Colliers: Recovery Shows Staying Power

The recovery has plenty of gas left in the tank, and investment sales in the nation's largest office market are on track for their best year since 2007.

“This isn’t a perfect economy, but it’s good enough, and especially for commercial real estate. . . This is going to be the best year yet, both for the recovery and job growth.”

That was the 2015 forecast offered this week by Andrew Nelson, Colliers International’s chief economist for the U.S. Nelson made his prediction during a briefing for the media and Colliers professionals that provided both a national economic outlook and an update on its largest real estate market.

Colliers International's Andrew Nelson (left) and Joseph Harbert

Colliers International’s Andrew Nelson (left) and Joseph Harbert

The U.S. is actually performing below historic levels at this point in the recovery, strongly suggesting that the recovery has plenty of gas left in the tank. Nelson ticked off the major reasons:

  • Little supply overhang in most major markets;
  • Developers are adding new inventory at only one-third to one-half of historic levels with the notable exception of the multi-family sector;
  • Steady recovery of the housing market;
  • Increasingly confident consumers;
  • Benign credit markets.

“All this new demand that’s coming in is going to support existing assets, raising occupancy and fueling returns for investors,” Nelson predicted.

He also challenged some conventional wisdom. “The story we’re hearing about foreign capital, I think, is a little overstated,” Nelson contended. Contradicting the impression that offshore investors are flooding major U.S. markets, Nelson reported that investment from homegrown and foreign sources are closely tracking one another. And while secondary markets are attracting increased interest, Nelson explained that “Investors are still very focused on the top markets.”

Nelson tempered a generally robust outlook with several cautionary notes. One is the unsettlingly high number of long-term unemployed workers, defined as those out of work for at least 27 weeks. Although the number of long-term unemployed has declined 1.1 million during the past 12 months to 2.6 million, that category still makes up about 30 percent of the unemployed. Those workers “are not getting their jobs back, they’re not staying in their industries,” Nelson explained. Other concerns: the concentration of the recovery’s gains in the upper end of the income spectrum, the risk posed to exports by the strong dollar and the market’s reaction to the end of the Federal Reserve’s easy-money policies.

Colliers’ president for the eastern U.S., Joseph Harbert, provided a snapshot of the Manhattan office market that reflected the positive economic outlook for the U.S. If first-quarter trends continue, 2015 will be the strongest year for sales since 2007, Harbert noted. Sales volume totaled $5.2 billion, the most in eight years. Pricing for Class A and Class B office assets hit record levels: $1,280 per square foot in Midtown, $1,077 per square foot in Downtown Manhattan and $416 per square foot in Midtown South, smallest of the borough’s three main submarkets.

Foreign buyers dominated during the first quarter, accounting for 62 percent of investment volume. Institutional buyers came in a distant second at 20 percent. On the sell side, private equity investors and funds were equally dominant, accounting for 67 percent of first-quarter office sales.

Manhattan’s leasing market showed plenty of muscle in the first quarter as well. Despite declines in overall leasing activity, average asking rents ticked up for the eighth corner in a row, registering a 1.7 percent increase. Manhattan’s FIRE sector (financial services, insurance and real estate) dominated leasing activity, accounting for 40 percent of leased square footage during the first quarter.

“All this we’ve heard about FIRE being overtaken by tech” is inaccurate, Harbert reported. New space coming on the market in downtown Manhattan boosted availability in the submarket to 14.6 percent, average asking rent hit a record $55 per square foot on the strength of high-priced new spacing coming on the market and repricing of existing assets.