June 04, 2019
Many institutional investors would argue that New York is an essential market for any sophisticated commercial real estate investment strategy. The intense competition during the past few years has prohibited many interested parties from entering the market. Today, the market is facing some uncertainty and upward pressure on capitalization rates that has slowed investment activity. That break in the action, combined with the booming technology industry and high-quality labor, has created an opportunity for investors to step in and make strategic real estate investments that will be highly successful in the long run.
Let’s start with the factors creating uncertainty in the New York commercial real estate market. There has been a slight uptick in capitalization rates recently, in part due to the migration of tenants from Midtown to Hudson Yards. At the current cap rates, it has become difficult to buy buildings due to the amount of necessary renovations and increasing tenant improvement allowances, or money given to tenants to complete build-outs of their space.
In addition, new legislation could create more challenges for the New York investment market, including a recent increase in the real estate transfer tax. High income taxes have already plagued New York on a personal level, leading to it outpace the nation in outward migration. To complicate matters further, WeWork is the largest tenant in New York, but lenders have become hesitant to underwrite coworking tenants because of the uncertainty surrounding the sector’s profitability and performance in a downturn.
Yet despite these very real concerns, New York investment is still a good option in the current market. For starters, there is an allure for companies to have a significant presence in New York. The educated and diverse workforce has been attracting international companies to expand their presence in the market. Cap rates have become more reasonable in the past six months. Industrial properties are particularly attractive due to the low upfront cost for investment.
And then there’s the real star: the tech industry. New York’s latest rebound was driven by tech, evidenced by Google having added a major presence in the market and the fact that Amazon (initially) picked New York as a location for HQ2. Of course, technology isn’t the only growing industry. Manhattan and the surrounding areas are home to some of the nation’s top universities. The best and brightest talent is still attracted to living and working in New York.
With infrastructure a huge focus for the federal government and more household companies expanding their presence in New York, we can expect to see improvements around the city. For example, an $8 billion renovation and infrastructure improvement project is underway at LaGuardia Airport, which includes improvements to entrances, transit connections, roadways and the Airtrain System, as well as new dining and shopping options. JFK Airport is undergoing $13 billion in similar renovations, adding 15,000 jobs over the duration of the project. Improvements to Manhattan’s transportation network are also planned, albeit at the expense of the city’s residents and workers by way of congestion fees. This plan – the first of its kind in the U.S. – is being imposed to encourage less driving and more use of mass transit.
Despite the current slowdown in New York investment activity, the Big Apple will remain one of the nation’s most desirable commercial real estate markets. Today’s environment presents a rare opportunity for a real estate investor previously priced out of New York to get involved in the action and reap handsome benefits down the line. Plus, investors in New York always have an exit available because global capital wants to be in the largest city in the United States – a market that will consistently perform well due to the diversification of its employment base.
Steve Pumper oversees investment and finance including, asset sales, financial advisory, and corporate real estate finance for all product types including office, industrial, retail, healthcare and multifamily.
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