William Saya, CPA
12.20.2018 | Berdon Industry Insights
The findings of the 2018 New York City Metro Real Estate Market Survey, a joint effort by Bloomberg and Berdon were recently released. The survey was conducted in September in an effort to gather insight regarding behaviors and expectations among real estate companies in the area. A total of 152 real estate professionals participated, mainly from organizations headquartered in New York State.
The results of the survey highlight various noteworthy market trends. Let’s take a look.
Commercial Market Pressures
Vacancy rates for commercial space have increased in recent periods in certain NYC Metro markets. This was reflected in the survey results with almost two-thirds of the respondents with commercial properties reporting vacancy rates higher compared to a year ago. This is due to a number of factors including significant new office inventory coming on the market in areas such as the West Side and Downtown Manhattan.
The survey also highlights the continuing strain put on net rents in the commercial market with 59% of survey respondents reporting an increase this year in tenant concessions required to secure new leases and 40% reporting no change in base rents to secure new leases as compared to last year.
The strain on net rents in the commercial market is tied to a number of factors such as the high construction costs associated with tenant buildouts and also the shifting demands of office market tenants who are being influenced by non-traditional landlords including the co-working brands like WeWork.
The impact of co-working on the commercial market has been significant. Prospective tenants are increasingly more inclined to consider the shorter-term leases, amenities and other features offered by the co-working brands. This has forced traditional office landlords to work harder to attract new tenants and impacted net rents for new leases in this competitive, evolving marketplace.
Tax Cuts and Jobs Act
It has been a year since the passage of the U.S. Tax Cuts and Jobs Act (TCJA). While time will tell what impact the act will ultimately have on the real estate market, based on the survey most real estate professionals seem optimistic. Seventy percent of respondents to the survey believed that the TCJA will have a positive impact on the New York City metro area real estate market. One of the most significant impacts is expected to be with respect to the Opportunity Zones provision. There is a tremendous amount of interest and excitement over the prospects of the program, which is expected to attract very significant investment dollars into the real estate markets and has already impacted values with respect to properties in the designated zones.
Commercial Office Development/Investment
Survey respondents were asked to identify the NYC Metro area submarket with the best near-term (18 month) development and/or investment opportunity. Manhattan continued to hold the top spot as the best near-term investment opportunity identified by 29% of respondents. The boroughs were not far behind. Queens was selected by 21% of the respondents, followed by Brooklyn at 16% and the Bronx at 14%.
Queens was the borough with the largest positive shift in 2018, and among the most popular submarket for companies with assets of $1 billion or more. Since the survey took place, Amazon announced its HQ2 move to Long Island City which will only increase interest in Queens and surrounding markets.
Other Real Estate Trends
Interest rates are on the rise which is sure to impact the real estate market in 2019. Seventy-eight percent of survey respondents predict interest rates to be higher with 66% predicting rates will be somewhat (25-100 basis points) higher. Although interest rates are on the rise, survey respondents were largely optimistic regarding their financing outlook for 2019, with approximately seven in ten respondents (71%) indicating that their financing outlook over the coming year is either somewhat favorable (43%), or very favorable, (28%).
The survey also analyzed the sources of foreign capital. The real estate market has seen a significant shift in the source of foreign capital in recent periods, most notably away from China. The share of respondents who identified China as a source of foreign capital dropped from 44% in 2017 to 12% in 2018. Canada was the top pick identified by 22% of respondents followed by Europe at 15% and the Middle East at 14%.
Questions? Contact William Saya at 212.331.7588 | email@example.com or your Berdon advisor.