Predictions 2006: post-boom prognosis

Return to normal, or condo glut and broker exodus on horizon?; commercial gets strong

Change is rarely simple, and 2005 was a year of change for New York real estate.

In the residential market, the year roared into reality amidst an unprecedented boom in sales prices – a boom that eased, by summer, amid incessant talk of a bubble. By the end of the summer, however, the leveling off in prices quieted talk of a bursting bubble, and the residential market finished the year fairly normally; there weren’t the spectacular numbers seen at the end of 2004, but New York real estate wasn’t tanking, either.

The commercial market entered 2005 with many question marks, most of them regarding Downtown, and while questions there still linger, Manhattan overall ended the year in good shape, with some of the lowest vacancy rates seen since at least 2001.

The Real Deal asked several real estate professionals about where they think the industry is headed this year – and what lessons they learned from the year that was.

Developers

Isaac Katan, Katan Developers

Where is the market now and where is it headed?

In the last few months, we’ve been experiencing a market that has leveled out in most areas. This is normal and was expected considering the time of the year. However, in some areas we are still experiencing a hot market. I believe the market will remain fairly flat until this spring. There is a sturdy group of buyers out there which are on “standby” mode, and, combined with large Wall Street bonuses, I believe the market will remain steady and strong.

What are you most worried about?

The federal deficit, which will impact interest rate hikes. A shortage of building material will boost prices up. The massive reconstruction of New Orleans will have great impact nationwide in this regard.

What will you do differently this year?

Diversify with a capital D. There are too many amateurs in the market. There are too many high-end developments emphasized in the newspapers. The papers do not reflect the urgent need for housing for families with two incomes.

What’s the next big trend in real estate?

More rental buildings in strong locations to satisfy the temporary needs of the “Echo Boomers.”

Aby Rosen, co-founder, RFR Holding

Where is the market now and where is it headed?

There is still as strong a demand as ever for commercial space and I think the demand is growing and vacancy rates dropping. [In the sales market] in the past, New York was always cheaper to buy than European real estate. Now they are on the same level, and I think this will continue in 2006.

What’s one telling statistic about the current market?

You can judge the state of commercial space by the vacancy rate. It shows we are headed in the right direction. Absorption helps; it was good in 2005, it should be great in 2006.

What’s the next big trend in real estate?

New York has always been ahead of other cities except in architecture. Finally, people are really embracing it; if only they had thought that way over the last 10 years. Architectural gems have high visibility. Great stuff stays great, bad can only get worse.

Residential

Frederick Peters, president, Warburg Realty

Where is the market now and where is it headed?

We had neither price increases nor decreases in most deals made in the third or fourth quarter this past year. We’ve had a plateau and I am not anticipating too much divergence. The more interesting question of 2006 is whether buyer and seller expectations will come more into synch. When a market stops skyrocketing the seller’s expectations still have more momentum. That has happened to a few sellers, that is why we’ve seen a rash of price reductions. I don’t see a frenzy in the first half of 2006. To predict more than six months ahead is hubris stepping over into folly.

What are you most worried about?

If I were to put my finger on one thing, it’s probably that we have so much condo construction under way that I think the number of units is going to put pressure on pricing on the marketplace. There is a danger of approaching saturation in some neighborhoods.

Betsy Dean, sales manager, Stribling & Associates

What are you most worried about?

Being a manager/broker, I tend to be an optimist. There is business to do in every market; there is just a different way of doing it, depending on whether it’s a down or up market. I wouldn’t be worried about New York real estate. You can’t manage brokers and have that attitude.

What’s hot and what’s not hot?

Condos have been hot and continue to be. All the new housing throughout the city will create neighborhoods we haven’t even heard of, but way east of Lexington is underrated and I think it still is undervalued. When there’s a change in the market, people become location conscious and some go back to the old and true. It has quieted down, so what was hot is slightly cooler.

What’s one thing you’ll do differently this year compared to last year?

I think more education for the brokers, partly for newer brokers and the industry as a whole. The newer brokers came into the market with a constantly rising multi-bid market. There has to be the understanding that there is business to be done in all markets.

Daren Hornig, CEO, Dwelling Quest

Where is the market now and where is it headed?

The residential boom is over, but there will be no bubble popping. It will be back to business as usual with product and brand awareness. The market will be back to a healthy growth rate of 3 to 9 percent annually with the market at $1,000 per square foot; if it is growing at $30 dollars a year, it is not an unhealthy market.

