MARKET HIGHLIGHT, MAY 2010
NEW YORK CITY
New York City Multifamily
Recent news: The multifamily market in New York City has held up better than any other property type segment during this downturn. While office buildings, and retail properties have seen values decline by 55 percent and 46 percent respectively, from the peak in 2007, the multifamily sector has only seen values decline by 20 percent for elevator properties and 16 percent for walk-ups. The main reason for this performance is that New York’s rent regulation system limits downside potential by keeping regulated rents at artificially low levels. Interestingly, while capitalization rates are up from their lows, in 2009 cap rates for walk-ups averaged 5.05 percent and elevator buildings averaged just 4.52 percent. These were the lowest cap rates of any property type in New York.
While this performance has been relatively healthy, tremendous uncertainty has crept into the multifamily market in New York, making predicting its future very difficult. This uncertainty has been created by recent court decisions, which have upended years of relied-upon rent regulation rules. The most notable of these was the Roberts decision in the Stuyvesant Town / Peter Cooper Village case. Remarkably, this decision overturned 13 years of precedent established by those who oversee the program. The court decided that it is illegal to remove apartments from rent regulation if a property is receiving J-51 tax abatements.
The Department of Housing and Community Renewal (DHCR), which is the sheriff of the system and whose opinions are relied upon by industry participants, had issued opinion letters, as early as the mid-1990s, that it was proper to deregulate units in buildings receiving J-51 benefits. Furthermore, the Department of Housing Preservation and Development (HPD), which is the sheriff of the J-51 program, effectively ratified DHCR’s decision by reducing the J-51 benefits by a percentage equivalent to the percentage reduction in regulated units. The Roberts decision overturns years of standard operating procedure. The biggest travesty of this decision is that the court simply said that units could not be deregulated. It did not establish the penalty for doing so or the ramifications if units were deregulated. No one knows what the legal rents in these units are or whether the decision is retroactive. The judge making the ruling decided to leave that decision to the lower court, ensuring many years of speculation until another court decision is made.
Additionally, in another recent decision, the court ruled that the Rent Guidelines Board (RGB), which sets regulated rent increases each year, did not have the authority to issue a low-rent supplement, again overturning years of standard procedures and relied upon authority that investors and managers have relied upon.
The result of these decisions has been the creation of tremendous uncertainty with regard to the multifamily sector. Only time will tell how this uncertainty will impact value.
— Robert Knakal, founding partner and chairman of New York City-based Massey Knakal Realty Services.
New York City Office
Recent news: In New York City, we have seen the velocity of activity increase by tenants looking to take advantage of a very competitive office market. These tenants are upgrading their office space, improving locations and possibly moving into larger spaces for future expansion. Over the past year we have seen a 20 to 30 percent reduction in rents as well as landlords that are willing to increase concession packages for tenants to design and build their spaces. This gives companies the perfect opportunity to relocate. One of the Kaufman Organization’s clients, Zelda, a high-end women’s clothing line sold in boutiques around the world, recently expanded to 6,000 square feet of office and showroom space in a well-known boutique fashion building, 260 West 39th Street. The affordable rent and the landlord’s commitment to complete a design-build at no additional costs allowed Zelda to move into a building with other renowned designers. Fashion companies are not the only industry benefiting from these concessions. There has also been an increase in non-profits actively looking to take advantage of lower rents and lock in long term. In Chelsea, we have one building that is now 100 percent occupied after placing three social justice non-profits in the building. Rents averaged $28 per foot and all spaces featured full-floor lofts.
Submarket update: In the Midtown West submarket, one of the Kaufman Organization’s specialties, we see unique ownerships with low leverage aggressively seeking tenants. This group of owners takes a long-term view of the market and is willing to offer new tenants higher concessions and cash contributions.
Predictions for the next year: Over the next several months we will see stabilization in market rents and concession packages. The velocity of activity in office leases will remain light in nature. In the Chelsea and Flatiron areas we will see very little positive absorption. Overall, in New York we will continue to see social and digital media and healthcare companies growing into larger spaces. These companies are attracted to the lofted, creative spaces neighborhoods such as the Flatiron and the West Side offer. Another growing sector is in electronic healthcare companies. Doctors are outsourcing electronic billings to these new types of software companies that are now aggressively looking for spaces in Manhattan.
— Grant Greenspan is principal of New York City-based Kaufman Organization.
New York City Industrial
Recent news: In Manhattan, particularly in the historically industrial areas of Chelsea and the Meatpacking District, the trend of converting industrial properties like service garages and old warehouses to “higher and better uses,” such as galleries and residential and office lofts, continues to be the dominant trend. As an example, my team is marketing a 55,000-square-foot multi-tenant loft/office building in the Meatpacking District that used to be a meat processing facility. Today, it’s nearly fully leased with small, creative office users such as architects, public relations firms and fashion showrooms.
In the boroughs, every industrial neighborhood is different, but overall, the industrial inventory is largely made up of smaller distribution or manufacturing facilities that serve just the local market due to lack of access to major highways. In most submarkets, the large end of the size spectrum is 20,000 to 30,000 square feet, though most of the transactions we’re seeing are in the 8,000- to 10,000-square-foot range, where tenants are paying approximately $10 per square foot for a lease term of 10 years. The borough submarkets have been fairly consistent – they have not been tightening considerably, nor are we still seeing widespread vacancies. Additionally, very little new development or redevelopment is ongoing due to the economic environment.
Predictions for the next year: In Manhattan, we expect continued redevelopment of industrial buildings into gallery space or residential/office loft. The Meatpacking District and Chelsea will continue to be in demand, and depending on the spring art auctions, these submarkets are expected to remain vibrant.
In the boroughs, the market for small distributors and manufacturers will remain consistent. For the next 18 months, we expect it to continue to be a two-sided market, where the market won’t necessarily tighten up, but we won’t see a slow-down in demand either. There are some great buildings available and potential tenants looking for space, so I’m fairly optimistic.
— Alan Weisman is executive managing director with the New York (Midtown) office of Grubb & Ellis Company.
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