We are still in the early stages of economic recovery with plenty of bumpy road ahead. For those of us in the investment property market, it is critical to understand how what is happening on the larger global and national stages is likely to impact our industry at the local level.
Real Estate In NYC: Well-Positioned And Moving In The Right Direction
Due to its inherent illiquidity, the real estate market moves more slowly than stocks and bonds. The bottom lagged behind the stock market bottom and the recovery will also lag. The good news locally, as reported by the Partnership for New York City and PricewaterhouseCoopers, is that New York City emerged from the recession with its ranking as the top global business center intact. Conversely, our traditional rivals – London and Tokyo – fell out of the Top 5.
National Snapshot Part A: Economic Hangover Lingers
For national perspective on the residential marketplace, note a recent report by Core Logic (NYSE: CLGX) that 23.1% of all residential properties with a mortgage were in negative equity at the end of 2010. The Fed has estimated that the value of household real estate has fallen $6.3 trillion from the peak and continues to fall in 2011, and household net worth is still off $8.8 trillion from its 2007 peak.
Renters aren’t faring any better. A recent Harvard University study reported that about 26% of renters spent more than half their pre-tax household income on rent and utilities in 2009. Other recent reports show apartment vacancy rates falling rapidly and rents rising, so this situation is probably even worse now.
National Snapshot Part B: Limited Supply, Increasing Demand
In a recent investor conference call by national REIT Avalon Bay Communities (NYSE: AVB) in which they discussed supply and demand for residential rental units in light of the recovering job market, they noted, “It’s both the magnitude and the composition of the jobs that matter and importantly, a disproportionate share of the new jobs created have been in the under 35 age cohort.” These young adults face a tight market for two reasons. First, significant demand for rental units by families who lost their homes to foreclosure. Second, supply is tight and does not appear to be improving.
In the same call Avalon also reported on recent supply trends and near term expectations. They noted that from 1998 through 2008 an average of 240,000 new rental units were completed annually. This dropped to 160,000 in 2010, and Avalon expects it to be lower than 80,000 this year – a 50-year low and a net zero increase.
New York City Snapshot: Strong And Growing Demand, Supply Constraints
Limited supply / high demand is not just a national phenomenon. Edward Glaeser, on The New York Times’ Economix blog, looked at new housing units created in the city in the last decade. He notes that despite the building boom, New York added only 170,000 new units since 2000, a 5.3% increase. Moreover, persistently high prices suggest that demand isn’t falling.
As I noted in “Current Market Conditions: Advantage NYC” in April, I expect a spike in residential rents, particularly in Manhattan. In addition to limited supply due to lack of financing over the last three years, and a recovering job market (11,000 new jobs in the financial services sector alone in the 12 months ending February 2011), Manhattan rents are pressed upwards by zoning restrictions and rent regulations.
Bottom Line: An Active Investment Property Market Moving Toward Stability
The big question for New York City commercial real estate is why so many buyers and so few sellers? Uncertainty regarding national housing market weakness, government budget constraints, and monetary policy grappling with nascent growth and blossoming inflation has people scared. Questioning income and expecting higher expenses creates anxiety. This is causing the majority of deal velocity to come from distress-related activity rather than voluntary sellers. In reality, New York is where the majority of the private equity is being raised and trying with difficulty to be placed; this, in conjunction with low interest rates is causing available product to be quickly absorbed.
I would like to close with a comment on inflation. Recently there was a steep decline in commodities, including oil. I previously mentioned that rising headline inflation would drive NYC real estate values higher. I feel that some of the recent increases in commodity prices were speculation driven, but, with the exception of mania style trading in silver, there is still strong upwards pressure on prices and this will only be a short reprieve. Monetary policy makers are still in uncharted territory trying to find stable ground. Fortunately we are moving in the right direction and the commercial real estate market is consistently gaining strength.
James Kinsey is CEO of ERG Property Advisors.