Is more partying ahead, or a hangover?

There was plenty of Dom to go around on New Year’s Eve, with both the commercial and residential sides of the New York City market having racked up a year of strong pricing and blockbuster deals. So when does the hangover strike? Probably post-2015, according to our panel of market experts, though the word “concern” is coming up often. To take interest rates as an example: yes, some of our panelists expect rates to rise, but a jump from the current extremely low levels seems to be baked into market expectations.

On individual topics, the theme seemed to be that this will be the year that might banish the crazy. Lending standards? “We expect some softening on the residential side, as we all agree that Ben Bernanke shouldn’t have trouble doing a refi,” noted Colliers International’s Joseph Harbert. Inventory? More projects coming online, though not enough in some segments: “Due to the rising costs of land and exorbitant construction budgets, we will see few ground-up rental projects in Manhattan,” notes Town Residential’s Andrew Heiberger. The outer boroughs? Well, read on to see what Eastern Consolidated’s Peter Hauspurg has to say about Queens…

Joseph Harbert
President of the Eastern Region, Colliers International

NYC’s commercial market continued to show strength in 2014. Are there any signs for concern? Where do you expect the market to be a year from now?

All signs point to a strong 2015 for the New York City market. The local economy will benefit from the uptick in the national economy. In addition, we expect office leasing to be strong, and as a result we will continue to see declining vacancy and prices moving up. Retail remains vibrant and the investment market only suffers from one thing — a lack of product.

Multi-family properties traded heavily in the last few years, particularly in Upper Manhattan and Brooklyn. Do you expect that market to stay active? Where do you think the focus will be in 2015?

Multi-family will stay strong in Manhattan and Brooklyn; we expect it to pick up in Queens and the Bronx as well.

Do you expect buyers or sellers to have the upper hand in the coming year?

Sellers will continue to have the upper hand. Interest rates are still very low. There is domestic and foreign money that wants to buy. Development sites will command a premium going into 2015. We don’t anticipate any falloff in interest.

Where are foreign buyers of commercial real estate from now, and where do you expect them to be from this year?

Buyers are coming from China, Korea, and Japan, in addition to some European money as well. There is still some Middle Eastern interest, but the fall in oil prices will slow that down temporarily.

Are you concerned that the anticipated interest-rate increase will put a damper on the NYC market in the coming year?

We have no concern at all about the rise in interest rates.  It looks like it will be moderate, and we have been talking about it now for so long that everyone has factored it in to some extent.

What do you expect from commercial lenders in 2015? Do you expect any easing in lending standards to accompany an increase in interest rates?

We expect lending standards to stay the same. The lenders have learned some lessons, as we all have, from the events of the last fifteen years, so the standards seem rational. We expect some softening on the residential side, as we all agree that Ben Bernanke shouldn’t have trouble doing a refi.

Which geographical areas will gain the most steam in NYC in the coming year?

The wonderful thing about the geography is that office space users seem open to going almost anywhere. It’s a highly fluid market. The days of there being a tenant who would only go to one submarket seem to be over.

Which geographical areas do you expect to struggle most in 2015?

We don’t see any of the submarkets struggling going into 2015. The reported death of the Grand Central and Sixth Avenue markets has been highly overrated. In fact, those markets have such great value now that it presents opportunities for tenants who are bottom-line thinkers.

There’s been a significant amount of commercial brokerage consolidation recently. Do you expect it to continue in 2015?

There will continue to be consolidation in the commercial brokerage arena. We will end up with something akin to the Big Four in the accounting world, possibly five full-service firms when all is said and done.

What trends will you be watching for?

I’m curious if we’ll see more growth in the shared office sector. We are also looking at growth in educational and medical uses, and we will watch to see if businesses start to push back at increasing rents and start to search for value plays.

What do you expect the biggest challenges to be in the coming year?

Our biggest challenge is to keep our sense of perspective about markets. We don’t worry about bubbles. Yes, the market is going higher, but it doesn’t seem to have hit its peak. Interest in New York City is greater than it has ever been, so we need to be grateful for what we have, as it is a great city to come to, to live in, work in, have friends, and careers in. We just need to find ways to make sure we keep it that way.

Andrew Heiberger
CEO and Co-Chairman, Town Residential

NYC’s residential market was strong in 2014, but some see signs for concern, especially as more new developments hit the market. What are you expecting to see in the New Year? 


While the frenzied pace of the market has slowed — all of the fundamental factors are in place for a healthy 2015. We are still seeing pent-up demand due to low inventory, with buyers anxious to capitalize on low interest rates, which, even with an anticipated increase, are still at a 40-year low.

Sales prices continued to rise in Manhattan in 2014’s third quarter, although the pace slowed. What are you expecting for pricing in the coming year?

The market is showing sensitivities and will only tolerate discerning properties that boast quality features and fundamental attributes like views, light, location and layout. We are anticipating that the standouts of 2015 will be the $1 million to $5 million price point, as well as thoughtfully designed penthouses and specialty properties.

