MARKET HIGHLIGHT, JANUARY 2005
NEW YORK CITY MARKET HIGHLIGHT
All of the major cities across the U.S. have central business
districts, where top retailers maintain locations. Some cities
have sub-CBDs Chicago has The Loop and Michigan Avenue;
Boston has Back Bay, Newbury Street and The Financial District;
Los Angeles has Santa Monica, Rodeo Drive and the New
Downtown; Miami has South Beach and Downtown Miami. Manhattan
tops the list with at least six CBDs Midtown, Chelsea,
SoHo, Upper West Side, Upper East Side, and Downtown.
These sub-CBDs have emerged because each area has the essentials
of retailing location, population, transportation,
In the last 15 years, the perception that Manhattan is the
most important city in the world has only grown stronger.
It can be argued that a store in any of these sub-CBDs has
a significant location simply because it is in Manhattan.
Manhattan has two populations the dense residential
population which surrounds each of the sub-CBDs and the population
of workers and tourists that pass through the city each day.
Each of these population segments provides retailers with
willing consumers and their massive numbers are unequaled
in the United States.
Although there are detractors, the subway and commuter systems
that service Manhattan are a wonder. They deliver people into
and out of the city in vast numbers. Each of the sub-CBDs
is serviced by anywhere from one to eight train lines, as
well as many bus lines and ferries.
Presently, retail rents in the Midtown sub-CBD rise as high
as $1,200 per square foot (on Fifth Avenue). Even so, retailers
of every type have found that the value gained from setting
up shop in this market is worth the price. The value is usually
present on the profit and loss statement and is often enhanced
by the promotional value of simply being known to be on Fifth
Other than Midtown, Manhattans five other sub-CBDs have
store rents that range up to $250 per square foot. The existence
of the outstanding retail essentials enables stores to generate
enough revenue per square foot to profit. Other retailers,
however, pay rents that are significantly higher than their
business models should permit. These are the national and
global retailers that embrace a perceived value. They view
their stores as unique brick and mortar statements of brand
dominance and worldwide presence.
Retailers who want to enter urban markets have many decisions
to make. Happily, Manhattan offers six alternatives
each of them vibrant divisions of the most unique retail CBD
in the world.
Gary Schwartzman is the associate managing director
of the Retail Group with Grubb & Ellis in New York City
and Lawrence Pahuskin is an associate in the Retail Group.
The New York City Industrial marketplace is undergoing a
major transformation. Functional and economic obsolesce is
acting as the catalyst for change for manufacturing facilities.
An interesting example of this can be seen in Bush Terminal,
the 6.5 million-square-foot industrial complex that stretches
for block after block alongside the Gowanus Expressway in
Sunset Park, Brooklyn.
Bruce Federman, a principal of Industry City, the owner and
operator of Bush Terminal, reports that Building One of his
facility has had all of its 333,000 square feet converted
to office space. He anticipates that this trend will continue
as the demand for back office, R&D space, and distribution
facilities replaces the large manufacturing concerns that
once populated this huge agglomeration of piers, warehouses
and railroad sidings.
Moving to the other side of Brooklyn, a different dynamic
is at work. In Greenpoint and Williamsburg, there is a proposal
wending its way through the approval process to rezone a 184-block
swath of the neighborhood from industrial to residential zoning.
Rezoning initiatives are responsible for much of the recent
activity in both the affordable housing and free market sector.
This trend of converting industrial facilities to commercial
or residential projects is reflected in many of the proposals
underway to prepare New York to serve as host for the Olympic
Games in 2012. Neighborhoods benefiting from this include
Hunts Point in the Bronx as well as Maspeth and Long Island
City in Queens.
This adaptive re-use of New York Citys industrial inventory
is the latest chapter in the constantly changing marketplace.
The real estate marketplace is evolving to meet the demands
of todays current conditions.
Tim King is a partner at Massey Knakal Realty
Services and the executive director of the Brooklyn operation.
Consistently rising prices in the Manhattan real estate market
over the past few years demonstrate that investment in New
York is more than a short-term venture. Historically high
prices and a limited supply of property have failed to diminish
homebuyers desire to buy and live in Manhattans
urban environment. In fact, investors are finding new ways
of getting value in the market.
Market conditions remain positive and interest rates continue
to stay low despite recent increases by the Federal Reserve.
