, we saw an increase in the amount of funds invested, therefore we had a very active year. We are anticipating much of the same in 2015. I don’t see the drivers of the market, interest rates, abundant capital, and the lack of investment alternatives, going away anytime soon.
Concurring with Messrs. Sturner and Von Der Ahe is Shimon Shkury, the President of Ariel Property Advisors. “We are bullish on the New York City economy and the domestic economy in general. Job growth is more robust than ever, the New York City unemployment rate in October was the largest three month drop since the state began collecting figures in 1976. Oil prices are falling and the city remains a safe haven for capital. We’re also optimistic about the local real estate market because we anticipate a bold and balanced housing plan from the De Blaiso administration that will have a positive effect on the market.”
Cautious optimism is the general thought of Brian Cohen, Partner, at the law firm of Foley & Lardner LLP. “In 2015, it will pay to incorporate the lessons we derived through our experience in the last cycle. That starts with recognizing that the current robust market is in fact part of a cycle. And, as this cycle unfolds and we structure our investment and choose our partners, our lenders and our opportunities, a premium needs to be place on proven experience and success over the long term. Thus, when the market begins to cool those lenders and private equity investors willing to stretch to make the numbers work can mitigate their risk with experienced sponsors who have multi cycle/multi-generational track records demonstrating that they can execute a business plan in the midst of turmoil.”
Bradley Korman, Co-Chief Executive Officer, Korman Communities, the owners of AKA Hotels in New York City, notes “It’s hard to imagine how pricing of commercial real estate in NYC can grow, and yet we are all confident that it will. This continues to be the best U.S. market for investment properties as the world continues to have an appetite for our real estate. We believe pricing will continue to rise and the quality of the offerings will also rise. There are still so many investors who are looking to park capital into hard assets like NYC real estate both on a large scale as well as on an individual unit scale. This desire will help continue the sale of condominium units to push pricing up in the more desirable neighborhoods. Cap rates will continue to stay low as interest rates are low and should only rise as inflation pushes up rates and values.”
He added, “We will continue to see conversions of apartments and hotel suites as individuals look to capture value of owning New York City real estate. We see a huge market for our AKA serviced residences as investors look to own our properties, enjoy the services and amenities we offer, and then recoup the costs of ownership through the AKA platform.”
His Co-Chief Executive Larry Korman, of Korman Communities, said “Our properties have not been a pure hotel and we will not be a pure condo. We are a hybrid for both, and will continue to occupy the bulk of our buildings with monthly stays. Some of the residents will own and some will rent. Our serviced residences appeal to adults visiting for 2 weeks to 3 months, and our condos will appeal to individuals, global citizens, wanting and needing to be in New York City for a month or a few months. They may want us to rent out their apartment monthly for periods they are not in town. These individuals will enjoy both the equity and appreciation and income of their investment, while also buying into a slice of New York City and a slice of the AKA brand. When you are part of AKA, you also will have access to AKA, a lifestyle membership, where they can enjoy exclusive benefits from our properties in Los Angeles to London.”
The Barclays Center, the opening of the Kings Theatre, a $94 million restoration of the classic Loew’s Kings into a venue for live performances, land selling for up to $300 per developable foot has helped to make the home of the Nets, the Borough of Brooklyn as a one of the strongest real estate and economic markets. Ofer Cohen, President & CEO of TERRA CRG said “We have seen a remarkable run up in Brooklyn over the last three years. 2015 is on track to continue this trend. Total dollar volume of commercial transactions in Brooklyn is expected to be over $6 billion, up from $5 billion in 2014.
Key trends that exemplify the strength of the market:
The Brooklyn residential rental market has been very robust. Over the last 4 years, we have seen an average annual rent increase of 10%. While we’re seeing residential rents in the top tier of the market (Williamsburg, Park Slope, Downtown Brooklyn) leveling off to regular growth rates, there is a catch-up game with secondary submarkets like Bed-Stuyvesant, Crown Heights and Bushwick. The aggressive growth of rents in these submarkets over the last few years have boosted the value of multifamily assets and will continue to do so in 2015-2016, offsetting any rise in interest rates.
The Brooklyn condo market is about to take off. The great recession caused all new construction inventory to be almost fully rental and there is a significant shortage of condo unit inventory in Brooklyn. Out of the 30,000 new construction units in the development pipeline in Brooklyn right now, only about 10% is slated to be condos. Almost all condo projects that went on sale in the last quarter of 2014 have seen robust contract- signing activity, pre-construction. This shortage in the next 12-18 months will enable sponsors to raise condo unit pricing through the roof.
Development market – Most of the residential development sites that we will sell in Brooklyn in 2015 will likely be positioned as condo projects. We have seen an aggressive run-up in land prices over the last 3 years, in some cases tripling. For example, downtown Brooklyn is now safely in the mid-$300’s/BSF territory. At the beginning of 2012 the price was $120/BSF. We think that land pricing coupled by the lack of clear understanding with regards to 421a and the 80’/20 program will eliminate any new market rate rental development projects until such programs are available again.
As I sit here reading the tea leaves and evaluate the thoughts of real estate professionals with investors from around the world pouring funds into New York City as a safe heaven, coupled with the economy in general, the signs seem bright for the real estate market in 2015.