Commercial bubble: Q&A Part III

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.

In our third and final web installment, we bring you TRD‘s interviews with Peter Hauspurg, chairman/CEO of Eastern Consolidated, Jim Gross, co-head of operations at Douglas Elliman Commercial, and Gil Robinov, executive managing director of International Advisory Group.

Peter Hauspurg
Chairman/CEO, Eastern Consolidated

What are your biggest concerns about the sales market in NYC?

The dark clouds that people are writing about really aren’t there yet. The expiration of 421a has dominated the conversation in recent weeks, but that only affects one segment of the industry. It’s really a “tale of two markets.” We are seeing an oversupply of high-end condos and, as a result, developers are cutting their floor plans, and we expect the expiration of 421a to lead to a slowdown of affordable housing development. However, at the same time, there isn’t any indication that land prices are falling. For example, we currently have a Manhattan development site in contract at well over $1,000 per square foot. On the other side of the market, income-producing properties such as existing multifamily buildings, retail condos and office buildings are performing very well and there is far more money chasing these assets than there is product available.

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

New York City has been adding jobs at a rapid clip; 2015 alone saw a net gain of 87,100 jobs, a 2.1 percent year-over-year increase. In December, NYC’s unemployment rate was 5 percent — down from 6.5 percent the previous December. …So as long as the city continues to create jobs, we expect to see office buildings occupied.

What do you see as the biggest challenges to the commercial market in the coming year?

We’re expecting a lot of residential units to come online in Brooklyn and Queens, but as long as the city continues to add jobs, the market should be able to absorb them.

Jim Gross
Co-head of operations, Douglas Elliman Commercial

What are your biggest concerns about the NYC investment sales market? Do you think the market has peaked or is nearing a peak?

I don’t see [a bubble forming]. The stock market has taken an enormous hit but I don’t see anybody panicking.

Have you seen interest waning from foreign investors amid global economic uncertainty?

We’ve seen a lot of interest but you still have to find the right deal and a lot of foreign groups don’t want to be in a bidding situation. … If you look at the price of oil, investors may want to be here, but no matter what, they still want to see the numbers [on their deals]. They’re not just going to throw their money down at anything just to be here.

Are there any interesting pricing trends you’re seeing in Manhattan?

In general, rents have risen 10 percent to 15 percent Downtown. The cheapest area in the city now is [around] Grand Central. The area that has increased dramatically is around 14th Street, where landlords are asking for over $100 a foot. Years ago you’d never think about that.

Are there any new trends in the office market that you’re seeing?

We’ve never had this level of young people moving to the city getting jobs with startup and Internet-based companies. With certain types of companies from the tech industry, landlords have wanted a lot of security, but if they can pay at least six months of security and take spaces of $80-to-$100 a foot that range from just 5,000 to 50,000 square feet, landlords are not afraid to fix them up. That is where the market is really popping.

Gil Robinov
Executive managing director, International Advisory Group

How has the Manhattan office market changed in the last 12 months?

People are not using as much space as they used to. They used to have corner executive offices, with couches and conference rooms, but you don’t have that anymore. If you have a company on a lease that is expiring and they’re occupying 25,000 feet, they’ll bring in a space designer and look at renting 17,000 feet — 20 percent less space. That’s more efficient for them. Even if they have to pay a higher rent, they’re not renting as much space as they used to because they don’t need large offices.

Where has this happened?

Startups and tech companies moving into the Flatiron and Meatpacking districts that have been in the business for just a few years do not want to commit to long-term leases. They will be happy with a lease for three to five years. Their primary concern is space that is open and flexible because they don’t know what the future holds. You have a whole new short-term market now as a result, but landlords are still trying to secure longer leases for stability. And in general, as people use less space, rents have gone up between 10 and 15 percent across Manhattan.

In January, Silverstein Properties was dealt a blow after 21st Century Fox and News Corp. nixed its plans to be the anchor tenant at 2 WTC. How difficult do you think it will be to find another anchor tenant to fill such a high-profile space?

Who knows why they lost the deal. People lose deals all the time, but I’m sure that somebody else is going to come along. Silverstein is smart, a dealmaker, and he’ll find someone else.

Where are the best investments and relative bargains for commercial real estate in NYC?

There are no bargains. If anything, you have to overpay.