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2018 set to be year of the tenant as new office spaces floods market

For companies looking for a change in scenery or an entry into the New York market, 2018’s commercial market holds a lot of promise.

A surging supply of new and renovated office space promises favorable leases for prospective tenants, particularly in submarkets that have waned in popularity and buildings that have yet to modernize.

Yet, it’s unclear how the investor market will respond in 2018, especially in the wake of a substantial federal tax overhaul. In recent years, the commercial sector has been defined by greater density and rapid expansion, Brad Wolk, partner in the consulting group at Savills Studley, said.

Total office square footage is on the rise, but rather than stretch their legs, companies have opted for open layouts to do more with less.

Brad Wolk

In 2017, Wolk said that created a “tenant-friendly” environment, with more options for leasees and offices suited to the demands of the 21st century workforce. He expects that trend to continue in 2018.

“In the 90s and from 2000 to 2010, less than five million s/f of commercial space was added in each decade, which is vastly different from what we’re seeing today,” he said.

“From 2011 to 2020, there will be north of 20 million s/f added and for 2020 and beyond, we’re looking at an additional 17 million s/f. There is going to be a direct correlation between that and higher availability rates, which will lead to lower rents and better deals for tenants.”

New developments in Hudson Yards and Lower Manhattan, as well as the thriving neighborhood appeal of Midtown South, have disrupted the commercial market, drawing attention away from Midtown East and Times Square.

Versatility and amenity offerings continue to boost emerging neighborhoods and help them attract youthful startups and established firms, alike. However, Wolk noted that this trend has also created opportunities elsewhere.

“The big migrations we’ve seen over the last couple years will continue in 2018 but I think you will see some very smart tenants find deals from a value standpoint and a building quality standpoint,” he said. “Four Times Square is a great example, that’s a building that’s less than 20 years old, in a prime location and much more cost effective than some of the newer products coming online.”

In this competitive market, Wolk said the landlords who’ve had the most success are the ones offering generous incentive packages with months of free rent or hefty tenant improvement allowances ranging up to $100 p/s/f for older buildings or new spaces built on speculation.

Triplemint broker Michelle Siegel said the retail market could serve as a warning sign to the commercial industry. Greedy asking rents, cash-strapped tenants and a surge in online shopping combined to create a stagnant marketplace and numerous vacant storefronts.

As 2017 drew to a close, Siegel said some landlords adjusted their expectations and were able to sign high-quality tenants. If this continues, she sees retail having a bounce-back year in 2018.

“Landlords have to be realistic and lower their rents if they want to bring in those big tenants,” she said.

While the rental market appears to be coming into focus, the financial landscape of 2018 remains obscured by a haze of complicating factors.

Last month’s federal tax overhaul spared the real estate world from a potentially crippling blow by keeping 10-31 exchanges for land sales. It also allows pass-through corporations to use property portfolios to reduce their tax bills and it slashed the corporate rate by 14 percent.

However, strict caps on deductions for state and local taxes and home mortgage interest threaten to drive up cost of living in New York, which is already plagued by high costs of land and labor. Also, questions linger about the longevity of the current growth cycle and geopolitical stability.

Diana Brummer

Diana Brummer, a real estate specialist for the law firm Stroock & Stroock & Lavan, said commercial transactions slowed down in 2017 in response to the unpredictability of President Donald Trump.

“He’s a unique figure in politics and people didn’t know what to expect from his behavior,” she said of the president. “Now they’ve seen him in office and have a sense of how things will operate under his administration so they’re starting to feel comfortable taking risks again.”

Sellers will also become more realistic with their asking prices, Brummer predicted, and institutional investors will come out of the wood works in 2018 after taking a backseat to large debt funds in 2017. She also sees more money coming from South Korea and Japan to make up for the tapering flow of investment from China and she foresees a sustained influx of Canadian money.

Jonathan Kalikow

Jonathan Kalikow, president of Gamma Real Estate, agrees that New York will remain a popular safe haven for the global elite to stash their money but he sees development slowing down considerably in 2018.

He also doesn’t share Brummer’s optimism about funds flowing more freely in the New Year, particularly in the multi-family residential sector.

“There’s an institutional investor base that believes this cycle is long in the tooth and is not excited about building to the cap rates that one would need to build to in New York, so I think that money will be a little more difficult to source,” Kalikow said. “Getting construction loans from banks is going to continue to be difficult on any larger scale (residential) project and on the high-end products the sales velocity is still pretty slow so you’ll see, certainly, a slow down over the next several years in new units coming online.”

Faisal Ashraf

Faisal Ashraf, managing partner of the real estate investment bank Lotus Capital Partners, said he has faith that

the economy will remain strong and, in turn, the commercial real estate sector will continue to thrive in 2018.

“At the end of the day, real estate is nothing more than a leveraged bet on the U.S. economy and the economy is performing extremely well,” Ashraf said. “So long as that holds up, it’s fair weather for commercial real estate for what I would say is the near and medium term future.”

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