Which geographical areas do you expect to gain the most steam?

Neighborhoods to watch include the High Line, Tribeca, Lower East Side, Financial District, City Hall area and the Upper East Side — all are seeing significant new development activity with buildings like the Four Seasons Residences and 150 Charles, 56 Leonard changing the landscape and The Charles setting price records for luxury infused with value. I also think that 432 Park, 520 Park and One57 will all be incredible successes.

What do you expect the biggest challenges to be in the coming year?

Due to the rising costs of land and exorbitant construction budgets, we will see few ground-up rental projects in Manhattan. That, coupled with the increasing trend of existing rental projects converting to condo, will cause a ripple effect in the rental market with monthly rents rising as high as 5-10 percent in 2015. Areas such as Jersey City, Hoboken, Astoria, Long Island City, and all parts of Brooklyn will continue to reap the benefits of Manhattan’s white-hot sale and rental markets. Construction delays due to the unavailability of quality contractors will also bode well for the resale and high-end rental markets.

Peter Hauspurg
Chairman and CEO, Eastern Consolidated

NYC’s commercial market continued to show strength in 2014. Do you expect that to be the case again in 2015?

Yes, I do expect the commercial market will continue to show strength in 2015, as we don’t really see any signs yet for concern … The real concern is what happens the year after 2015. Since the second quarter of 2010, the market has been appreciating 2-3 percent per month, maybe even more in the case of land prices. That’s unprecedented. Prices are way above those in 2007, with land prices being more than double the 2007 levels. While the market appears to be continuing to increase, we think land-sale prices may have peaked, because we’re seeing inventory build up on the very high end.

Peter Hauspurg

Multi-family properties traded heavily in the last few years, particularly in Upper Manhattan and Brooklyn. Do you expect that market to stay active?

Yes, we do expect the multi-family market to stay active, as it’s probably some of the most popular product that exists. It doesn’t seem to make any difference whether the units are rent-stabilized with giant upside because of below-market rents, or free market. Investors believe that free-market rents are going to continue to rise in Manhattan, as they have up until today.

Do you expect buyers or sellers to have the upper hand in the coming year?

I expect it will continue to be a seller’s market, only because there is so much more money chasing product than there is product. If you don’t like the terms that a buyer may attach to his offer, there is always a guy behind him, and the guys behind him are all offering the same price level, [though] some may make it easier for the seller to transact than others.

You mentioned the price of land continued to rise in Manhattan in 2014. What more are you expecting this year?

The price of land is cause for concern, with the uncertainty of whether the 421-a [incentive] program will be extended, and the anecdotal evidence we’re starting to hear, on the part of the residential brokers, that the sales of very high-end and larger units are starting to slow down and hit pricing ceilings. That’s why we expect land prices to taper off from 2014, or at least until the 421-a program is resolved. We’ve been talking to certain members of the New York State Senate and Assembly, and pretty much everyone says that you’re not going to get a deal until the 421-a expiration in June 2015.

While some have said residential prices cannot continue to rise, what do you expect to see on the commercial side when it comes to building sale prices and office rents?

I expect to see less dramatic movement than there has been recently. Commercial rents seem to be strong, but not moving upward nearly as quickly as residential rents or sales prices. There are still surprisingly few commercial buildings on the market … We have had a couple of recent land deals that we thought were going to become hotel or apartment buildings in the Meatpacking District and popular areas of Chelsea, but they ultimately turned into office space as a reaction to the $80-$90 dollar rents in those cool, hip new areas that have very few new office buildings … I think you will find more office development in these really hip locations.

Do you expect any easing in lending standards in 2015 to accompany any increase in interest rates?

We’ve already seen easing in lending standards, and we expect it to continue. Deals that required 50 percent equity, two and three years ago, now require 35 to 45 percent. In the multi-family market, we’re back to 25 percent, if the deal can support it. Rates are at rock-bottom levels and lenders are competing as hard as they can to get a loan, sometimes accepting prices that make you scratch your head and wonder how they’re even making any money on it. There’s also plenty of mezzanine money around to fill the gap up between 50, 60, and 80 percent. There’s so much of that money that mezzanine folks are having a hard time getting the pricing they did in the last cycle. It’s hard for them to break 10 percent now; in the last cycle it was 13 to 15 percent and up in some cases.

Which sectors of the commercial market do you expect to perform well this year?

The hotel market is on fire. Two years ago, a good residential site would normally pass a hotel development in terms of pricing, but recently, the hotel sector has become so popular and healthy that some sites we would have expected to become residential have actually become hotel instead.

Which geographical areas do you expect to gain steam in the coming year?

