Want to know where the market is headed and what the next big trends are in real estate? Forget the crystal ball. The Real Deal talked to developers and brokers to get their take on 2007 — and their answers may surprise you.
Some of the prognostications are rooted in 2006’s drama. Economists pronounced the national housing boom officially over, fear dominated the headlines, and real estate professionals held their breath, waiting for a collapse.
But the sky didn’t fall. The average price of a Manhattan apartment remained above $1 million, and fears of fire-sale prices for new luxury developments weren’t realized. But developers see an oversupply of new condominiums flowing into an already saturated market in the first half of 2007. One predicted it will take years to absorb the condos on the market and in the pipeline. A new development marketer cautioned, “We are past the ‘build it and they will come’ era. That’s over.” But others are encouraged by bonus money spending, the less than 1 percent vacancy rate for rentals and still-low interest rates. One broker said, “the next six months are going to be phenomenal.”
For commercial real estate, the picture is clearer. Hotel and retail real estate are particularly hot, and industry members are encouraged by soaring asking rates and dropping office vacancy rates, which fell to a five-year low in November. “The market hasn’t been this tight since the second quarter of 2001,” a broker said. Thanks to job growth and continuing rising rents, brokers see these trends holding in 2007.
With this wild ride in the rearview mirror, The Real Deal called upon market insiders to voice their expectations for 2007.
Developers
David Picket
president, Gotham Organization
Where is the market now and where is it headed?
We are in the middle of a correction of condo prices. While the market is on a downward curve, it hasn’t bottomed out yet. I don’t see a massive drop in prices but there is definitely some weakness on the sales side. Rents for the past year have gone up precipitously and will continue to go up.
Developers will have a hard time making a rental work at present land prices, which are still upwards of $300 a square foot. Rents will continue to go up, so at some point if land prices come down a bit more there will be an opportunity.
There will be a period of adjustment for sellers of land who thought they would get a lot of money when the condo market was hotter. They will have to come back to reality. The changes to the 421-a tax abatement program will affect what someone is willing to pay for land.
Abolishing the certificate program will increase the cost of development and ultimately result in a reduction in land values.
What are you most worried about?
I’m worried about it taking a long time for landowners to come to grips with the change in the marketplace. Condo prices are off, soft costs are up, and construction prices are up — something needs to give. Land prices are not low enough to do rentals and too high to do condos.
What will you do differently this year?
Maybe cast a wider net; look into Brooklyn, Queens and the Bronx in an effort to bring in some deals. We are very numbers-based and it’s important that the deal works intrinsically.
What’s one telling statistic about the current market?
The extremely low cap rates at which people are buying assets — in some cases, below 4 percent. There is an awful lot of institutional money flowing into New York and artificially inflating the value of many assets.
Tom Elghanayan
president, Rockrose Development
Where is the market now and where is it heading?
We’ve seen a terrific run-up in both the residential and commercial markets. In many ways, the city has never been better. Employment is up, crime is down, the quality of life has improved and we are fully recovered from the aftermath of Sept 11. In Manhattan, the vacancy rate for rentals has been less than 1 percent for the last two years. The condo market has not burst despite some dire predictions. But it will take a couple of years to absorb all the condos on the market now or in the pipeline. Office vacancy rates are declining due to increased hiring in educational services, professional and business services, and leisure and hospitality. New York’s real estate market has always been independent of the rest of the country unless there is a recession.
What are you most worried about?
The increased cost of raw materials and land has made building so expensive that only high-end products are feasible. This is putting the brakes on new construction.
What’s the next big trend in real estate?
Student housing. There are 370,000 students enrolled in colleges in New York City currently. The schools have expanded their enrollments, and there is no place to house them. The federal Department of Education forecasts a 25 percent increase in students between 2000 and 2013.
What’s the most underrated aspect of real estate?
Building management. It is important to treat tenants with respect no matter how tight the market. A friendly, smiling doorman and a responsive building staff counts just as much, if not more, than fancy kitchen fixtures.
Most overrated?
Labels over quality of product.
Residential
Frederick Peters
president, Warburg Realty
Where is the market now and where is it headed?
