New year, new president, new market predictions

Experts ponder the impact of a Trump presidency, whether megaprojects are over and the future of CRE
By Fang Block | February 01, 2017 07:00AM

David Walker, Gary Barnett and Elizabeth Ann Stribling-Kivlan

Presidential inaugurations often usher in a good deal of uncertainty, but the dawn of the Donald Trump era has introduced a particularly high level of anxiety to the NYC real estate market. It’s difficult to predict, for example, what impact the new president’s threat to cut federal funding to “sanctuary cities” such as New York could have, especially in combination with geopolitical and economic upheavals and the continuing saga of the 421a tax abatement. Some residential developers, including Extell’s Gary Barnett, say the overall economic fundamentals, stock market and housing demand remain strong. But challenges exist, namely concerns that the luxury market is grappling with an oversupply. Add to that the difficulty of obtaining financing, even for big kahunas like Barnett. Moreover, as Greystone Development’s Jeff Simpson pointed out, “Soaring land prices mean that developers often paid too much.” Similarly, Noah Rosenblatt, the founder of UrbanDigs, noted that construction costs are near peak levels, prices are softening, and the rising mortgage rate is dampening demand. He contends that the age of the megaproject is “over.” Still, others argue that Manhattan will retain its status as a financial safe harbor and that the industry stands to benefit from Trump’s anticipated deregulation of Wall Street and corporate tax cuts.

For a closer look at how the market is shaping up in 2017, we turn to the experts.

Gary Barnett
President and founder, Extell Development

What is your overall assessment of the market in 2017? Right now, the New York real estate market, the overall economy and the stock market are all doing well. However, we see some oversupply in certain markets, particularly apartments in the $3 to $8 million range. Some properties have had to really reduce pricing, but by 2019, the cycle will pick up again, assuming the overall economy is doing well.

What are the game-changing megaprojects to watch this year? We might see some government projects and other significant private buildings in 2017, but no large, stunning game changers. Completion for [Extell’s] Central Park Tower is slated for the second half of 2019. When finished, it will be the second-tallest building in the city, after One World Trade Center.

How will Trump affect the real estate industry? Trump is pro-jobs, pro-development. He wants business and real estate to succeed. Most likely, he’ll lower the corporate tax rate and overall we’ll see a favorable environment for business.

Will the luxury residential market continue to soften? Actually, the superluxury market was very strong the second half of last year. There are only four superluxury buildings, as I see it: 432 Park Avenue, One57, 220 Central Park South and Central Park Tower. To me, a superluxury building has to be a newer building with presence, size and grandeur. One57 had a dozen sales in the second half of last year, but we did see some price softening in the 10 to 15 percent range. Now, prices have stabilized and it’s the best time to buy. This year or next year, the other three buildings will sell out and Central Park Tower will be the only premium one left.

How has China’s move to curb money outflows impacted investment in New York real estate? The government not allowing funds to go out of China is a protective, desperate measure, and not sustainable in the long term. China will continue to engage with the world and encourage two-way investment. And we  still have consistent foreign investment from Europe, Canada, South America and the Middle East. Turkey is also looking to invest in the U.S.

What will be your focus this coming year? Our two large projects, Central Park Tower and One Manhattan Square, which offer smaller units at good price points, but with spectacular views and amenities. We also have our first project in Downtown Brooklyn.

What about the challenges in financing?  We are happy financing is a challenge — we need to slow down supply. And we are quite comfortable that we’ll be able to finance all of our projects.

Elizabeth Ann Stribling-Kivlan
President, Stribling & Associates

What’s in store for 2017 in terms of big, game-changing projects? I think the St. John’s Terminal project — the huge residential, commercial and recreational center that is being built with Pier 40’s air rights — is something to watch. I’ll be interested to see what it will mean for inventory in the West Village as well as for the overall community.

How do you think the Trump presidency will impact the New York real estate market? Last year was dominated by the elections.  Regardless of political persuasion, buyers were on the sidelines. We saw an increase in demand in the last quarter of 2016 — should things remain in this trajectory, it will be a good year for real estate. That being said, we must carefully monitor the global geopolitical situation and the transition to a new administration in order to be fully versed in where the economy is going.

What do you see happening in the luxury market?  New York has still seen almost record-breaking closings, and we have heard of developers getting extraordinary prices per square foot at certain landmark projects like 220 Central Park South. If you look at the $5 million-and-up-market in the last 12 months, it has been dominated by new development, although in the last few months we have seen a rise in condo resales. In the past few years, the luxury co-op market has slumped. We tracked a nearly 20 percent drop in overall co-op sales priced $5 million and up from 2015 to 2016. Co-ops present excellent long-term value, but many people don’t want to deal with board packages and summer renovation rules. I think the boards are going to start becoming a bit more flexible to compete with the new, shiny condos. But overall, a lot remains to be seen with the presidential transition — the market is holding its breath.

