MARKET HIGHLIGHTS, AUGUST/SEPTEMBER 2012

NEW YORK CITY

New York City Multifamily

Nelson

For the first time in recent memory, the dollar volume of multifamily sales in New York City outpaced that of the office sector in the first half of 2012. While dollar volume typically receives the headlines, the number of multifamily property sales is also significant. During the first half of 2012, walk-up and elevator apartment buildings accounted for 23 percent of buildings sold throughout the city.

Elevator apartment buildings led all submarkets with $1.8 billion worth of property sold through the first half of the year. Cap rate compression has continued and cap rates now average of 3.81 percent, down 64 basis points compared to 2011. We believe cap rate compression is due in large part to low interest rates and a lack of inventory, creating an acute supply-demand imbalance. This imbalance is forcing investors to become more aggressive in their underwriting to win transactions.

The Brooklyn market — specifically Downtown Brooklyn and Williamsburg — is seeing a marked spike in activity. Dollar volume for the entire Brooklyn multifamily sector has already surpassed 2011’s total by 19 percent, with Downtown Brooklyn and Williamsburg leading the way with 40 percent of that total dollar volume. The average returns for apartment buildings in Brooklyn range from 5.4 percent to 7.28 percent. These cap rates are about 100 to 150 basis points above 2006 and 2007 levels, when interest rates were considerably higher. Furthermore, according to the New York City Housing and Vacancy Survey, with Brooklyn’s vacancy rate of only 2.61 percent, rents have soared. This trend should continue as new product is scarce because available land parcels are few and far between.

The multifamily sector in New York City will continue to improve and reach levels consistent with the pre-Lehman era. This is due in part to several factors, the first being the supply-

demand imbalance. As mentioned earlier, cap rates averaged 3.81 percent during the first half of the year, signaling that investors are tolerating lower returns. Property values will continue to rise as demand increases in a market with extraordinarily low inventory.

The low interest rate environment has also been a big driver. Ten-year U.S. Treasury bonds have been trading at historically low yields between 1.4 percent and 1.6 percent for the last several months, compared to yields in the mid-3 percent range during the first half of 2012. Commercial lenders are becoming increasingly competitive for stabilized multifamily assets, in some cases offering interest rates around 3 percent for 5-year loans.

The current New York City apartment breakdown makes investing here attractive. It is estimated that 64 percent of the housing market in the city is rent regulated, and these buildings are significantly more stable during a downturn in the credit cycle. Multifamily investments have tremendous upside as most apartment rents are artificially low due to rent regulation. As the units become vacant, there is only upside. Buyers will be able to invest at well below replacement cost. In Brooklyn, apartment buildings sold for less than $200 per square foot on average last year, a significantly more affordable investment than building from the ground up.

— James Nelson, partner, and Caroline Hannigan, senior associate, with New York City-based Massey Knakal Realty Services

New York City Hospitality

In 2011, hotel transaction volume in Manhattan jumped to $3 billion, the city’s highest volume on record, making Manhattan the top investment market in the world in terms of volume — a position it had not occupied since 2007. London ranked second after leading the global city rankings for hotel investment volume from 2007 to 2010. New York’s average price per room rose markedly in 2011, reaching 2001 levels, though it remains below record prices observed in 2006 and 2007.

The city’s largest transaction in 2011 was Pebblebrook Lodging Trust’s acquisition of a 49 percent interest in Denihan Hospitality for $446 million in August. Other notable deals included the purchase of the New York Helmsley for $313.5 million and the Morgans and Royalton Hotels for a total of $140 million.

Large transactions in 2012 have so far included the Park Central Hotel in January for $396 million, the Ritz Carlton Central Park for $198 million in February and the Cassa Hotel in May for $126 million. Most recently, a 60 percent stake in the Plaza Hotel transacted for a reported $570 million.

