If 2012 was the year of recovery for New York City’s real estate industry, 2013 might be the year of uncertainty. New York City real estate faces a number of unknowns heading into 2013, from post-Sandy devastation to the upcoming “fiscal cliff.” The year will also see the city’s mayoral race heat up — another subject that brings nail-biting anxiety to real estate professionals.
In this end-of-the-year issue, The Real Deal looked at these and other key issues that will impact the real estate industry in 2013.
The so-called fiscal cliff is being feverishly debated in Washington right now, but the situation also has the New York real estate community on pins and needles as it gears up for 2013.
Unless elected officials take action by Jan. 1, Bush-era tax cuts will expire and a slew of deep government spending cuts will kick in (see related stories, “Stuck in limbo” and “Fiscal cliff hits home”).
“Uncertainty is never good for the market,” one commercial broker said.
And the tax changes set to take place — especially a capital gains increase that could boost the rate from 15 to 20 or 25 percent — may impact investment sales, real estate sources say.
Brokerage Massey Knakal projects that Manhattan’s investment-sales market will end 2012 with 3.3 percent of buildings trading hands for the year — only the fifth time since 1984 that the rate has exceeded 3 percent. That could be due to a strong market — or, perhaps more likely, to sellers rushing to finalize deals to beat the tax-policy changes.
Massey Knakal chairman Robert Knakal argued that New York could see an investment sales slump in 2013 if the tax changes kick in.
“If cap gains go up to the extent [they are] likely to go up, discretionary sellers are going to need to take a while to adjust to the new reality,” he said, noting that the adjustment could take two or three years.
It’s not just what the federal government is doing that’s creating uncertainty in the market — it’s what it’s not doing. For example, in September, the Federal Reserve announced that until further notice, it would continue quantitative easing, which will keep interest rates low and inflation at bay.
“They basically said we’re going to keep interest rates low through 2015 because we don’t like what we see,” said Jonathan Miller, president and CEO of appraisal firm Miller Samuel.
The Fed action, Miller added, has spooked already rattled banks by suggesting the economy is unsettled and that consumers should hold off on any home-buying because rates will remain low for the near future.
For nearly 20 years, starting with Rudy Giuliani and through the three terms of current Mayor Michael Bloomberg, the New York real estate industry has felt it had a strong ally in City Hall.
But as Bloomberg finishes his final term, some in the industry are worried that there’s no true developer-friendly candidate waiting in the wings to replace him when he hands over the reigns at the end of 2013.
Real estate pros said the Bloomberg administration’s policies — including myriad zoning changes that have paved the way for residential development — have benefited the real estate community and reshaped the city, from the Williamsburg waterfront to Manhattan’s far West Side.
Real estate players need only look at Bloomberg’s would-be successors to be concerned, said one industry executive who asked not to be named. The source noted that mayoral wannabes city comptroller John Liu and public advocate Bill de Blasio have both called for higher taxes on higher-income New Yorkers — a move that many in the real estate world are against.
On the other hand, city council speaker Christine Quinn, another contender, has not called for higher taxes and has been a more reliable friend to the industry. Earlier this year, after much speculation, she pleased the real estate world somewhat when she cut the number of workers covered by the so-called living wage bill, which required developers with projects subsidized by the city to pay workers higher than the minimum wage.
Still, Bloomberg, whose veto was overridden by the city council, is suing in Manhattan Supreme Court to overturn the law entirely.
And Quinn is viewed as more of a wild card for the industry. For now, though, the parlor game in real estate is pining for four more years of the current mayor.
“I really wish Bloomberg could be elected for a fourth term,” Ofer Cohen, president of commercial brokerage TerraCRG, said with a laugh.
One World Trade Center/ Condé Nast Move
Condé Nast made waves in the Lower Manhattan office market last year when it signed a lease for 1.1 million square feet at One World Trade Center. But in 2013, the magazine publisher will actually move 5,000 employees into the 3.5 million-square-foot building, which is expected to top out next year, too.
The company is expected to relocate from its Times Square headquarters by the end of 2013 and the tower is scheduled to be completed shortly thereafter.
The move is expected to have a significant impact on the entire surrounding area, which has long strived (and struggled) to become a 24-hour community.
“I think now that you’re going to be adding media to the mix, it’s going to be more of a 24-hour, multidimensional neighborhood,” said Keith Lipstein, a senior managing director at commercial firm ABS Partners Real Estate, who does commercial leasing and sales Downtown (note:correction appended).
The very presence of all of those Condé Nast employees from magazines like The New Yorker, Vanity Fair, Vogue and a slew of women’s glossies will upend the usual financial services–insurance–real estate dynamic that fuels downtown leasing (the so-called FIRE sectors), according to Lipstein. That could entice other, non-FIRE firms from Midtown and Midtown South. With that, of course, may come higher rents.
The average Class A asking rent for Downtown was $47.14 a square foot in the third quarter of 2012, according to Colliers International. Condé Nast is reportedly paying around $60 a square foot (about what it pays at 4 Times Square now).