What neighborhoods will take off in 2017?  The far Upper East Side — with the Second Avenue Subway up and running, the area is just so accessible. The proximity to parks and the water, along with fabulous housing stock, has now been coupled with transportation.

What kinds of trends do you expect to see in foreign investment?  I think that we will see an increase in buyers from the Middle East, especially the UAE, Saudi Arabia and Kuwait. New York has always been looked at as a gateway to the U.S. and, on a currency level, a safe hedge.

Noah Rosenblatt
Founder, UrbanDigs

In 2016, we saw several megaprojects (e.g. Hudson Yards, Essex Crossing) move closer to becoming a reality. What’s in store for big game-changing projects in 2017?  From the market standpoint, the megaproject is over. The cost of the building, labor, and land is near peak. By early 2015, the Manhattan luxury market — $10 million-plus — fell off a cliff. The sector with the highest price point got hit first. The broader resale market held on until the fall of 2015. The market started rebounding sluggishly, but buyers have negotiation power and leverage. We’ll still see year-to-year decline in the next couple of years. Apartments priced between $1 million and $3 million are in strong demand, but going mega is over.

How will the Trump presidency affect New York real estate? We have to see what policies he enacts. Tax overhaul will affect businesses and individuals. Corporate tax cuts would be huge, but the New York City market is more driven by the global equity market.

What about the flow of foreign investment? In 2014 and 2015, we saw very euphoric, strong global investment coming in. It’s not going away — the depth of global demand for Manhattan properties never ceases to amaze me — but in 2017, the foreign investment might be weaker. It’s going to be an average year.

What will be the biggest challenge in 2017? Interest rates are a potential problem. Buyers are still used to historically low rates and might not want to assume extra cost.

David Walker
CEO & co-founder, TripleMint

What are the game-changing projects of 2017, and what impact will they have on the city? I see megaprojects like Hudson Yards and One West End as the big ones, as they’re really creating new neighborhoods. Also, while it’s not a real estate development, the opening of phase one of the Second Avenue Subway has completely changed the access to Midtown for Upper East Side residents. Also, General Investment & Development Companies’ Waterline Square seems to be getting some hype.

What do you think will be the major market drivers in 2017? A lot of people think changing mortgage rates will be the biggest market driver in 2017, but I don’t think they’re going to move significantly enough to change buyers’ minds. I think what we’ll see is a bigger gap between buyers and sellers, with sellers expecting bidding wars and buyers becoming more conservative. In addition, it’s impossible not to think about the impact the new administration will have on New York real estate. The thing that makes it unique is that [President] Trump is a businessman at heart, with a huge portion of his business in real estate. I have seen a marked optimism in the New York real estate community, particularly among developers.

What do you see happening in the luxury market, where on the really high end, units are taking longer to sell and price cuts  are becoming more common?  In terms of uber-luxury, there’s just too much inventory right now. We’re seeing dramatic price drops, primarily on penthouse units in some of these condo projects. That said, I continue to be amazed by how many buyers are still picking up luxury units in all-cash deals.

What neighborhoods will take off in 2017? Which ones will struggle? I think Yorkville will take off. With the Second Avenue Subway coming in, people will start to realize: “Wow, this really does improve the area so much!” On the other hand, I think Carnegie Hill will struggle. It’s still priced much more per square foot than Yorkville, but a lot of the luxury units have had the same owners for 30 to 40 years and need renovations. They’re losing buyers who don’t want to spend so much money on renovating and would rather go for new development.

What about the mayoral election? Will Paul Massey gain enough traction to become a realistic candidate? There is definitely a wait-and-see mentality, particularly with the ongoing investigation of Mayor de Blasio. That said, it’s telling that the Independence Party endorsed Massey this early on in the race.

What kinds of trends do you expect to see in foreign investment?  We certainly hope the EB-5 program will continue, but there has always been a foreign investor market of one kind or another in New York City real estate.

Jim Costello
Senior vice president, Real Capital Analytics

What’s the biggest change that will happen under the Trump presidency, and how will it impact the New York real estate market? Nobody really knows yet. The Trump team is still trying to build their team, and there is a great deal of uncertainty on actual policy. One of the things to watch is a big change in the tax code, which will benefit corporations and the stock market.