Based on the closed transactions and hotels on the market, 2012 transaction volume could reach $2.7 billion. New York’s market dynamics bode well for the near- and long-term outlook for industry fundamentals, particularly as higher-rated corporate and corporate group demand returns. Manhattan will remain the top U.S. hotel investment market, attracting significant attention from domestic and off-shore buyers who want to have a foothold in this gateway market.

Strong Demand Generators

As one of the world’s most dynamic and diverse cities, New York City is the leading international center for business, finance and trade, and is home to many of the world’s foremost financial institutions, major international corporations and media outlets.

The presence of more than 200,000 companies, access to capital and a desirable quality of life make New York City one of the most attractive economic centers in the United States. New York City encompasses a broad spectrum of industries, with financial, insurance and real estate industries (FIRE) forming the basis of the city’s economy. As of second quarter 2012, the city has approximately 270 million square feet of office space or 6,460 square feet of office space per hotel room.

New York is also one of the most visited tourism destinations in the world and visitations reached a record 50.6 million in 2011 of which 10.3 million were international visitors. Visitations are expected to increase in the coming years driven by the influx of travelers from emerging destinations such as China, India and Brazil.

As a result of this high corporate and leisure tourism activity, the New York City lodging market is the strongest performer of the top 25 hotel markets with a 50 percent RevPAR premium over the next highest city.

New York’s upper tier hotels experienced a RevPAR increase of 8.9 percent in 2011 over 2010 levels. In 2012, hotels in the city are expected to achieve RevPAR growth of 5 to 6 percent over 2011 levels, with the increases driven by average daily rate — a result of continued high demand levels, supply absorption and a more robust economic environment. Both luxury and select-service hotels have seen strong performance increase.

A strong development pipeline

For 2012, 19 properties have opened or are scheduled to open, spanning 3,248 rooms, a 4 percent increase compared to 2011. After 2012, major developments expected to hit the market include the opening of a 210-room Park Hyatt in 2013 and the reconversion of the Knickerbocker hotel in Times Square slated to open in 2015. By the end of 2012, Manhattan should reach approximately 81,800 hotel rooms. Over the past 10 years, room supply in Manhattan has grown on average by 2 percent annually.

— Amelia Lim, executive vice president, Strategic Advisory & Asset Management, Jones Lang LaSalle Hotels

New York City Retail

Parker

The booming New York City tourism industry will support solid consumer spending this year, encouraging retailers to expand in the five boroughs. In the last year, New York City recorded the largest increase in visitor volume in the nation due to a surge in international tourists, a mild winter, and strong attendance at conventions. The rise in volume has bolstered hotel occupancy citywide to pre-recession levels, while favorable exchange rates helped boost retail sales to peak levels. Robust tenant interest for space on Fifth Avenue will allow landlords to enhance rents significantly this year, while the ongoing transformation of Lower Manhattan will boost foot traffic in the area. The upswing in tourism is rippling to the outer boroughs as well. Budget-conscious travelers can rent a room in Long Island City, Williamsburg, and Downtown Brooklyn for an average of $60 less per night than comparable rooms in Manhattan. As a result, developers will ramp up construction and deliver a total of 3,400 rooms to the city this year, while another 6,200 rooms will come online by 2014. Retailers will capitalize on this trend and expand near new developments and tourist attractions to capture a slice of the estimated $32 billion that visitors are expected to spend in New York City in 2012.

Horowitz

Further growth in the retail investment sector has been fueled by strong local job growth. The employment market in New York City outperformed most of the nation in the past year as businesses accelerated hiring. Approximately 80,600 jobs were created in that time, expanding total payrolls by 2.1 percent. In the previous 12 months, the city gained 54,200 positions. Despite recent headlines about the financial industry cutting jobs, the sector has expanded by 1.1 percent from a year ago, with the addition of 4,700 workers. Moreover, the booming technology industry continued to grow as the large pool of talent and overall appeal of New York City enticed major corporations such as Facebook and Google to expand operations.