I do think there are going to be thousands of real estate brokers looking for a new line of employment in 2006. Big companies that spent a lot of time expanding their employees and office space this past year will be feeling a lot of pain this coming year. The last few years, too many got into the business and most struggle as it is. 2006 is the year the cream will rise to the top.

What are you most worried about?

Construction prices concern me. In the last six months, cost has gone up almost $50 a square foot.

Anthony Santangelo, manager of the Fort Greene office, Fillmore Real Estate

Where is the market now and where is it headed?

It’s definitely in a different place than six months ago. We are seeing property on the market for a longer amount of time than in the past few years. In the past, some people felt they didn’t need our help. Now the necessity of the broker is going to become more apparent. It will be weeding out the novice investor from the more serious buyers.

What’s hot and what’s not hot?

Being based in Brooklyn, we see the opportunity in downtown Brooklyn. We see that as being hotter as more people realize that it is just as easy to get to Wall Street from downtown Brooklyn as the Upper East Side.

What’s one telling statistic about the current market?

I think the fact that we are working on properties longer than we have been in quite some time. When we’re taking a listing of a house or co-op on the market, we are married to it for the full six months. Agents are attached to a client for a lot longer, taking that much longer to get to the end result.

Patricia Burnham, president, P.S. Burnham Inc.

What’s hot and what’s not hot?

What is not hot – overpaying in a mediocre location. If the market does come down you’re stuck with the property and can’t sell it for what you paid.

What’s one thing you’ll do differently this year compared to last year?

Try to buy more real estate for myself.

What’s the next big trend in real estate?

I think we’ll see continued interest in new construction because people really like to buy something that’s done, with new kitchens, new baths. Something that has been redone and in good condition is appealing, but everyone likes new, new, new. Very few people want to do the work. Of course, the success of the building depends on the quality and location. Just because a new building is built doesn’t mean it’s going to sell. It’s the location, finishes, and floor plan.

Jacquelyn Sonenberg, executive vice president and managing director, Stribling Marketing Associates

What are you most worried about?

I suppose what we all worry about is New York City having another catastrophic scenario that would stop the market cold. It bounced back quickly after September 11, but the market would take significantly longer to bounce back if it happens again. The economy is on the upswing and there is a lot of new product on the market. I worry about something we can’t control, but I am very optimistic about the real estate market.

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What is the most underrated aspect of real estate now? Most overrated?

Overrated: the amenity package. Developers are trying to outdo each other by putting a tremendous amount of money into making their building stand out. The truth is what makes it sell is the design and the livability. When that’s satisfied, then people buy. Developers should put more into the apartment and less into the amenity package.

Underrated? Listening to journalists who say the market has gone down dead in the water and the bubble has burst. Some journalists want to write something controversial to make the article more interesting, but it is not a truthful picture of what the market is all about and it hurts the industry.

What’s one telling statistic about the current market?

The amount of planned developments that are coming out in the next couple of years is the most active that I can remember in my 32-year career. It is in all neighborhoods and all price ranges, creating residential infrastructures in emerging markets. It’s a very exciting time; it tells me that New York City is still the center of the world. And everyone still wants to be here.

Commercial

Dean Shapiro, executive managing director, CB Richard Ellis

Where is the market now and where is the market headed?

In the office market, there are no pat answers. Each of the three major markets is different. The Midtown market is strong and tightening. Midtown South is strong and tightening. Downtown is relatively weak with a prognosis of beginning to tighten. When we try to make predictions we look at supply and demand factors. Demand has been solid, but supply has been very minimal; therefore, the tightening. I think we will continue to see tightening in the markets in 2006.

What’s the next big trend in real estate?

Hotel development. The conversion of hotels, and a slowdown in residential conversions. Demand is up and supply way down for hotel rooms, and, therefore, values are up.

Jeff Gural, chairman, Newmark

Where is the market now and where is the market headed?

For the buildings we own, the market is very strong. There is very little vacant space and maybe the market will go up a little bit – not dramatically, but it’s very healthy. Most tenants can pay the rent. Arrears are very low, which is a very healthy sign.

What are you most worried about?

The only thing is a terrorist attack. In the short run, that’s it.

What is the most underrated aspect of real estate now?

We own buildings in all different areas of the city, and they are doing well. Downtown is softer, but we don’t own a lot Downtown, just one building.

What’s one telling statistic about the current market?

The vacancy rate is relatively at equilibrium. Where it becomes unhealthy is when the vacancy rate is too low and rents go up dramatically. That’s where you have to make a lot of concessions to attract tenants or tenants go out of the city. What you have now is healthy, as healthy a market as I have ever seen.