What do you think will be the major market drivers in 2017? Investors in commercial real estate (CRE) may worry that the stock market run-up will make CRE investments look paltry in comparison to equities. That’s a short-term issue though. Interest rate increases are not as intense moving forward.

What do you think will be the biggest challenge in 2017? The ongoing uncertainty and shifting landscape as new policies out of D.C. impact the CRE market. Will 1031 exchanges go away? What happens to interest deductions? Commercial projects will continue to be difficult to finance. Underwriters are tightening their standards. Too much supply is putting pressure on banks, regulators and high-volatile bond issuers.   

There’s been a lot of concern about the commercial market in terms of defaults and vacancy rates. How will this play out in 2017? Default concerns are overblown — there was a small uptick from low, low levels. Vacancy is a problem only in certain pockets, particularly where apartment construction has been strong. But apartments are still needed, and investors are still buying them.

What kinds of trends do you expect to see in foreign investment?  Chinese capital still wants to come to the U.S., all exchange rate and capital control issues aside. It was only a couple of years ago that Chinese insurers were allowed to move capital overseas, and more diversification is needed for their portfolios. Russia is still recovering from falling oil prices, and Russians have no excessive wealth to invest in dollar-denominated assets.

Melissa Ziweslin
Managing director, Corcoran Sunshine Marketing Group

What do you think will be the major market drivers in 2017? The tail end of 2016 saw a resurgence of luxury and ultraluxury purchasers in the market, and we expect that momentum to continue. Thirty Park Place, Four Seasons Private Residences New York Downtown, signed more than $110 million in contracts in November alone, including five deals above the $20 million mark. Buildings with immediate occupancy like 30 Park Place, or 56 Leonard, or the Greenwich Lane have enjoyed a sales spike as buyers are able to walk in, see the views and appreciate the layouts. And there are a handful of developments coming to market this year that are anticipating the last available 421a tax abatements — a significant incentive for local, domestic and international buyers.

What do you see happening in the luxury market, with ultraluxe units sitting on the market longer and price cuts becoming more common?  Over the past couple of years, there was a perception among buyers and real estate professionals that a glut of new development inventory would flood the market, and the reality is that it just didn’t materialize. Only about 2,200 new units entered the market last year, far less than expected and 51 percent fewer than in 2015. Development financing was difficult for developers to lock down, and some chose to wait and allow existing product to sell through. Similarly, 2017 is expected to have fewer launches than initially predicted. We believe that buyers in some segments — including the luxury sector in select neighborhoods — may actually be surprised to find some inventory constraints where the pipeline has been scaled back. Even with financing constricting across the market, the construction loan finalized at Waterline Square [GID Development Group’s three-tower project on the Upper West Side] — in November was astonishing. Its total financing package of $2.3 billion is one of the largest residential construction packages in New York City history.

What neighborhoods will take off in 2017?  The success of Hudson Yards proves that newer neighborhoods can compete with some of the most established in the city. The West Side development from Tribeca to the Upper West Side is tremendously compelling.

What do you expect will be the biggest challenges in 2017? At this moment, there is a lack of efficiently sized and lower-priced residences on the market, which is a barrier to entry. Behind the scenes, we’ve seen developers make very considered moves to adjust their strategies. In the next 12 to 24 months, we expect to see more new residences on the market with smaller square footages and lower absolute prices.

Josh Kuriloff
Executive vice chairman, Cushman & Wakefield

What’s the biggest change that will happen under the Trump presidency, and how will it impact the New York real estate market? We do not want to comment on politics, but the repeal of the Dodd-Frank Act will be a stimulus to the financial industry. New York has a lot of financial institutions.

In addition, the Trump administration is also committing capital to infrastructure; this will be further stimulus.

What do you think will be the major market drivers in 2017? This year is going to see moderate job growth. And we have new supply coming to the market: Hudson Yards, the World Trade Center and Essex Crossing. The trend of urbanism is growing, people want to be in gateway cities. Also, major corporations are transforming their workplaces, making them more collaborative and creative. Many will move their headquarters to Manhattan. Overall, office rent will see stable but moderate growth, that of 2 to 4 percent.

There’s been a lot of concern about the commercial market in terms of defaults and vacancy rates. How will this play out in 2017?  We are seeing job creation, and the vacancy rate will be flat. We also see less debt in office acquisition, less default than in the last cycle.

In terms of office projects, who will be the winners and losers? Manhattan West, Brookfield and Hudson Yards will see strong demand. Long Island City is also a growth market. Personally, I think Brooklyn has too much office supply.

What trends do you expect to see in foreign investment?  New York has been a favorable destination for foreign investment, and this will continue, particularly investment from China, Germany and national sovereign wealth funds.