What Does An Emerging Market Look Like In NYC In 2016? Good Question.

Land prices in some parts of the city look to have peaked. There’s a new inclusionary zoning law, but without 421-a, it’s an open question whether it’ll do any good. Manhattan’s office market’s got a case of the hiccups while Brooklyn’s is seeing its day. The face of retail is in flux. It all raises the question: what do we even mean these days when we talk about an emerging market?

Panelists at Bisnow’s event on that topic yesterday had a range of answers to that question. As Treetop Development principal Adam Mermelstein (snapped with Nelson Management president Robert Nelson) pointed out, NYC is a bubble. (No, not that kind of bubble.)

It’s like no other market in the country, and he says it’s one of the only markets in the world where investors can buy assets based mainly on rent growth instead of what operating income looks like shorter-term. Adam didn't mince words when summing up how far he sees that growth going in market-rate workforce housing. “At a certain point, there won’t be any workforce housing left in this city,” he said. 

As RXR EVP Seth Pinsky (with the mic, snapped next to Metropolitan Realty Associates managing partner Todd Bassen) pointed out, land prices have been largely driven by the residential market in most parts of the city. But with banks tightening lending standards for condo buyers and a looming rental inventory crunch due to the lack of 421-a, Seth said he sees the value proposition for development shifting in places like Downtown Brooklyn, where he expects more development to be driven by commercial rather than residential use.  

If land prices are taking a hit, how bad is the hit—and what will it mean? Cushman & Wakefield EVP Robert Shapiro (on the left with Townhouse Management president & CEO Mitchel Maidman) said he’s seeing development site offers coming in at around 25% off the peaks of this cycle in Upper Manhattan. Rob’s takeaway is that while new residential development uptown will keep happening, a shift toward investment in less-risky, rent-regulated existing product is something to look out for.

Grid Properties managing director Scott Auster said we should look out for higher-end retail to be developed in Harlem, with a new Whole Foods on 125th Street serving as a validator of what that strip can do on the retail front. But he said upper Manhattan’s not likely to see the same office/residential boom parts of Brooklyn are seeing, since in that part of town he doesn’t see the demand for the $50/SF rents needed to make an office project work.

If we’re going to talk about what’s behind the Brooklyn office boom—and why wouldn’t we, these days?—Seth reminded us that it’s also worth talking about what’s been going on in the core office markets of Manhattan. He points out that the well-known new construction in places like Hudson Yards and the World Trade Center won’t actually push up the total office inventory substantially over what it was 15 to 20 years ago. The loss of office space to hotel and residential uses has been happening at almost the same pace as new inventory entering the pipeline, he says. (Speaking of new inventory, news came out the very day of our event that RXR and Youngwoo Associates are on the verge of closing on a $225M loan for their Google-anchored Pier 57 project on the far west side of Manhattan.)

And as one more reminder that we’re talking about an interconnected real estate ecosystem, Robert Shapiro told us his crystal ball predicts increasing values for residential assets pushing ever further into Brooklyn and Queens as the outer borough office market keeps delivering new product. He sees middle class workers realizing that they can find affordability farther into Brooklyn or Queens and still have a commute time on par with going from a prime Brooklyn neighborhood to an office in Manhattan.

Speaking of commute times, Seth noted that it takes him about as long to get to Midtown from where he lives, in Park Slope, as it would on Metro North from Yonkers. It’s about the time it takes, not the miles, he said. He pointed out that there could be some untapped demand for transit-oriented residential development in farther-flung places we might tend to overlook.

Arker Cos principal Daniel Moritz made a similar point, noting that his firm got 70,000 applications for 65 affordable units at a project it’s building in Jamaica—an area that’s not exactly close to Manhattan as the crow flies but is a quick Long Island Railroad ride. He sees a familiar pattern taking shape there: a developer puts up a new affordable housing building with some desirable retail at the base, the area gets more “on the map,” and it’s not long before the market-rate development arrives.

Pivoting back to retail, Scott helps frame the stakes when a retailer goes to an emerging neighborhood. A head of real estate for a retailer used to do 30 to 40 deals a year. Now, he says, maybe it’s more like 10. That means there’s more time to think each deal through fully, but it also means they can’t be wrong in where they choose to open up shop.

Rosenberg & Estis member Bradley Silverbush, who moderated the discussion on workforce housing that kicked off our event. 

Giscombe Realty Group's Holley Drakeford, who moderated the discussion on commercial development.