New York City Real Estate: Battered, But Not Broken

The Big Apple has had sweeter days. Buffeted by the turbulence of a global economy gone haywire, New York City’s real estate market is feeling its share of …

The Big Apple has had sweeter days. Buffeted by the turbulence of a global economy gone haywire, New York City’s real estate market is feeling its share of pain.

“New York City has been hit particularly hard in the current recession,” executive managing director of NAI Global’s New York City office Andrew Simon says in a posting on the NAI New York website. “New York is home to the top global investment banks, the hard-hit stock exchange, as well as headquarters of literally thousands of companies. In this difficult recession, we are seeing more space come back to the market than can easily be leased or sold, and the lack of significant transaction activity is likely to continue for the next six months.”

NAI reports that New York City is down about $30 billion for 2008, with rents forecast to plunge between 10 and 20 percent in the next year or two. In its recently released 23rd annual Global Market Report, the firm all that all property types are troubled and recovery is not expected to begin until first quarter 2010.

In the online posting, NAI president and CEO Jeffrey M. Finn says the global economic decline has come home to roost in commercial real estate markets worldwide — including New York: “Markets from New York to New Delhi are seeing a rise in unemployment, a fundamental shift in financial industry practices, plummeting asset values and companies retrenching while grappling with debt and the prospect of declining markets,” he says.

Sour Times Began Last Year

New York’s famously steep office rents continued to be robust through the first half of 2008, according to NAI. The good times were soon to end, however, as negative absorption began to kick in during the second half of 2008.

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The company believes things will worsen before they begin to improve, with increasing sublease space as well as surplus yet to hit the marketplace adding to vacancy rates and slackening rents.

“The market is definitely struggling,” Manhattan construction and real estate attorney Stephen Del Percio says. Del Percio currently practices law at Arent Fox LLP and is the publisher of greenbuildingsNYC, an online clearinghouse for topics related to green real estate.

He says prices are dropping when it comes to residential sales and rentals as well as commercial transactions. “Many developers and owners overleveraged themselves in terms of making acquisitions during the boom — this may create some opportunities for investors in both sectors as those same properties may trade at significant discounts as cash-strapped banks and other institutions look to raise cash and stay solvent during the downturn.”

Green building has hardly proven immune, according to Del Percio. “Boston Properties suspended construction on a planned LEED Gold office building after an anchor tenant pulled out, though the parties may be back in negotiations,” he says. “Another planned LEED Gold office building, 11 Times Square, still does not have a single tenant; the developer refuses to back off of triple-digit (per square foot) rents.”

Though high-profile green condo initiatives such as the Riverhouse at the north end of Battery Park City and the Brompton and Lucida projects on the Upper East Side appear to be doing well, Del Percio says many sales took place before the market collapse last fall. “Two green condo projects in Brooklyn — Toren and the Edge — have not sold a single unit since last fall,” he says.

Investment Appeal Remains

While Manhattan apartments were selling at well above $1,000 per square foot as recently as a year ago, Del Percio says these deals are now taking place in the $700 per square foot range. “Some sellers are refusing to budge off asking prices, but as more folks get laid off and/or the economy gets worse, we could see some significant discounts across the market,” he says.

Fringe real estate neighborhoods such as East Harlem, Bushwick, and the South Bronx are most likely to get hit hard during the downturn, Del Percio says. However, he sees Manhattan as a perennially good investment.

“New York is the only truly 24-hour city in the country and continues, despite the downturn, to be the most international of American cities. There is a constant influx of both foreign capital and nationals, both of which are major players in the real estate landscape. New York’s density and mass-transit system are unique among U .S. cities. Wall Street is — was — probably the driving force behind real estate prices and development over the past ten years,” he says. “New York’s economy is predicted to recover more quickly than the rest of the country, and people will always want to live and do business here.”

Future Predictions

Del Percio offers a gloomy short-term outlook, but a rosier long-term view. “The mayor of New York still projects a one-million increase in population by 2030; there is still, even with the boom units coming on line this year, a severe lack of residential units, particularly in the affordable-housing sector.”

For their part, NAI believes that the New York market may be in a stronger position during this recession than in previous ones, given the record highs shown by both occupancy and rental rates at the beginning of the downturn. “When the industry pulls out of the current recession, we will not see massive oversupply of product,” Finn said in NAI’s online posting. “Recovery can begin with a healthy balance between supply and demand.”

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