Experts Unsure Of What 2017 Holds In Store For NYC Real Estate

Thank the heavens 2016’s almost over. From the deaths of David Bowie, Prince and Muhammad Ali to a presidential campaign that left Americans on all sides with a bad taste in their mouths, this year has been a mess from start to finish, at least from a cultural perspective. Economically, however, industry players agree that 2016 was stable, and 2017 presents a minefield of uncertainties and potential declines.

What The Experts Missed In 2016

Hidrock Properties CEO Abraham Hidary (pictured) says 2016 was fairly calm, with steady fundamentals and no major price fluctuations. The only thing that didn’t pan out the way he predicted, he tells Bisnow, is construction costs.

Like GFI Development president Steven Hurwitz, Abie believed we’d be seeing decreases in costs, but the difficulty of finding quality contractors and longer timelines have kept costs high.

Another prediction that didn’t come to pass, Savanna managing partner Chris Schlank says, is the migration of TAMI tenants to every possible Brooklyn neighborhood. Although transit-oriented Brooklyn 'hoods like Downtown Brooklyn experienced steady leasing, it wasn’t the explosion many expected. And, as he'll detail further at Bisnow's 2017 NYC Forecast event at 75 Broad St on Dec. 8, he's not expecting it to happen in 2017.

Cushman & Wakefield economist Ken McCarthy said the year definitely started with a surprise, with the massive stock market decline sending investors into a tizzy. And while the market was able to recover and consumer spending was strong, he tells Bisnow that 2016 was definitely weaker than C&W expected in terms of job growth.

Will Lower Taxes Help Market At Large?

In 2017, Abie says, the lower taxes that tend to come with a Republican government will give the economy a jolt, although it’ll be mitigated by an equally certain rise in interest rates.

Ken (pictured) says lower taxes could also offset flattening corporate profits and the business sector’s decline in optimism, although this depends on what the President-elect is able to pass.

“We expected more of the same, but now we’re getting something else,” he says. “But we need to see what that ‘something else’ is.”

Ken and Chris add the US economy’s strong momentum will be able to carry it through any uncertainty of Trump’s early presidency, and Ken says he’s already seen sentiment improve.

Savills Studley chief economist Heidi Learner’s not as sure. With Treasuries up 50 basis points since the election, Trump’s presidency could make financing costs higher and returns smaller, turning things sour for high-leverage financed assets.

There’s also uncertainty, she says, as to how real estate held in a partnership will be taxed. Trump said on the campaign trail that carried interest tax could be raised. The interest deduction on debt could be eliminated. As such, many deals may be put on hold until new policies are implemented. 

Asset Classes To Watch

The asset class to watch (and not in a good way) is multifamily. Much like Heritage Equity Partners president Toby Moskovits, Abie says the 421-a is only one of multifamily's issues, and Chris (pictured here with Savanna managing partner Nicholas Bienstock) adds that there’s still plenty of vague, confusing aspects to the proposal that need to be defined and agreed upon, which could take some time. 

Even with the abatement’s potential return, Abie says, multifamily’s still hindered by increasing real estate taxes, arcane rent regulations, minimal increases in rents, and wealthy tenants living in below-market units that don't fit their lifestyle.  

For offices, Ken and Heidi say flattening job growth and a focus on densification could lead to a period of slowing net absorption and increases in short-term subleases.

Chris believes we’ll actually see the densification trend reverse as companies realize the quality-of-life issues that come with putting “four people in the space of one.”

The Boroughs

Although Brooklyn and Manhattan are still strong, Abie says, the expectation that “you can buy something for a dollar and sell it for two” isn’t as guaranteed as it used to be.

Ken says Brooklyn’s office market is particularly uncertain, as he’s not sure demand is strong enough to justify the building boom. Heidi (right, with UBS's Leila Larijani and UBS's Jonathan Woloshin) worries that the strengthening dollar and tightening monetary policy could make Manhattan too pricey for foreign capital flows, which made up more than half of office transactions through Q3.

All of this will have to be seen, but it’s clear that 2017 should start with caution. Come to Bisnow's NYC 2017 Forecast event on Dec. 8 to find out more.