MARKET HIGHLIGHT, JANUARY 2005

NEW YORK CITY MARKET HIGHLIGHT

Retail Market

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, and value.

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 Avenue.

Other than Midtown, Manhattan’s 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.

Industrial Market

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 City’s industrial inventory is the latest chapter in the constantly changing marketplace. The real estate marketplace is evolving to meet the demands of today’s current conditions.

— Tim King is a partner at Massey Knakal Realty Services and the executive director of the Brooklyn operation.

Multifamily Market

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 Manhattan’s 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 in Manhattan.

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.

Investment Market

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 it’s 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 it’s 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 sector.

— Robert Knakal is chairman of Massey Knakal Realty Services.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.