There are a few areas in Brooklyn that have not yet gained steam, but will probably continue to improve, including East New York, Bed-Stuy, and the Coney Island area…. The other area is Queens. The borough has really turned the corner and become a very desirable place to live, even in the former industrial areas, which are being transformed with new high-rise towers and communities.

Frederick Peters
President, Warburg Realty

While there is plenty of new construction, especially on the high end, limited resale inventory continues to be an issue. What are you expecting on the inventory front in the coming year?

I doubt it will be all that different. So much of what is being built is not for the ordinary New Yorker. For a number of years, we have had what are essentially two markets — one for ultra-high-end new product mostly aimed at foreigners or global citizens, and one aimed at more ordinary New Yorkers. I expect there will be the beginnings of a glut in the former in 2015, while we continue to experience inadequate supply in the latter.

Frederick Peters

Do you expect buyers to gain ground in 2015 or do you expect sellers to continue to have the upper hand?

Sellers have already lost the upper hand in many segments of the marketplace. A lot of the time they just don’t want to acknowledge it.

Several industry leaders have said recently that prices cannot continue to rise. Do you have concerns about a luxury market bubble in the coming year?

No. Generally these issues are self-correcting in the absence of greater economic forces bringing too much pressure to bear. I think we all welcome a hiatus in price increases. But seeing prices cease their upward trajectory is not the indication of a “bubble.”

Do you foresee foreign buyers continuing to drive the luxury market? Are there particular countries you expect more buyers to be coming from?

No doubt ultra-luxury purchasers will continue to come from the BRIC countries. And I expect we will see more Africans.

Are you concerned that the anticipated interest rate increase will put a damper on the NYC market in the coming year?

If interest rates increase in a significant way, that will likely have an impact on the lower end of the market, where the rent vs buy ratio tends to be delicately balanced and can easily tip. I think that end of the market is the greatest point of vulnerability.

Which sectors of the market, both in price and product type, do you expect to perform well in NYC this year?

These days, if given their druthers, most people want condos. So they will continue to perform well. I expect that the prejudice towards new construction or mint condition will also persevere. Most buyers have simply lost the appetite for doing a big renovation. And I anticipate, barring a big interest rate hike, that the market $2 million and below will continue to be the hottest, and the locus of the largest number of competitive bidding situations.

Which new projects do you expect to generate the most excitement in the NYC residential market in the coming year?

Hard to believe at this point that anyone will be all that excited by any of them.

How do you expect the industry to respond to Mayor de Blasio’s affordable housing initiatives in 2015?

Hopefully with enthusiasm. We sure need those initiatives!

Jonathan Miller
President and CEO, Miller Samuel

What are you expecting to see in the residential market this year? Where do you expect the market to be a year from now?

I think 2015 will be a lot like 2014 sales-wise, with overall prices drifting higher. However, a lot of new development product will be hitting the market in 2015 with continued skew towards the high end, yet this small but very visible subset is not a proxy for the balance of the market. There is no real linkage between a $20 million new development sale in Midtown and a $500,000 sale in the East Village.

What are you expecting on the inventory front in the coming year?

We already saw rising re-sale inventory throughout much of 2014, pulled in by rising prices. However, resale supply levels will likely remain inadequate to meet demand in 2015. New development volume will rise sharply, slowing their absorption rate.

Do you foresee foreign buyers continuing to drive the luxury market?

I do see foreign buyers continuing to be part of the luxury market.… My biggest concern is the strengthening U.S. dollar, which reduces the “discount” international buyers have been enjoying when purchasing U.S. property. However, the foreign buyer phenomenon has been driven by the “safe haven” concept and not so much by a “currency play.” That said, a continued increase in the U.S. dollar would likely take the edge off foreign demand.

Are you concerned that the anticipated interest rate increase will put a damper on the NYC market?

Since tight credit conditions remain in place, and 45 percent of Manhattan sales are cash, I’m skeptical the rising rates, if they rise at all, will have much of an impact on the sales market.

Do you expect any easing in lending standards to accompany any increase in interest rates?

No way. Credit conditions are being dictated by pressure on banks by Washington, which is justified, but should have happened 4-5 years ago rather than now, when the economy is beginning to improve. Record settlements with the DOJ, forced buy-backs of old mortgages by the GSEs, concerns about what will happen to Fannie Mae and Freddie Mac, low and slipping rates, and a slow economic recovery could prevent the easing of residential mortgage underwriting standards unlikely any time in 2015.

How do you expect the industry to respond to Mayor de Blasio’s affordable housing initiatives in 2015?

I think there will be a lot of “wait and see.” The administration is still trying to get their arms around the solutions to a vastly complex problem that has also occurred in most large U.S. urban centers. The city can’t afford to subsidize so they must create market incentives.

What trends will you be watching out for in the coming year?

Lots of outward geographic expansion and continued “neighborhood creep.”

What do you expect the biggest challenges to be in the coming year?

Affordability. Period. I get concerned that the upward pressure on rents will eventually dampen job growth.