What’s one thing you’ll do differently this year compared to last year?

Actually focusing on trying to do some gimmicky things to show our tenants how much we appreciate them. If business is good, we plan to spend more money in capital expenditures because I believe that the time to fix up your building is when it is fully rented.

What’s the next big trend in real estate?

We may see more hotels being built or properties converted to hotels, rather than condos or rental housing. The secret to real estate is not to be overleveraged, and, if you aren’t, you don’t have to be worried about anything.

Robert Sammons, director of research, Colliers ABR

Where is market now and where is it headed?

The market is tight and getting tighter. The vacancy rate is at its lowest since September 2001. I fully expect that to continue in the coming year. The asking rent has lagged but that’s typical; there will probably be rent spikes in 2006, especially in Midtown.

What are you most worried about?

If anything, the fact that there is very little new construction in New York City, specifically Manhattan. It is probably very difficult under the best circumstances to build office towers in Manhattan. The market got so tight in the late 1990s to 2000 that companies started looking for overflow space in the suburbs, primarily Jersey City. They have in some instances come back; even after September 11, most tended to come back to Manhattan, although there were several financial services firms that took space outside the city.

What’s hot and what’s not hot?

Going into 2006 for New York City, big blocks of space are hot because they are getting harder to find. Midtown is hot because residential conversions remain hot. They have begun filtering up from Lower Manhattan to Midtown South and filtering into Midtown proper. Class B properties are being converted to residential use. The reason is two-fold; a number of old buildings don’t work for modern office space anymore because they have smaller floor plates and lots of columns. The price per square foot is higher for residential than office, so the owner is making out well in the process.

Not hot: I hate to say it, but, right now, as it stands, the World Trade Center area is not hot. There’s still a lot of bickering going on over four years after the fact and people are losing interest. It’s going to be something to watch, but, right now, no one’s interested in leasing space.

What’s one telling statistic about the current market?

The figures for monthly net absorption. There is a record high for the first 11 months of 2005 – through November 2005, 11.7 million square feet, which eclipsed the record 11.5 million for all of 2000. It is a more telling sign than strictly leasing activity, which could be tenants moving around. It means new tenants are leasing and tenants that are already here are expanding. This is backed up by growing employment figures in New York City. Firms are hiring.

What’s the next big trend in real estate?

A major lease signing at 7 World Trade Center. If a major block of space is leased, that will be a happy day for [Larry] Silverstein and Lower Manhattan. Also, redevelopment into the far West Side. The city has rezoned that whole area, so the next big thing would be someone putting up a new office tower. There’s a lot of residential activity, but not office development.

Peter Hauspurg, chairman and CEO, Eastern Consolidated

Where is the market now and where is it headed?

Both the residential and commercial property markets are at an all-time high following a 10-year bull market interrupted only briefly after September 11. I expect residential pricing to finally soften, but I predict prices of commercial real estate to remain high as demand for it has changed fundamentally in recent years, with no real increase in supply.

What are you most worried about?

One big concern is that rising interest rates may cause both pricing and trading volume to decline.

What is the most underrated aspect of real estate now?

Most underrated: the fact that well-located real estate is probably superior to Treasury Bills in terms of its ability to store, protect and enhance value.

Most Overrated: A good many of the REIT stocks.

What’s one telling statistic about the current market?

There are less people bidding at the top range in recent auctions – only two or three, instead of eight or 10. Investors are becoming more cautious, although good locations still command a lot of attention.

What’s one thing you’ll do differently this year compared to last year?

As the market cools, I’ll probably have a lot more time to work on my golf game.

What’s the next big trend in real estate?

Look for investors to accept much more in third-tier locations at relatively low cap rates.

Mitchell Konsker, executive vice president, Cushman & Wakefield

Where is the market now and where is it headed?

The commercial market is very strong and vibrant and will continue at the same pace in 2006, with large blocks of space in the third and fourth quarter absorbed or taken off the market. There is limited supply of large blocks of space. The financial banking and brokerage tenants are all in the market looking for additional space since they have been on a hiring spree and all are looking to house these additional employees. Rents will continue to climb as concessions and free rent will continue to decline.

What’s hot and what’s not hot?

The commercial sales market is starting to cool off. Regarding the amount of purchasers chasing properties, pricing has become so inflated that there will be price adjustments in 2006. The residential market will cool down; it was so overheated that we think it will readjust and realign itself.

What’s the next big trend in real estate?

Continued consolidation of commercial firms in New York City as well as residential firms.

Rights and Wrongs: How 2005 turned out

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