A resilient city | Real Estate Weekly

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New York always comes back.  As New York City recovered
from the darkness of 9/11 and the depths of the financial crisis even stronger,
it will emerge from the pandemic in the same way.

As of July, Manhattan already recaptured 110,000 jobs tightening the unemployment rate to 8.3 percent from a peak of 16 percent during 2020. Before the pandemic it sat at 2.8 percent. We anticipate job growth to surge once companies return to the office in large part this fall. 

Goldman Sachs and JPMorgan Chase already started their return-to work efforts on June 1, which could have a trickle-down effect on other financial services companies and office-using industries.

As of the week of July 18, 2021, Manhattan office foot traffic at representative locations is up 5.8x from the quarantine-induced low of the week of March 29, 2020, but remains 67 percent below the week of March 1, 2020 levels, according to an analysis of cell phone data by Avison Young’s Innovation and Insight Advisory team.

While it’s unlikely that the Manhattan office market will
achieve normalcy in terms of vacancy rates or leasing activity at any point
soon, we are anticipating greater leasing volume in the next 12-18 months
compared with post-COVID levels to date as tenant-favorable conditions persist
in most segments of the market and return-to-work efforts accelerate.

Companies continue to be drawn to New York City’s talent
pool. Google, which has 11,000 employees in New York, plans to add 3,000 in the
next few years. Google intends to return to its offices in West Chelsea in
September. Meanwhile, Facebook leased over 700,000 square feet during the midst
of the pandemic.  New York City’s universities will largely reopen in the
fall, bringing back students from around the world and adding to the city’s bench
of talent.

Once international travel bans lift, New York City’s tourism
numbers will also surge again. NYC & Company predicts that only 36 million people
will visit New York City in 2021.  This number should gradually increase closer
to the 71 million visitors recorded in 2019, which will in turn fuel the city’s
economy.

Lastly, New Yorkers and the real estate community
are excited about having new leadership. Eric Adams, the presumed next
Mayor, has made it his priority to ensure the streets are safe so that New York
City can recover and prosper.

The Opportunity

Overall, New York City’s sales activity picked up in the 2nd
quarter with a total of 103 sales, the most since the 1st quarter of
2020.  We’re anticipating large pent-up demand as the 10-year quarterly
average is more than double that figure. Further, New York City total dollar
volume in 2022 is projected to be at only $7.8 billion, the lowest sales volume
since the depths of the financial crisis in 2009. The 10-year average is more
than 4.5x this amount. 

We’re already seeing a recovery in pricing, however.
According to Avison
Young’s Tri-State Investment Sales Report for 2Q21
, Manhattan multi-family
sales values increased 4% to $742/SF in the 2nd quarter compared to the
trailing 4-quarter average; retail was up 6% to $1,545/SF; office pricing rose
10% to $1,039/SF; and development sites increased by 9% to $434/BSF.

Multi-family

Multi-family assets in Manhattan offer exceptional value
with average capitalization rates of 4.67%. This allows for positive leverage
when mortgage rates are still widely available in the 3 percent range.
Residential rents are already recovering nicely. Concessions are burning off
and landlords are returning to the 90% occupancy that they have historically
enjoyed. Net effective rents, however, are still off by 20-30% from before COVID.
Rent growth over the next few years should be substantial. Although
multi-family pricing rose 4% to $742/SF in 2Q21 compared to the trailing 4 quarters,
it is still 24% below 2018-2019 pricing offering considerable value.

A strong multi-family strategy will be to invest in
properties that are mostly or entirely fair market to take advantage of this
rent recovery. Investors should also look to target tax protected classes or
properties with tax abatements where real estate tax increases are capped.

Retail

The average price per square foot for Manhattan retail
properties sold in 2Q21 rose 6 percent compared to the trailing 4-quarter average,
which is a positive sign.

Retail locations in residential neighborhoods have fared
better than more tourist-dependent locations. According to the REBNY’s Spring
2021 Manhattan Retail Report, average asking rents dropped by less than 15% on
the Upper East Side compared to rents in the Spring of 2019.  

There will be even greater opportunities for high street
retail, as the pendulum has surely swung too far as the drop in tourism has had
a major short-term impact. For example, average asking rents in SoHo fell by
nearly 40% from 2019 to 2021.

A smart retail strategy will be to buy significantly discounted
or distressed vacant retail. Investors should look at occupied retail to take
advantage of capitalization rates that have greatly expanded in favor of buyers.

Office

Office properties have been the most surprising asset class.
Sales values have increased since the pandemic, rising 10% from pre-pandemic
levels.  These averages were drawn from only 5 sales per quarter during
the pandemic, compared to some of the pre-COVID quarters which had more than
triple the number of sales.

Avison Young’s Q2
2021 Manhattan Office Insight Report
shows that although the 2Q21
availability rate of 19.2% represents a post-2000 high and net effective rents
have dropped 10.8% from April 2020 to June 2021, we have already seen signs of
stabilizing since March 2021, signaling that demand for office space has
incrementally risen.  There has no doubt been a flight to quality with
82.8% of the leasing activity happening at Trophy and Class A properties
compared to a combined 72% pre-pandemic level. Additionally, 1.5 million square
feet of sublet space has already come off the market as companies rethink their
plans.

Buyers should look to invest in boutique offices in the most
sought out neighborhoods, especially in walking distance from good
transportation. Opportunities will no doubt arise from owners who are facing
high vacancy and are unable to refinance at their current levels.

Development

It should be noted that the current dearth of land sales
will create a supply shortage in future years, although buyers without ground-up
development experience should be wary due to the inherent risks of these
projects. The residential market has also rebounded which signals demand for
new product.

The luxury home market has had record months for contract
signings as of late. In the second quarter, Manhattan apartment closings surged
152% from a year earlier, the biggest annual increase in data going back to
1990, according to a Miller Samuel report.  The report also said that the
momentum is continuing as the number of contracts signed in the quarter soared
619% year-over-year to a record 4,633 transactions. Demand is likely to
continue as foreign buyers, largely absent for over a year, eventually return.

Meanwhile, the listing inventory of available units for rent
dropped 38% in June from the previous month to 11,853, according to Miller
Samuel and brokerage Douglas Elliman Real Estate. While still elevated from
pre-pandemic levels, the inventory has been reduced by more than half since
January.

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