MARKET HIGHLIGHT, MARCH 2008

NEW YORK CITY MARKET HIGHLIGHTS

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 miniscule, 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.

New York City Investment Sales Market

Last year was a banner year in the New York City investment sales market. A majority of the business in 2007 was conducted in the first three quarters of the year, while the last quarter saw just a handful of sales. It’s going to be extremely difficult for 2008 to mirror the heights of 2007.

Nonetheless, numerous major deals were completed in the last few months. For example, 440 Ninth Avenue sold for $160 million ($472 psf), while 470 Park Avenue South was sold for $157 million ($604 psf) and 120 Park Avenue, the long-time Altria headquarters, sold in November for $525 million ($816 psf).

Most recently, Sitt Asset Management signed a contract with The Clarett Group for 180 Madison Avenue for $180 million ($545 psf). While none of these transactions alone will have any major impact on the market, it is important to note that all of them were completed at healthy prices. These deals are an indicator of the strength of the New York City market and evidence that there are buyers out there looking for property and willing to pay top dollar for it. Perhaps the greatest example of the market’s continued strength was the sale of 1177 Avenue of the Americas, which Silverstein Properties (in partnership with CalSTRS) bought from Paramount Group for more than $1 billion.

Nonetheless, by the fourth quarter of 2007 there arose significant uncertainty in the market. In addition, offices vacancies will most likely be increasing, which will inevitably drive prices down. This is simple supply and demand. As far as investment in office buildings is concerned, the focus will be on Midtown as the market contracts.

The downturn is being driven, at least in part, by the tightening of the credit market and funds are not as readily available for the very largest deals as they were a year ago. Smaller deals continue to be underwritten by balance sheet lenders (banks, insurance companies, etc.). The larger deals do not have Wall Street funding right now, which is somewhat crippling for dealmakers. In addition, a strong demand persists for well-located residential properties. When available, these could be considered the most attractive assets for acquisition today.

If Wall Street re-enters the game, then investment sales activity (especially at the highest level of trophy properties) will definitely pick up. There is still money out there, and it is still relatively inexpensive. Yet more equity is required for these deals and banks’ lending requirements are more stringent than they were last year. This is the key to the recent drastic changes. As the CMBS market has all but vanished, which translates to a huge source of capital is no longer available to investors. While sellers’ expectations remain stuck in 2007, buyers are more keenly aware that it is now 2008. Many investors are waiting for the lending spigots to open up again.

— Neil Helman is a senior managing director of Grubb and Ellis New York.

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