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Deals & Dealmakers

Third down brings value play to office mart

In his latest round table discussion, Cushman & Wakefield vice president James Nelson takes the pulse of the local, national and international markets with his firmʼs Ken McCarthy, chief economist, president and CEO Ron LoRusso, Senior Managing Director in Capital Markets Janice Stanton and Steven Kohn, president of Cushman & Wakefield Equity, Debt & Structured Finance.

James Nelson: Ken, what is the current outlook for the economy, both domestic and abroad?

Ken McCarthy: The US economy is in pretty good shape. We expect to see GDP growth this year at about two and a half percent.

Globally, there are concerns that Europe continues to grow but very slowly, and now you have Britain exiting from the European Union. What does that mean for growth in Europe? What does that mean for businesses in Europe?

Asian economies generally are slower than they have been. China has slowed down, and that is causing demand for the materials that go into the Chinese manufacturing machine to slow down as well.
Latin America is very weak, and certainly Brazil is in recession. Other countries are very sluggish.

James Nelson: How is employment looking for the US, and here in New York City?

Ken McCarthy: The US added over three million fulltime jobs in 2014, and another 2.7 million fulltime jobs in 2015. That was the best two years of job growth in the US since the late 1990s.

James Nelson: What industries are driving our real estate market here in New York?

Ken McCarthy: The real star in this recovery, in this expansion, has been the creative technology industries that we refer to as TAMI – Technology, Advertising, Media and Information. They have added approximately 85,000 jobs since this recovery began, the most of any major office-using sector.

James Nelson: How has the uncertainty in the stock market played into real estate investments here?

Ken McCarthy: We did see a bit of a caution in the investment market. Now we are back up and we have regained all that was lost in the first six weeks of the year. Equity markets are now pretty stable, and as a result I think the investment market has picked up again.

James Nelson: What other macro or micro considerations play into the real estate market here in New York?

Ken McCarthy: The biggest driver of the New York real estate market has been the influx of Millennials into the region, the generation born between 1980 and 2000. They are coming here in droves, and the companies that want to hire them are coming here to hire them.

At the same time, the older piece of the Millennial generation is starting to get to the point where they are settling down and having families, so I think we are going to see a shift towards the suburbs in the next cycle.

James Nelson: Ron, how is the New York City real estate market doing overall?

Ron LoRusso: Overall it’s doing well, both on an investment sales and leasing perspective, as well as our own services.

James Nelson: Cushman & Wakefield put out a report that Midtown rents are still below peak in 2006-07, so is this still the value play? What is happening with Midtown South, Downtown, or even Brooklyn and those markets?

Ron LoRusso: There is just not enough product in Midtown South for the statistics to give you a true indication of what is going on in the market. It is at about a five percent vacancy right now, the tightest in the market. There are pockets of Midtown that are like Midtown South, where buildings are being repurposed, and the developments on the west side. Third Avenue is probably the greatest value play in the Manhattan office market.

James Nelson: Do the Hudson Yards and World Trade Center markets compete? How are you seeing tenants compare those two markets?

Ron LoRusso: Every market competes with each other on a much broader scale than it ever had in the past, so much so that it extends into Brooklyn, and New Jersey. The market is bigger for every tenant base, because they have the opportunity to move to more sub markets.

James Nelson: How is the retail market? What is your retail leasing group talking about?

Ron LoRusso: There is much more product that is able to be available in the retail marketplace than what is currently listed. It is not only block-by-block specific, but corner to midblock specific. There has been much movement north in pricing. Big retailers are still attracted to New York City’s flagship streets, but not for the retail traffic, it is from the advertising type traffic.

James Nelson: For the first quarter, sales volume was down 30 percent from last year. The land market has really frozen up partly because of the restriction of construction financing and the fear of surplus of luxury residential. Additionally, without the 421a program, it is virtually impossible to build today. With that being said, the income-producing product like multifamily, retail, and office is still busy.

Ron LoRusso: I think the second quarter is a much better quarter over first. And the first half of this year is even better than probably the second half of last year, just with the volume and pace of deals.

James Nelson: Janice, what has global appetite been like for the New York City real estate market here?

Janice Stanton: Globally they cannot get enough of New York City right now. In 2015, 41 percent of all deals in New York City were backed by foreign capital. New York real estate is perceived to be the treasury bond of the global real estate market.

James Nelson: What countries have scaled back, and what countries have more appetite now?

Janice Stanton: In the first quarter of this year, China and Hong Kong represented 50 percent of the international appetite for New York City. Last year, the Middle East represented 22 percent of the international appetite. Chinese investors are putting more money into the market in 2016 than in 2015, because they think their currency is going to devalue. There is safety and security flight capital coming into New York City.

James Nelson: Are foreign investors looking to buy at the asset level, or are they coming in as equity?

Janice Stanton: Many foreign investors come in as limited partners, because they want to observe how the game is played, participate in the development, and understand how they can do it themselves next time. Others will come in looking for liquidity, and want the whole asset.

James Nelson: Steven, what type of equity exists for sponsors out there?

Steven Kohn: In New York City, the assets are predominantly residential, office, and some retail. There has been a recent venture set up where two large sovereign wealth funds are working with a New York retail operator to buy value add retail opportunities.

James Nelson: Is it mostly value add for this type of equity, or is there core?

Steven Kohn: There is still a large core demand from across the globe, so it depends. I think many funds these days have buckets for almost all types of returns and risks.

James Nelson: What type of returns are they looking for? Are the returns getting compressed?

Steven Kohn: The value add returns have dropped. There is virtually no opportunistic capital now. It is tough to find 20 percent plus IRRs without engaging in condo development, for example.

James Nelson: Is there still equity out there to do ground up projects?

Steven Kohn: I would say there is, and I would say more of that equity has shifted to pref equity rather than common equity.

James Nelson: So is there still construction financing that’s out there today?

Steven Kohn: That might be the most lliquid part of the market right now, construction financing for condominiums, especially high end. If you are not a developer that has had a long term relationship with a major bank, then you are limited to debt finds, mortgage REITs, and the like.

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