Here’s How Area CRE Pros Really Feel About The Market

Favorable new tax legislation, a pipeline packed with megaprojects and developers’ ambitions to build an ever-higher skyline are heating up New York City’s commercial real estate market.

New York-based accounting firm Berdon LLP partnered with Bloomberg in September and polled local CRE owners, investors and brokers to find out how they feel about the New York City Metropolitan Area market, comprising New York City, Long Island, Westchester, Connecticut, New Jersey and Northern Pennsylvania.

The investigators conducted online and telephone interviews of over 100 NYC area CEOs, directors, owners, founders, vice presidents and managers, who revealed their expectations, predictions and concerns going into 2018. Seventy-three percent of these dominant NYC CRE players had portfolios worth over $100M, with 16% controlling over $2B worth of assets.

From the hottest submarkets and asset classes to the impact of new tax legislation, here are five key takeaways from the data.

1. Development Pipeline Filled With Office And Multifamily

Seventy-two percent of survey respondents reported having development projects in their pipeline. Of those, 44% had projects representing over $100M in aggregate value, compared to 8% with under $5M.

Condos were the most popular project, constituting a part of 56% of respondents' development pipelines. Market-rate apartments, Class-A office and affordable housing followed at 40%, 32% and 22%, respectively.

Retail, parking and self-storage were present in the fewest pipelines, at 14%, 9% and 1%, respectively.

The rise of e-commerce and ride-sharing services, like Amazon and Uber, are likely responsible for the decrease in retail and parking development, as they reduce the need to shop at a brick-and-mortar store or drive a private vehicle. Cloud-based storage may also be making physical storage less necessary by eliminating bulky documents, filing cabinets and physical music and video libraries.

2. Tax Legislation Impacts Investment Strategy

Ninety-one percent of respondents said that President Donald Trump’s tax bill would affect their investment strategies.

Fifty-three percent forecast rate changes would be the most important provision, while 46% identified the preservation or elimination of like-kind exchanges as their top consideration.

CRE is expected to benefit greatly from the tax bill’s reduced rates, concessions for REITs and pass-through entities, surviving loopholes, more favorable depreciation rules and the preservation of like-kind exchanges under section 1031.

3. Manhattan Leads Submarkets For Near-Term Opportunity

Thirty-two percent of respondents said that Manhattan is the optimal submarket for 18-month investment and development opportunities. This was more than double the 15% who chose Queens as the next hottest submarket.

Manhattan has the highest average price per square foot of all submarkets across asset class, as well as the highest concentration of Class-A and trophy properties.

Respondents favored the Chelsea, Hudson Square, Grand Central and Penn Plaza areas over Times Square, SoHo and the Financial District.

Analyzing areas outside of New York City, more than 60% of respondents indicated that Long Island presented “good” or “excellent” near-term opportunities for development and investment.

4. Vacancy Rates Rise, But So Do Base Rents

Forty-four percent of respondents with office buildings in their portfolios said their average vacancy rates were over 6%. Nearly two-thirds of office owners reported their vacancy rates had increased.

Those surveyed said the three chief threats to the commercial office market were migration to outer boroughs with cheaper rents, the diminishing appeal and increase in maintenance costs of old inventory, and a supply glut due to new construction.

Despite these concerns, 75% reported an increase in rents in their office portfolio, while only 5% noted a decrease.

5. For Multifamily, Price And Location Trump Amenities

Price, location and access to public transportation topped respondents’ lists of priorities when purchasing a multifamily property, with a respective 50%, 30% and 18% claiming each criteria as most important. Forty-nine percent of multifamily owners had a transit-oriented multifamily property in their pipeline. 

Compared to price, location and public transportation, only 2% believed a building’s amenities to be the most prominent decision-making factor. As with office, 41% of professionals surveyed felt that oversupply was the most significant threat to the existing luxury multifamily market.

To access Berdon LLP and Bloomberg’s full NYC CRE survey, click here.