Buoyed by a strong economy and the lowest level of unemployment
in 3 years, homebuyers and investors are optimistic about
investing in New York City.
The average sale price for a Manhattan apartment was $1.07
million in November 2004, an increase of 56 percent from November
2003. The strength of the real estate market, coupled with
an increase in the sale of larger apartments, continues to
sustain the phenomenal growth of the residential sales market
On the East Side, sale prices for studio, one- and two-bedroom
homes have increased by an average of approximately 16 percent.
At an average sale price of $499,000, one-bedroom apartments
recorded the highest gain. Sale prices for three-bedroom and
larger homes have increased an astounding 96 percent since
November 2003. Due to the fewer number of units of this size,
however, prices tend to fluctuate more than with smaller units.
On the West Side, sale prices have increased an average of
22 percent for studio to two-bedroom apartments, and downtown
sale prices have increased by an average of approximately
17 percent since 2003.
Despite an increase in inventory from a year ago, demand continues
to exceed supply. High prices and low inventory have created
buyers that are willing to pioneer new areas of Manhattan.
Developers are building and converting luxury condominiums
to accommodate the rising demand from homebuyers and investors.
Many non-traditional areas are now becoming havens for families,
offering all the amenities of more built-up neighborhoods,
led by new developments that become anchors in the area.
New construction and conversions were generating sales of
$1,007 per square foot in the third quarter of this year,
up from $804 a year ago. Apartments at 50 Madison Avenue,
which is currently undergoing expansion into an 11-story,
nine-unit, 30,000-square-foot residential building, are selling
rapidly at $1,200 per square foot, historically high prices
for this neighborhood.
A strong economy, both locally and nationally, lower unemployment,
continued low interest rates, and confidence in New York City
real estate have sustained extraordinary growth in the market
and will continue to prove that buying Manhattan real estate
is an excellent long-term investment.
Louise Phillips Forbes is a senior vice president
with Halstead Property, LLC.
The multifamily apartment building market in New York City
is as strong as it has ever been. Capitalization rates in
Manhattan have dipped to the 2 percent to 4 percent range,
depending upon the percentage of rent regulated units in the
building and location. Even secondary and tertiary locations
are receiving capitalization rates in the 4 percent to 6 percent
range, and its difficult to find a true yield higher
than 6 percent. Many brokerage set-ups may show higher yields,
but if you include actual vacancy and collection losses, management
fees, and true expenses, rarely will a return exceed 6 percent.
In the outer boroughs, the yields are slightly higher but
are still miniscule on a historic basis. There are many reasons
for this phenomenon.
The relative attractiveness of multifamily buildings as an
asset class has become more and more evident as equity capital
both from foreign and domestic sources is flooding
into the market.
Recently, given the strength of the condominium sales market,
converters have been more aggressive than rental holders.
Given this dynamic, properties need to be converted in order
to make economic sense at the price levels they are trading.
This is very reminiscent of the multifamily market in the
late 1980s when co-op converters were paying more than anyone
else for these properties. Unlike the late 1980s, loan-to-value
ratios are extremely small, with an overwhelming majority
of transactions requiring 40 percent to 60 percent equity.
During that time, loan-to-value ratios were as high as 100
percent for conversion transactions. The current dynamics
in the market, based upon the prudent lending practices of
banks, result in a much stronger market with less vulnerability
to market fluctuations.
People frequently ask how long this market will last, and
we believe the answer will be determined by the endurance
of the absorption of condominium prices of $1,000 and more
per square foot. Land prices and conversion property prices
are predicated on this market continuing to thrive as investors
project sell-outs north of $1,000 per square foot. There is
also concern that tax law changes could significantly affect
the market, although its less likely that a substantial
capital gains tax increase will be implemented in the post-election
environment. However, the massive U.S. deficits need to be
addressed and real estate is vulnerable.
A tax law change notwithstanding, the fundamentals in the
market are excellent and there is nothing on the horizon that
would lead one to think this market will not continue. Naysayers
point to the fact that, in the past 50 years, up cycles in
the building sales market have been approximately 7 years
each. We are currently entering year 12, which gives some
participants in the market reason to pause. For many, however,
there is optimism and belief that the market in 2005 will
continue to be excellent, particularly in the multifamily
Robert Knakal is chairman of Massey Knakal Realty
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