Now that the books for 2013 have been closed in New York City and 2014 has ushered in a new and different administration at City Hall, this Q&A with some of the best commercial real estate minds in NYC is a must read!
For anyone working in the real estate industry in and around the five boroughs of New York City, the names Robert Knakal (Massey Knakal Realty Services), Ron Lo Russo (Cushman & Wakefield), Peter Riguardi (Jones Lang LaSalle), John P. Maher (CBRE Group Inc), and Michael T. Cohen (Colliers International) will likely be familiar as they are some of the leaders in the commercial real estate market.
Now that a new administration has taken over the helm of New York City with what might be termed a different slant on doing business than the prior administration, some of the questions that needed to be asked and answered have to do with the potential impact that Mayor de Blasio might have on the commercial real estate market now and into the future. From Crain’s New York Business:
Question: Where will Mayor Bill de Blasio affect the market most?
Robert Knakal, Chairman, Massey Knakal Realty Services: His main impact will be on affordable housing because he stressed this during his campaign. The industry will likely be willing to work with him on this. But real estate taxes could be a problem, as the new mayor will need revenue to deal with the 152 union contracts that must be negotiated. I think we are all concerned about [a possible rise in] crime, as tourism is a key economic driver.
Ron Lo Russo, President, NY tristate region, Cushman & Wakefield: First and foremost, the most important responsibility for any leader of the city is the safety of its constituents and visitors. I hope that Mayor de Blasio will be as diligent and thoughtful as the previous administration in that regard.
Peter Riguardi, President, New York operations, Jones Lang LaSalle: I hope there is no negative impact on the city’s recent record on crime. In a city poised to grow and lift all people, the most significant factors are safety and a high quality of life. We could use more affordable housing, as it supports a healthy, diverse and dynamic economy. There are a number of opportunities to create affordable housing. It would benefit the city enormously if the mayor is capable of improving that situation.
John P. Maher, Executive vice president, CBRE Group Inc.: We’ve gotten used to a smart, pro-business administration with a long-term outlook. Change is likely to make people uncomfortable. But Mr. de Blasio is smart. Notwith-standing the rhetoric, he recognizes that New York is in the best condition ever. The mayor will see that many of the policies, procedures, personnel and investments that the Bloomberg administration put in place are still needed.
Michael T. Cohen, President, tristate region, Colliers International: The city’s economic engine must continue to be stoked, and today’s engine is predominantly fueled by the technology, communications and entertainment sectors. The new mayor needs to focus on the necessary steps to make sure those industries continue to be attracted to the city, and to thrive. It’s all about jobs.
Mr. Knakal: Demand for new office space is extremely high. A huge percentage of our office stock is functionally obsolete. The new buildings in the financial district and Hudson Yards will be overwhelmingly successful, as will any other new office and retail space delivered to the market. Let’s hope midtown east rezoning makes a comeback and is a bit more flexible with regard to its applicability.
Mr. Lo Russo: Downtown Manhattan is changing more rapidly than any other area. We are already seeing a significant diversification of the tenant base there. This is particularly true of companies having a hard time finding space in midtown south because of a lack of availability or rising rents. We look at downtown as the next midtown south—the next market to benefit from the growth in the tech, advertising, media and information sectors.
Mr. Riguardi: Absolutely! I think the paradigm shift downtown is just beginning. When construction is complete, the bridges and sidewalks finished, the memorial open to the public and the new transportation hubs open, lower Manhattan is going to be an even more wonderful place to live, work and socialize. Companies will want to go there. It’s going to become the place to be.
Mr. Maher: It will take some time to lease—except the retail space, which seems well on its way to being full. We are tracking more than 60 tenants looking for nearly 20 million square feet. Competition is fierce, but the great downtown properties like the new World Trade Center and Brookfield Place can now compete on something more than price. There’s a new, vibrant down-town that enhances the quality of the occupancy experience.
Mr. Cohen: There’s more than enough demand, but those properties will be competing with Hudson Yards and midtown. This is a game of musical chairs. When the music stops at the end of the year, some of this space will be leased and some will be vacant. In addition, there will be newly created and pending vacancies, as tenants who have committed to the financial district and Hudson Yards leave behind their old space.
Mr. Knakal: The office-space market is currently a difficult one to figure out. It seems that most renewals are for less space than the tenant occupied before. Tenants appear to be utilizing space differently today.
