Tom Toland, Waker & Dunlop

The state of the commercial real estate industry - steady, but for how long?

Despite recent indications that NYC’s commercial real estate boom of the last several years is finally starting to cool, the area will continue to remain one of the strongest real estate markets in the U.S. and internationally. Supported by a strong job market, an increasing population, an abundance of domestic and foreign capital, and low interest rates, the perception of the real estate market here as essentially immune to the challenges emerging elsewhere is mostly justified. And as foreign money continues to pour into the city driven by the opinion of NYC (and the U.S. commercial real estate market generally) as a relatively safe, consistent investment environment, rents, transaction volume and pricing have all hit historic highs. 

However, we are finally beginning to see some tapering and adjustments in rental growth and pricing.  The reappearance of concessions in certain high end rental buildings (not seen since the last downturn) and recent evidence of pricing adjustments in the luxury condo market, largely dominated by international buyers, indicate that rents and pricing might have finally found a ceiling. 

Competition between lenders for deals (especially multifamily) remains intense and debt pricing is still historically low, but we are now seeing some pull-back and resistance to the trend of increasingly higher leverage and interest only periods. Construction lending is becoming significantly harder to obtain with the return of personal recourse in certain circumstances. Fortunately, underwriting standards have remained relatively stable and more stringent than anything we saw during the bubble before the financial crisis. 

There was a general expectation for the fed in increase rates by year end, but officials there have already skipped rate increases at every meeting this year, making it difficult to make any prediction there other than noting that debt pricing should remain near historic lows for the near future.      

421A Tax Abatement Remains Chief Focus for Future Development Potential

Despite the incredibly high demand for additional affordable and rental housing in N.Y., the 2016 expiration of the 421-A Tax Abatement program, a long term property tax discount available for newly constructed apartment projects, has essentially frozen multifamily development in the city. With land ($1,000 s/f in some areas of Manhattan) and construction prices at record highs, the development of new rental projects doesn’t make economic sense without the tax abatement.  The result is that residential developers continue to build luxury condos instead of the new rental units N.Y. badly needs. Currently at a political impasse, the renewal of the 421-A is essential for the development of more affordable housing tax in a region where the average rent is in excess of 40% of income. 

If there is a silver lining to the astronomically high rents and residential pricing in Manhattan, it’s that it has led to an economic revitalization of many of the surrounding areas. Driven by a “flight to affordability,” residents seeking affordable housing options have migrated further out from the city center encouraging development in many neighborhoods long ignored by real estate owners. Williamsburg in Brooklyn has been the poster child for this kind of gentrification but similar revitalization has also occurred in places like LIC, Hoboken and Jersey City. Even the South Bronx is finally seeing a surge of “workforce housing” tenants, which is one of the reasons the Bronx saw the largest increase in apartment sales transaction volume in the metro area last year. 

Part two to appear in the November Financial Digest of the New York Real Estate Journal.

Thomas Toland is senior vice president of Walker & Dunlop, New York, N.Y.