By Shimon Shkury
President, Ariel Property Advisors
Commercial Board of Directors & Temporary
Co-Chair of the Commercial Upper Manhattan
By all counts 2015 was a successful year for New York City commercial real estate and we were happy to have worked closely with REBNY’s constituents on several notable and unique transactions.
With a new year ahead of us, below are frequent questions and where we see things headed:
What has been most surprising about NYC real estate in 2015?
We have been pleasantly surprised by the establishment and expansion of major commercial centers popping up citywide. Whether it’s the Dumbo Heights office project in Brooklyn, the Bronx’s Hub, 125th Street in Harlem, or downtown Jamaica, REBNY affiliated owners and investors are diversifying their investments in commercial properties outside of core Manhattan.
In fact, commercial and retail property transactions throughout all five boroughs was up by 27% from last year. This is positive for two main reasons.
First, as the city’s economic and consumer engines expand beyond core Manhattan, job opportunities and the quality of life in various neighborhoods benefit as a result. Second, these investments in commercial properties will help strengthen regional economic growth and consequently improve residential values citywide.
What is your outlook for 2016?
We think 2016 will continue to be a very active year for property sales and financing.
Changes in the financing environment have added a level uncertainty that wasn’t as present in recent years.
Similar to what we witnessed in 2012 when people rushed to beat out the sunset of the Bush tax cuts, it’s possible that we will see more real estate transactions as owners seek to lock in today’s low cap rates and low interest rates. An increase in acquisitions and refinancing transactions means another active year for commercial real estate brokers.
What do you see as the strengths and obstacles for NYC’s multifamily market heading into the new year?
Multifamily property values have a lot going for them in 2016. Strong national and local GDP growth have helped push revenues and support elevated asset pricing.
The supply of units continues to lag demand. Even with new construction underway, the supply of rental housing is being outpaced by the demand, demonstrated by low vacancy rates of 3.45 percent.
In 2015, roughly 18,000 new units were completed, while the studies say 20,000 new residential units are needed annually to accommodate population growth. Uncertainty in the direction of rates may spur more sales transactions or trigger more refinancing.
Global economic instability, particularly relating to China, is a cause for concern. Also, rental rate growth may pause this year as several thousand new rental units come on the market in 2016, but we believe such a lag will be temporary.
Overly restrictive housing policies from the state and city are also a concern for owners and investors.
We support REBNY’s dedication to enacting sensible policies that create and preserve affordable housing stock, which is so critically needed.
What’s a hot neighborhood to keep an eye on for 2016?
While we’ve seen coverage of expanding areas such as the South Bronx or Prospect-Lefferts Gardens, we’re paying very close attention to East Harlem in 2016. While neither Mayor de Blasio or the City Council have yet released details, the City will soon unveil a major rezoning initiative for the neighborhood that will include a mix of market, moderate income and affordable housing.
The market may be pricing this in already as we’ve seen major jumps in both multifamily prices and in development site prices between 2014 – 2015.
For multifamily buildings in East Harlem, the average price per square foot jumped to $462, a 24 percent increase from 2014 levels.
The average capitalization rate dropped precipitously to 3.78% from 5.45 percent, year over year. For development sites, the average price per buildable square foot hit $214, an 18 percent increase compared to 2014 levels.
The area is poised to greatly benefit from recent, significant investments made by key REBNY supporters, including Extell, Thor, Westbrook and Clipper Equity.
It is also a very accessible neighborhood that will eventually benefit from The Second Avenue subway’s eventual arrival.
We’re also keeping an eye on Jamaica and Ridgewood in Queens. Both neighborhoods are increasingly on investors’ radars and both have several projects in the pipeline that may serve as a catalyst for broader change.