New York City’s retail development market has also gained momentum. Year over year, builders completed roughly 930,000 square feet citywide, with nearly half of the new supply landing in Brooklyn. Another 1 million square feet is currently under way in the five boroughs. A $400 million makeover is taking place at Macy’s flagship location, Herald Square in Manhattan. The transformation will add 100,000 square feet of additional floor space, targeting shoppers in the 13- to 30-year-old cohort. Century 21 recently committed to be the anchor at City Point in Downtown Brooklyn, which will give developers enough confidence to begin construction in the coming months. The retailer will occupy 125,000 square feet of the 500,000 square feet expected to come online by 2014.

Supply constraints and intense demand for retail properties in New York City will keep cap rates compressed. As uncertainty persists in Europe, private and foreign buyers will expand in the market to diversify their holdings. In Manhattan, Midtown will draw keen interest as investors acquire retail condos with a value-add component, while more conservative buyers will purchase single-tenant assets leased to a highly rated tenant. As competition remains fierce, initial yields will average below 5 percent for investment-grade properties. Buyers hunting for higher yields and lower price points, meanwhile, will turn to downtown for underperforming properties. The median price in the area is 15 percent lower than in Midtown and returns average up to 200 basis points higher. In the outer boroughs, a bulk of the deals will be closed by private investors, many of them drawn to Brooklyn in particular by the higher cap rates available and the potential to significantly increase their NOI. Much of this increase is achieved through capital improvements and by taking advantage of the rapidly increasing rents through vacancies.

— J.D. Parker, vice president and regional manager of Marcus & Millichap Real Estate Investment Services’ Manhattan office, and John Horowitz, regional manager of the firm’s Brooklyn office.

New York City Office

Financial indicators show that the U.S. is creeping along slowly toward recovery, slower than most would like, but better than almost every other country in the world.

The New York City economy is healthy. More than 50 million visitors arrive on our island now every year. They bring their desire to explore this great city, they spend their money and they keep coming.

Overseas investors come here because New York City is the center of the world and a safe haven. With the Euro crisis, some nations in “war type” circumstances and others in political disarray, America and New York City, in particular, are again prime locations for investment. So, with the economy “putt-putting” along, and the jobs market in New York getting stronger, the one real “unknown” on everyone’s mind is the result of the upcoming national election.

In uncertain times, it takes courage to start to develop new projects. To see the gleaming new World Trade Center buildings now well above the New York skyline, swells the pride of New Yorkers. We are forward looking people, and people who never forget. The downtown office market may have had its difficulties, but the WTC development and transportation hub modernizes the market and helps make it a destination again.

Where would this country be without innovation? The technology and new media field has grown by leaps and bounds in New York with no small help from Mayor Bloomberg who continues to push for science and engineering in New York. The Midtown South market, in particular, the Flatiron district and the Park Avenue South district have benefited greatly as they are the preferred locations for technology and new media tenants, with the Park Avenue South market perhaps the hottest market in the country.

The New York office and investment markets are now segmented with some markets outperforming what were formerly stronger locations. The midtown office market has been affected by world circumstances. Pharmaceutical, law and financial firms who benefited from worldwide alliances now find that they are retooling for the future. Another destination location is the Meatpacking District on the Westside, just north and south of 14th Street. A prime retail location, with exciting nightlife options, it is also the home of the very popular elevated park, the High Line, formerly an elevated freight rail line.

New York has always benefited from innovation. Founded by people who were seeking freedom and independence, it is natural that once here and able to think freely, they would begin to develop and now continue to develop new ideas, new technologies, new ways of doing business. This economy may be moving too slowly for some and some people may wonder what will happen on November 6, but one thing is for certain: New York City is an intellectual hub of creativity and with creativity, desire, freedom and innovation comes continuity and greatness.

— David Greene, president of Brokerage Services with New York City-based Murray Hill Properties/TCN Worldwide

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