With the Condé Nast move and the completion of One World Trade, such figures could become the new normal. “If I were a tenant,” Lipstein said, “it’s like, ‘Do a deal Downtown now because now’s the time to get it while it’s cheap.’”
In the fourth quarter of 2006, Manhattan’s median apartment rent hit a peak of $3,265, according to Miller. But in 2013, the median is expected to easily surpass that.
Indeed, for those who thought 2012 was the year the Manhattan rental market went through the roof, experts predict 2013 will be even crazier.
The main reason that rents are likely to continue soaring in 2013, Miller said, is that tight credit is keeping would-be first-time homebuyers in rentals. At the same time, interest rates will remain low through 2013, leaving little motivation for buyers to act with urgency.
Meanwhile, the city keeps adding jobs — 92,600 in the 12 months ending September — which helps drive demand. And while rental development has been steadier in the outer boroughs, in Manhattan, only 2,596 units are expected to have come online in 2012, according to Gary Malin, president of Citi Habitats. That’s the lowest total in the seven years that Citi Habitats has been tracking rental development (rental construction peaked in 2009, when 3,966 units came online, while 3,607 were added in 2011).
Therefore, Manhattan’s scorching rental market should get even hotter in 2013, with leasing activity continuing unabated despite the higher rents.
“It feels weird,” said David Schlamm, CEO of City Connections Realty, “but people would rather overpay — they should be buying right now!”
World Financial Center
Brookfield Office Properties is expected to complete its sweeping, $250 million upgrade and expansion of the retail portion of its World Financial Center next year. The changes could spur an uptick in retail rents for the surrounding neighborhood — but they were done in large part to bolster the office space upstairs.
The project will add 177,000 square feet of revamped retail space back to the market. That’s enough for more than three dozen higher-end stores and a 25,000-square-foot gourmet food marketplace as well as up to six restaurants spread over 40,000 square feet.
There will also be a glass pavilion along West Street at the street level, as well as underground passageways connecting the center to both the planned World Trade Center and Fulton Street transit hubs. Construction started at the site in October 2012.
In 2011, Dennis Friedrich, president and chief investment officer of Brookfield, was quoted in Crain’s saying that the upgrades could boost Downtown retail rents by anywhere from 50 to 100 percent. (The average retail asking rent in the Financial District is $152 a square foot, according to a fall 2012 report from the Real Estate Board of New York.)
Others are not buying the idea that rents will spike because of the World Financial Center upgrades.
“In terms of what’s going to happen in the rest of the Downtown area, I would say not much,” said Benjamin Fox, executive vice president of retail leasing at Massey Knakal.
Fox said he sees the World Financial Center as geographically separate from other Downtown retail corridors, like Broadway as well as Wall and Fulton streets. Plus, it’s too soon, he said, to gauge the effects of any connectivity to the transit hubs now under construction.
Faith Hope Consolo, the chairman of the retail leasing and sales division at Douglas Elliman, said brokers are watching to see who Brookfield bags for the space.
“I think they need to sign not just a deal, but a game-changer,” Consolo said.
In the end, though, the retail impact might be felt in Brookfield’s backyard. The company has said that the revamp was designed, in part, to entice office tenants upstairs. Rental agreements expire in 2013 on 4.6 million square feet of office space in 2 and 4 World Financial Center occupied by Merrill Lynch. While Brookfield did sign more than 600,000 square feet of leases this year with tenants like OppenheimerFunds and Commerzbank AG, there are still millions of feet to fill, which could have an impact on the Downtown office market.
Brookfield did not respond to requests for comment.
Barclays Center Retail
The long-anticipated opening of Brooklyn’s Barclays Center in September has already prompted increasing commercial real estate prices in the area. But as deals negotiated in 2012 start to close and new retail and office tenants begin to move into the area, the impact on the surrounding commercial market is expected to be even greater in 2013.
“We’ve just seen an influx of institutional investors looking to take advantage of this market,” said Cohen, whose office sits across the street from the arena on Pacific Street.
For retailers, the demand will come from “the realization that 18,000 people are going to be here 250 nights a year” with money to spend, Cohen said.
His firm’s research shows that asking retail rents along Flatbush, between Dean Street and Atlantic Avenue, are now $200 to $250 a square foot. South of Dean, they run from $150 to $175. Meanwhile, asking retail rents along nearby Fourth Avenue are $100 to $125 a square foot. All are up around three-fold from before the arena’s opening.
In fact, in 2013, $200 a square foot should become the new baseline for prime retail spaces near the arena. And more tenants will compete for those spaces.
“There are people crawling all over the area,” said Christopher Havens, director of commercial property at the brokerage aptsandlofts.com. “There are way more tenants than there is space.”
Havens estimated that as many as five to 10 tenants will be competing to secure each available space in 2013 in the area around the arena.
As for investment sales, the triangular-shaped 182 Flatbush, across from the arena, traded in September for $4.1 million (or $856 a square foot), a record for a vacant three-story building in Brooklyn. The buyer, an investment group, plans to renovate the interior of the 4,791-square-foot building and market it toward retail tenants in 2013.
