NYC Feels Heat from Credit Crisis, But Long-Term Outlook Still Favorable
- Nov 10, 2008
New York City’s commercial real estate market isn’t immune to the fallout caused by the economic downturn. Transactions have plummeted 61 percent from the beginning of the year through October, according to data from Real Capital Analytics Inc. In the longer term, however, the outlook for the market remains strong.The credit crunch has been “very democratic” in terms of its impact on the commercial real estate landscape, touching all markets, investors and property types, according to Dan Fasulo, managing director & head of research for Real Capital Analytics. “The more that net operating income decreases for properties, the more pressure that investors are going to be under to either dispose of assets or to give the keys back to the bank,” he said. In a third quarter report on New York City’s office market, Colliers ABR noted that it expects the next one to two years to be a challenging period for New York City’s commercial real estate market. “While we are bullish on the city and the region in the long-term (2011 and forward), like the rest of the country we will have to buckle down for some time (especially on the ownership side),” the report states. “A ‘silver lining’: tenants with a lease expiring will find increased possibilities and declining rents even in primary locations.” Stephen Siegel, chairman of CB Richard Ellis Inc. said during a morning briefing in October that “right now, there’s a perception that [the Manhattan’s office market] is dead or dying, and that’s not true.”There were some major sales deals in New York City that took place in the third quarter, perhaps most notably Lyold Goldman’s grab of 1372 Broadway from Wachovia Corp. and SL Green Realty Corp. for $274 million–61 percent less than what the joint venture shelled out for the property in July 2007. On average, the size of transactions taking place in New York City is markedly lower than that of the megadeals that that market has grown accustomed to. “Of the small amount of deals that are actually happening right now, a majority of those have been smaller transactions: $2 million to $20 million,” Fasulo said. “It’s very difficult to get financing for any type of significant deal right now. Lenders aren’t willing yet to go out on that limb and loan into this environment and to make bets of that scale, given the perceived risk.” Small multi-family assets, however, have been somewhat of a bright spot. Financing available from Fannie Mae and Freddie Mac, as well as from local and regional banks–some of which have remained active to a point–has helped the multi-family sector hold up.On a national level, going into September, $20 billion in office, industrial, retail and apartment sales were in contract, but less than $10 billion transactions closed, according to Real Capital Analytics. For sales volume to rejuvenate, the debt markets must return to some semblance of normalcy and investors must feel confident that there is a light at the end of the tunnel regarding the lagging economy. The number of U.S. jobless claims, however, surely will not bode well for strengthening investor confidence. The government announced on Friday that employers slashed 240,000 jobs in October, pushing the U.S. unemployment rate to 6.5 percent, its highest level since 1994, and bringing the total number of jobs lost this year to a staggering 1.2 million. “There’s a lot of uncertainty right now, and when there’s uncertainty, investors avoid making decisions,” Fasulo said. He adds that the industry does not have the supply issues it’s had in previous down cycles and that there is a significant amount of capital on the sidelines that has been built up. But “the future is too hazy to make an accurate prediction about what’s going to happen.” Perhaps some level of clarity will surface now that the election season is over. All eyes are on President-Elect Barack Obama, as some industry pundits argue that a degree of uncertainty will be removed by at least knowing who the next Commander-in-Chief is, while others contend that a changing administration adds to the list of things investors are uncertain about. But another legislative change that may be even more important to the future of New York City’s commercial real estate market is that the Democratic Party has regained control of the state Senate, although it is too early to tell how the power shift will play out.