By James Kinsey
Those of us working in the New York City real estate market know that there is our market…and then there is everywhere else.
Domestic and international conditions tend to impact New York City in powerful ways, but, more often than not, we come out ahead. And sometimes — as is the case now — conditions that hurt people in other industries and locations actually create great opportunities in our market.
So where are our advantages now? Three places: global troubles, domestic inflation and monetary policy, and local realities.
Advantage 1: Global Troubles
Globally, the worsening EU debt crisis, unrest in the Middle East, the earthquake-provoked nuclear disaster in Japan, emerging market inflation, and the cooling of China’s economy will all impact real estate in New York City, but in a good way. New York City is perfectly positioned to benefit from all of these factors because in a volatile world it is seen as a safe harbor. Our strong legal system and basic ownership rights consistently compare favorably to those in emerging markets and China.
Advantage 2: Domestic Inflation and Monetary Policy
The Fed remains committed to Quantitative Easing 2 (QE2), increasing the money supply and stimulating the economy by buying government bonds and other financial assets, but is also committed to its expiration in June. The tough decisions will continue when they have to decide how to remove the excess liquidity from the market. in addition to both reducing the Fed balance sheet and changing its composition back to Treasuries and away from mortgage backed assets.
Federal Reserve language on inflation is also drifting towards admitting that there are price increases in most consumer products. Although they are saying that this is temporary and that headline inflation, which really matters, will remain low. In reality, most people are already beginning to feel this in their everyday spending.
In a recent trip to Zaro’s Bakery I saw a display next to the register listing the double or triple digit percentage increases in various food related commodities along with an apology for the need to raise their prices.
One area of concern, the possibility that the low cost of financing is contributing to a second real estate bubble, is where the inflation will come in to save the New York City market. Real estate is a traditional hedge against inflation. In addition, I anticipate residential rents to increase dramatically in the near term. Office rents will increase as well albeit slower.
Overall income will rise faster than expenses. instead of the opposite, which took place over the last two years. Building values will also increase in conjunction with further cap rate compression. (Manhattan was recently reported in Crain’s as having the lowest cap rate in the nation at 6% in the office sector.) Deal velocity should also continue to improve as banks strengthen and can continue to liquidate there under or non-performing assets.
Advantage 3: Local Realities
In addition to being an attractive safe harbor, there are the fundamental forces of supply and demand that appeal to investors whether or not they are under duress. If rent stabilization is strengthened (as it appears it will be) and zoning remains restrictive outside of Mayor Bloomberg’s redevelopment areas, then the reduced density will limit current and future supply.
On top of that, the lack of construction financing over the last three years has prevented new projects from coming online.
All of which wouldn’t mean anything if the demand weren’t there. But it is. Four main items will push demand for the limited space higher:
• Recovery of the financial sector (10,700 jobs added for the 12 month period ending February 2011 according to the New York State Department of Labor.)
• Google and other technology companies increasing their presence in New York.
• Mayor Bloomberg’s push for bio-tech and science parks.
• Expansion plans by Columbia, New York University, and The New School.
Put all of this in the context of the predicted population increase of 900,000 by 2030 (an average of 50,000 per year) according to PlaNYC 2030 and it demonstrates an extreme lack of supply of new residential units. And, due to rent regulation rents may spike as much as 25% this year alone.
Bottom Line
Real estate in New York City is different, and those of us who work in the industry have to stay on top of a much broader array of influences than our counterparts in less complex locations. But our fundamentals are exceptionally strong and the forces that are in play now as well as the forces we anticipate in coming months are opening up exceptional opportunities for our firms and our clients.
James Kinsey is CEO of ERG Property Advisors.
