By Adelaide Polsinelli,
vice chairman, Compass
Bank of America CEO Brian Moynihan just gave the commercial real estate sector five good reasons to be glad summer is over.
After nine unprecedented years of straight growth, New York went into the dog days feeling slightly deflated after a series of legislative moves that many worried could turn the tide on the city’s traditionally red-hot multifamily market.
However, a new midyear report from Marcus & Millichap shows that New York City apartments continue to benefit from some of the strongest demand dynamics in the country. Job growth above the national average and high home ownership costs have created an apartment vacancy rate that is less than two percent, below any major city in the US.
That squeeze is pushing rents, particularly in Class A apartments, even higher, sending the pace of sales in the $20 million-plus range north.
According to Marcus & Millichap, the highest concentration of newly built properties trading so far this year has been in Brooklyn, with properties of 50 to 100 units the top seller.
And following the wave of anger over changes to rent-control regulations, sellers are entering the fall market holding a full deck in terms of underwriting. After a virtual second quarter freeze at the lower end of the multifamily market, many expect trading to accelerate during the third quarter as those looking to cut their loses do so and those running into debt join them. With plenty of money on the sideline looking for a place to park, the third quarter is shaping up to be a busy one.
Moynihan, CEO of the country’s leading consumer bank, believes we should all be looking on the bright side as the leaves turn golden. Here’s why:
- There is a flight to quality right now, and tons of money is flowing towards the USA in an unstable global economy. Real Capital Analytics US Cross-Border Investment Compendium shows investors made direct acquisitions totaling $21.3 billion in H1 2019. While that’s a 37 percent dip on a year ago, it’s still at a healthy level of activity. US commercial real estate offers investors the potential for higher returns relative to Europe and parts of Asia and, in a market famous for both its stability and flexibility, foreign investors continue to be drawn here.
- The US consumer is everything. Right now, Americans are employed, earning more and spending more. Average hourly earnings for all employees increased 3.2 percent from July 2018 to July 2019, according to the Bureau of Labor Statistics. The total labor force came in at a record-high 163.4 million. That’s the highest it’s been since Neil Armstrong walked on the moon. The numbers point to an economy that is doing well.
- Consumer spending with Bank of America clients alone is up 5.9 percent over 2019. Consumer spending is strong, representing around 70 percent of the entire US economy. The Bureau of Economic Analysis said Americans splashed out on new cars and trucks in July. They also ate out more and one-quarter of their disposable income was spent on clothing and groceries. That spending signals that the American consumer is confident in the economy.
- The odds of a recession are always around 20 percent, even when the economy is strong. The New York Fed’s recession probability model is currently warning that there is a 30 percent probability of a recession in the next 12 months. However, with U.S. stocks losing ground right now, fundamentals suggest real estate remains the solid long-term play. According to the Emerging Trends in Real Estate Report 2019, produced by PwC and ULI, Brooklyn is the second strongest investment market in the US behind Dallas/Fort Worth.
- The US economy must do well to hold up the world economies. The US economy is huge: US healthcare alone is the size of all of India’s economy. In a column in the South China Morning Post over the summer, former White House economic advisor Todd Buchholz said he believed that America is stronger today because the rest of the world is in a recession. With borrowing costs lower than at any time since the founding of the US Federal Reserve in 1913, 80 percent of the economy powered by the consumer and exports or imports making up only 12 per cent of the economy, Buchholz said, “Because the rest of the world is in a recession, our interest rates are scraping bottom. And because our interest rates are scraping bottom, our economy is actually doing pretty darn well.”
Bank of America’s Moynihan, meanwhile, has said he doesn’t see a recession in the wind thanks to the US consumer. “The underlying consumer is doing well and making more money, they’re employed; and more importantly, they are spending more money. We have nothing to fear about a recession right now except for the fear of recession,” Moynihan said in a Bloomberg Television interview in August.
As New York’s real estate industry pack’s up its beach bag for another year, there seem to be few storm clouds gathering in the sector.
Despite concerns about a flattening yield curve, tax reform and trade tariffs, New York’s success in attracting global tech giants such as Apple and Google, growing next generation talent with campuses like Cornell Technion and Columbia, and building future-proof office stock such as Hudson Yards, will keep the city front and center in the real estate investment sector.