NEW YORK – Seth Molod, CPA, Co-Chair of Real Estate Services at Berdon LLP, moderated a panel discussion about market trends and expectations for the NYC Metro Area real estate market in 2018, held at Waterman Interests’ corporate headquarters in Midtown Manhattan on December 12, 2017.
The discussion covered a number of important aspects related to the real estate market, including the commercial office market, pricing trends, foreign investment patterns, lending, and the future of the suburbs.
Joining Molod on the panel were the following real estate executives:
The 21st Century Office Market
Molod kicked-off the discussion by asking Maturo for RXR’s take on the office market and where it expects it to go in 2018, given the company’s recent large-scale office projects at 75 Rock and World Wide Plaza. Maturo remarked on the strong activity taking place from a leasing standpoint, which is complemented by the influx of supply coming onto the market on the West Side as well as Downtown.
He added that there is a “definite shift in what tenants are looking for in New York City [and] an office in general,” which warrants the need for more modern, 21st Century spaces, and noted that in order to attract tenants, buildings must be able to help them acquire the best talent by delivering access to “good space, good location, [and] good transportation.”
Looking ahead, Maturo believes that while areas traditionally dominated by 20th Century stock – such as Midtown – are currently suffering, “over the long term, it's going to be good,” with continued rehabilitation projects to transform older buildings into 21st Century stock, similar to how RXR has done with buildings such as 75 Rock.
Dollars and Cents
Molod asked Van Zandt about concessions and rental rates going into 2018, specifically with regards to the luxury rental market. Taking an optimistic stance, Van Zandt said that now is “a good time to be a renter,” adding that in today’s extremely competitive market, landlords are “probably as aggressive as we have seen in the last 10 years,” with regards to incentives to get leases signed – often taking the form of a couple months free on a 14 month lease.
From an investment sales-standpoint, Hwang said that while overall investment sales volume was “down pretty meaningfully” in 2017, the fourth quarter saw a favorable increase. According to Hwang, the “biggest issue [in 2017] was the bid-ask spread,” with sellers want pricing levels comparable to those in 2015, but buyers are simply unable to get the growth or net operating income that was being underwritten at the time.
With that said, Hwang is beginning to see the bid-ask spread close due to a lack of alternative investment options for buyers as well as the fact that sellers are simply “being a little more reasonable.” Furthermore, while the beginning of 2017 marked increased amounts of domestic institutional buyers fleeing Manhattan to secondary cities – such as Charlotte and Atlanta – they ultimately returned to New York City for safety and security – or as she put it, because if “you hold long enough in New York City, you win.”
Global Players in a Local Market
Commenting on sources of foreign capital – which have been very active in general – Hwang said that Chinese investors remain “one of the most dominant players in the U.S.,” despite intense governmental regulations in Beijing. Given this, she believes that China will remain one of the predominant sources of foreign capital going into the New Year.
Maturo added that over the last 18 months, the outlier bid has vanished. As one of the primary factors that he believes had previously driven pricing, outlier bids have historically come from Asian or Middle Eastern money. Moreover, while he agrees with Hwang that there is increased activity from Chinese investors, Maturo also sees a large amount of investment activity from other countries.
“We have investors from all over the world, including Asia and the Middle East,” Maturo said. They are still very interested, and Korea is in the market, but more on the debt side. He added that Japan is also beginning to play an active role in the U.S. market.
Lending is Looking Up
As the sole pure lender on the panel, Bechtel remarked that deal flow in 2017 was “almost quadruple the volume from the [previous] year.” He attributes this to increased regulation continuing to constrain traditional lenders, resulting in an expanded alternative lending space.
“We are part of that space, so our business has expanded dramatically,” said Bechtel, “and we foresee that growing into 2018 and the future.” He added that, with the recent influx of lenders entering the market and creating competition, now is a good time to borrow capital – regardless of whether it is short- or long-term capital.
Maturo added that while RXR is involved with the lending space, it is nontraditional in the sense that it participates in the capitalization of various projects, thereby serving as “more of a partner with a lending hat on.”
“A project that we have worked on is a Ritz Carlton flag condominium community out on Long Island,” said Maturo, mentioning that “there is also a similar project that is in the market in New York with the St. Regis flag.” While RXR provides construction and mezzanine financing for the St. Regis project, it also shares experiences regarding vendors, architects, and marketing skills that it learned from working on the Ritz Carlton project.
Reinventing the Suburbs
Molod concluded the panel by asking Maturo for his take on the increased development activity centered around transportation hubs, given RXR’s recent developments in Westchester and on Long Island. Maturo responded by saying that affordability and access to transportation are the primary factors that attract people to the suburbs, given the increased competition in the multifamily market.
With all else aside, Maturo explained how people are moving away from “the malls, the business parks, [and] even the white picket fences,” in search of urban environments. He added that there are abundant opportunities for suburbs to reinvent themselves to provide the work with play environment found in the city.
“Continued infrastructure improvement out into the areas with East Side access and the third track on Long Island are going to improve transportation,” said Maturo, “and that will be the reinvention of suburbs, and how they get back on track, retain talent, and get companies to [go] back out there.”