Mr. Lo Russo: The main reason we have seen an increase in vacancies over the past year has been an increase in inventory. That will definitely continue with the completion of 1 World Trade Center in the first quarter. However, we anticipate that after that initial spike, vacancies will decline, driven by rising employment in many sectors, and I wouldn’t rule out growth in both the financial and legal sectors in 2014.
Mr. Riguardi: There is no question that the challenge for our marketplace is job growth. The market is adapting to a lack of new jobs and to firms taking less space per employee. However, there are alternative uses for the excess office space, such as hotels, residential conversions and medical space. It appears that this will drive the vacancy rate down a bit or keep it flat over the next year or so.
Mr. Maher: Wall Street’s being on the sidelines has given other tenants room to grow. Companies in technology, new media, biotech, etc. have given the city new diversity. That said, expect vacancies to be slightly higher this year, going to 12.5% from today’s 12.2%. But the softness will be less about Wall Street and law firms than new supply coming on line and all firms looking to densify.
Mr. Cohen: It depends. Those submarkets that cater to the [older industries like finance] will now target growing sectors, such as tech, media, entertainment, etc. We have already begun to see some migration out of the super-heated midtown south and Hudson Yards markets into the financial district and the mid-town core. This out-migration has the potential to offset or weaken the blow [of slower growth among financial tenants].
Mr. Knakal: Retail rents remain very underpriced and have substantial room to grow. As a result, retail space is selling for much less than it is worth today. Retail space has become so valuable that it is now having a substantial impact on the prices paid per buildable square foot for sites where there is a retail opportunity.
Mr. Lo Russo: Tourism has been one of the great success stories for the Manhattan economy. It is an important driver of the local retail market, but not the only one. Areas that are not tourist destinations are also experiencing healthy retail leasing. However, there is no question that some of the healthiest retail markets are those where tourism is the strongest, and as long as tourism remains strong, retail rents will remain healthy.
Mr. Riguardi: We see very positive retail fundamentals in Manhattan. New York will remain the No. 1 destination for tourists in the country, and the city’s population continues to grow. Retail opportunities are more in demand. Meanwhile, gentrification and improvements in numerous neighborhoods are creating a retail boom in the outer boroughs.
Mr. Maher: Quality-of-life issues, not to mention crime and terrorism, can turn tourism on a dime. If Mr. de Blasio is vigilant in keeping New York safe and friendly, tourism and retail will remain strong. While tourism-based retail may continue to raise rents in traditional locales, new retail districts are the next story. Westfield’s work at the World Trade Center, Brookfield Place and Hudson Yards is highly anticipated.
Mr. Cohen: Yes. Ground-floor retail space is the most supply-constrained commodity in our industry. As long as New York City continues to grow and attract shoppers from all over the globe, retail will continue to appreciate in price.
Mr. Knakal: Populations all over the world are aging [including ours], which is stressing economies around the globe. This has led to uncertainty about sustainability and has created a flight of capital to safety. Our economy and political system are relatively stable, which is funneling foreign capital into our market.
Mr. Lo Russo: We saw a surge in demand from foreign investors in 2013. The biggest uptick has been from Asia/Pacific and the Middle East, with continued strong appetite from Canada as well as Europe. This is particularly visible in Boston, New York, Washington, D.C., San Francisco and Los Angeles. These investors are joining forces with local players to co-invest, but some are making outright acquisitions as well.
Mr. Riguardi: We still see New York as the leading city for foreign investment globally, whether it is among Canadian, Chinese or European investors. Manhattan is a highly stable market, and it remains a great place to invest. It has been most efficient for foreign buyers to invest in Manhattan with local partners, and this trend will likely continue.
Mr. Maher: China in the past three years bought or financed more than $5 billion in assets. Germany, the U.K., Kuwait
and South Korea follow. Interestingly, Canada is the
No. 1 acquirer or lender, nearly doubling the financing of the next-closest country. Foreign investors will continue to have an extraordinary role, and are now frequently choosing to be direct investors.
Mr. Cohen: Yes. The elephant in the room is China. Chinese investors are sitting on piles of dollars and learning how to maneuver around their export controls. They will certainly become major players in the global real estate market, and their presence in New York City has just begun to be felt. In addition, New York continues to be attractive to Western investors.
Clarification: “We’ve gotten used to a smart, pro-business administration with a long-term outlook,” said John P. Maher, executive vice president of CBRE Group Inc. His response to where Mayor Bill de Blasio will affect the market most was unclear in an earlier version of this article originally published online Jan. 12, 2014.
This article appeared in Crain’s New York Business here.
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