“By the end of the summer, you’re probably going to see a completely different neighborhood,” said Cohen, who added that the area around the arena is on its way to becoming “a little of a Times Square.”
Extell Development’s under-construction condo One57 got more than its share of newspaper ink in 2012 as word of record-setting apartment sales leaked to the press. And while the 90-story tower is not expected to be complete until the start of 2014, it’s the next year that could have the largest impact for the building and for what it means to the residential luxury market, sources say.
That’s because the megadeals that have been the talk of the town will finally begin closing in 2013. Indeed, while the building is expected to open by 2014 (despite a partial crane collapse there during Hurricane Sandy), closings, according to sources, are expected to start in the summer, providing official market data and likely setting new benchmarks for the luxury market.
Like with 15 Central Park West five years ago, One57’s sales prices will alter not only the statistics of the marketplace, but sellers’ perceptions of it as well, brokers say.
A duplex in One57 — which has 95 units and is located at 157 West 57th Street — is reportedly in contract for $90 million, along with several of the 11 full-floor units for at least $53 million. The highest price paid so far in One57’s closest luxury ancestor, 15 Central Park West, which opened in 2008, was $88 million.
“It could potentially sway the average up artificially,” said Douglas Elliman managing director Leonard Steinberg of One57.
“That’s not a good thing,” Steinberg added, “because then people think their apartment is worth so much more when maybe it isn’t.”
As news outlets inevitably report on One57’s closings in 2013 (more than half the units in the building are already under contract), brokers may have to talk luxury sellers out of inordinately high asking prices, sources say.
“High prices always have an effect on sellers because they, too, feel they are entitled to a very high price, especially if they have a very good property,” said Paula Del Nunzio, a managing director at Brown Harris Stevens, speaking generally about the higher-end market.
Mega Building Deals
The city’s residential market isn’t the only sector poised for high-priced sales in 2013. Two of the biggest building sales in New York history could be on tap for next year.
George Comfort & Sons and RCG Longview put their 1.8 million-square-foot Worldwide Plaza on the market in August, and it’s now expected to sell for roughly $1.2 billion — roughly twice the $600 million the partners bought it for in 2008. Meanwhile, the Sapir Organization and CIM Group are looking to sell their 2.3 million-square-foot 11 Madison Avenue. Their asking price? More than $1.5 billion.
If either breaks the $1 billion marker, they would be in an elite class in Manhattan: Fewer than 20 single buildings have ever sold for more than $1 billion, according to an analysis of Real Capital Analytics figures by TRD. The last such sale was in late 2010, when Google acquired 111 Eighth Avenue for $1.9 billion.
Indeed, New York investment sales have been on the smaller side in 2012. The average price of a property sold in the city through the first three quarters of 2012 was about $9.3 million, according to Knakal. And, while office properties comprised more than one-third of all dollar volume, most of those trades were for under $100 million.
“The trading in big-office has really been lagging,” Knakal said.
Worldwide Plaza and 11 Madison could change that quickly, motivating other owners to list their larger trophies.
Either property’s sale would also signal the general strength (or weakness) of the investment-sales market after the expected federal tax changes set to take effect in the New Year, brokers said.
“Keeping up the momentum for sales, especially large iconic properties, will send a strong message for investors that the confidence factor is strongly bullish on Manhattan real estate,” Adelaide Polsinelli, a senior director at Eastern Consolidated, said in an e-mail.
The properties’ owners as well as the listing brokers — Doug Harmon and Adam Spies of Eastdil Secured for Worldwide Plaza, and Darcy Stacom of the CBRE Group for 11 Madison — did not respond to requests for or declined to comment.
Superstorm Sandy wreaked its havoc in 2012, but the dollars needed to repair its damage and the headaches it’s caused (both financial and logistical) will be a serious real estate issue for New York City in 2013, sources say.
In addition to the destruction the storm caused in the outer boroughs, where thousands of people were left homeless, Sandy impacted 29.8 million square feet of commercial space in 41 buildings Downtown, according to a report from Cushman & Wakefield. That chopped the submarket’s usable inventory from more than 85.2 million square feet to 55.4 million (see related story, “Landlord losses”). Residential real estate was impacted, too. The city deemed 19 residential buildings unsafe for occupancy.
And it may take until February — or later — before all the buildings are usable again, according to the Cushman report. As the calendar turns from 2012 to 2013, many commercial brokers and building owners are holding their breath to see when exactly tenants will be able to get back into their offices — not to mention when they can start showing available office space for leasing and for those looking to sell buildings.
The financial cost of Sandy to Downtown landlords and tenants, many of whom relocated, will continue to mount through 2013 as they negotiate with insurance companies, pay for temporary office space and see an overall decline in profitability because they are out of their headquarters.
In addition, the damage has thrown the real estate industry a serious emotional curveball.
“People never thought about this before,” said Lipstein. “[Only] a few people probably looked at a map and said, ‘Oh, my building is in Flood Zone A, my building is in Flood Zone B, my building is in Flood Zone C.’
“People are going to think twice in the future about being so close to the water,” Lipstein said.