Commercial bubble trouble: Q&A, Part II

JLL's Jon Caplan and Ariel Property's Shimon Shkury
JLL's Jon Caplan and Ariel Property's Shimon Shkury

From the March issue: Predicting a market bubble is almost always a losing pastime. But that hasn’t stopped brokers, market analysts and economists from talking about whether the New York commercial market is peaking — and what the global economic slowdown will mean on the ground here. This month, The Real Deal talked to investment sales executives who said that while investors and lenders are exercising more caution these days, the bubble theory is being overblown. That’s even as prices have soared since 2010, prompting comparisons to the boom and bust of the mid-2000s.

In our second web installment, we bring you TRD‘s interviews with Shimon Shkury, president of Ariel Property Advisors, and Jon Caplan, vice chairman of JLL.

Shimon Shkury
President, Ariel Property Advisors

How much is Manhattan investment sales activity up or down by, and are you seeing a slowdown?

We find all this talk of a slowdown premature. Dollar volume in the second half of 2015 was up 23 percent compared to the second half of 2014. People are expressing caution about the global economic climate, but NYC’s characteristic as a safe haven remains true amidst this turmoil.

What kind of properties are attracting the most investment in NYC and which are investors steering clear of?

Investors are acting with more caution for development sites, but the market is still healthy overall. We are marketing an assemblage at 86th Street and York Avenue right now, and we’ve received several dozen bids in six weeks. Pricing remains at elevated values.

Are developers and lenders going to be willing to tackle new commercial projects given the uncertain market?

Every market has the occasional pullback but the city’s long-term trajectory is great. We expect to see more work-life projects like Hudson Yards and Essex Crossing. The city’s economic growth is diversifying through the development of new or converted buildings to accommodate the growing TAMI industry.

Which new areas are developers and investors showing interest in?

While we’ve seen coverage of expanding areas such as the South Bronx or Prospect-Lefferts Gardens, we’re paying very close attention to East Harlem. The anticipated rezoning there will include a mix of market-rate, moderate-income and affordable housing. We’re also keeping an eye on Jamaica and Ridgewood in Queens. Both are increasingly on investors’ radars and have projects in the pipeline that may serve as a catalyst for broader change.

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Jon Caplan
Vice chairman, JLL

How do commercial property values compare to the recent past? Do you think there’s a bubble forming?

Over the past six to 12 months, there’s been some leveling in pricing, which is not surprising — or of major concern. … New York is not facing significant overbuilding or overleveraging, and the underlying fundamentals have been strong. Lower-risk capital stacks with increased equity in deals is being driven by more conservative underwriting and lending standards, as well as by investors, particularly for larger and more institutional-type assets. In times of global uncertainty, NY real estate benefits.

How much is Manhattan sales activity up or down by compared to the recent past?

Manhattan set a new record in 2015 with $60.3 billion in investment sales. That represents approximately a 50 percent increase over 2014 and close to a 25 percent increase over Manhattan’s prior record of $48.5 billion in 2007. Several trends have contributed to record sales activity last year, including greater foreign participation, more recapitalizations — partial interest transactions — and the increased number of larger deals, those above $500 million.

What types of properties/areas are attracting the most investment in NYC?

Institutional, foreign and private capital players have been expanding the submarkets they’re pursuing, driving investment to Downtown, Brooklyn and Queens, as well as Northern Manhattan and the Bronx. Class B office has seen a rebirth, partly because of its appeal to TAMI tenants. Development, particularly in residential, has attracted greater institutional and foreign participation. There are signs of more caution, particularly in the hotel and development sectors, but there hasn’t been a major shift away from certain product types. In 2015, office transactions generated the largest dollar volume, with $24 billion, and the residential sector saw the greatest number of deals, with 232 deals valued at $13.5 billion.

Have you seen interest wane from foreign investors amid global uncertainty?

Foreign participation in the New York investment market soared to 45 percent of Manhattan sales [dollar volume] in 2015 versus 19 percent in 2014. … Foreign capital will continue to be active at a higher level than prior to 2015. There is great diversity among the foreign sources as well. Last year, the three largest participants were Canada at 35 percent, China at 27 percent and Norway at 7 percent of foreign capital investment.

Jeff Blau at Related has said that Chinese investors were notably absent among bidders to recapitalize the first Hudson Yards tower. How has Chinese investment been impacted by the country’s economic slowdown?

Globally, investors face incredibly low — sometimes negative — yields on low-risk sovereign bonds. While Manhattan real estate yields are low by historical standards, real estate yields appear quite attractive relative to global “risk-free” rates. That should continue to attract foreign investment to New York, including Chinese capital. In addition to political and economic stability, the combination of significant Chinese money held outside of China, and the continued strengthening of the dollar vs. the yuan, adds support to Chinese investment in U.S. real estate.