Reports in the press to the contrary notwithstanding, there has been substantial absorption of Manhattan inventory, especially in the prewar $2 million-and-up market, in the fourth quarter. Today there is very limited product availability in the resale market, which has stabilized prices. At the same time, the one-bedroom resale market continues to be oversupplied with inventory, which is of course forcing prices down, especially in the East Side corridor east of Third Avenue. New condos are of course competing mainly against one another, and it will take another six to 12 months before we can judge if there is truly an oversupply.
What are you most worried about?
I think the continuing flow of new condominiums onto the market during the first two quarters of 2007, before the current supply has been absorbed, is the most worrying.
What’s hot?
Big is hot. We have never seen so many deals for $10 million and over.
What’s not hot?
Unless they have really good ancillary features, properties needing a lot of work are not hot. New Yorkers work so hard these days that they do not want their free time eaten up with renovation anxiety.
What’s one thing you’ll do differently this year compared to last year?
One thing we will continue to do this year is price properly. This market is still suffering from price inflation, for which brokers are often responsible, which causes inventory levels to rise and creates a sense of slowing sales.
What is the most overrated aspect of real estate now?
Maybe “name brand” architecture is the most overrated. Buyers are impressed by famous architects, but in the end people want well-organized, livable space. That matters more to them than the name on the project.
Michael Shvo
president, Shvo Marketing
What are you most worried about?
Poorly conceived product by people who don’t know what they’re doing. We are past the “build it and they will come” era. That’s over. Developers and marketers really have to understand what the consumer wants and deliver that.
Also, badly written gloom and doom articles about the real estate market, which isn’t as black and white as people think.
What’s the next big trend in real estate?
Condo units that are designed for privacy and quiet and that give you a sense of well-being. Green design in all its applications.
Most overrated?
The most overrated aspect in real estate now is that bigger is better. All New Yorkers want space but any space that isn’t well designed isn’t a good space.
Michael Simon
president and CEO, Century 21 NY Metro
Where is the market now and where is it headed?
There is no one statistic that defines the marketplace. Overall, the market is a mixed bag, but fortunately not unstable. Interest rates that are stable, low jobless claims and the potential for a big year for Wall Street bonuses should indicate a positive trend. However, there is still significant inventory with developers changing their strategies. The inventory backlog allows buyers to be more selective as time on the market increases and prices drop.
What’s one thing you’ll do differently this year compared to last year?
We will shift our advertising dollars to the Web because it’s cost effective and more targeted. With an overwhelming majority of home buyers — 85 percent — starting their search online, we need to be where they are.
Louise Phillips Forbes
senior vice president, Halstead Property
Where is the market now and where is it headed?
It is jamming. Brokers will have no rest for the next four months. Bonus money has been announced and people are confident to truly spend it. Interest rates are on our side. I think the next six months are going to be phenomenal. There will be record sales and a record number of transactions that brokers are doing.
What are you most worried about?
I’m concerned for developer friends of mine who have very large projects with half a million square feet or 500 units. To me, those projects in a concentrated area do concern me.
Shlomi Reuveni
senior vice president, the Corcoran Group
Where is the market now and where is it headed?
Buyers are very educated and savvy about what’s out there. No one is making rash decisions. They are going to competing projects for deals and making very educated decisions about which building offers the best product.
What’s the next big trend in real estate?
The West 50s and 60s. It’s one of the hotter neighborhoods, and it’s escalating in value. Also, Union Square is becoming very exclusive.
Adrienne Albert
president, the Marketing Directors
Where is the market now and where is it headed?
Buyers in the market were bombarded by the media and the Fed was playing with interest rates, so there was tremendous slowdown in spring and summer all over the country. But in the last quarter, traffic to Web sites for the projects we are marketing has doubled and there has been a crescendo of activity through Thanksgiving. Developers may have to anticipate a longer sellout but we certainly aren’t hurting at all. There will continue to be an uptick and the volume of sales will continue. The condo market will tighten as rents increase over $4,000 a month for a one-bedroom. Renters will want to purchase and no longer rent.
What’s one telling statistic about the current market?
The difference between the first half and second half of 2006 in terms of absorption and the firming of prices. It sets the stage for 2007.
Commercial
Mark Gordon
head of the international lodging group, Sonnenblick-Goldman
Where is the market now and where is it headed?
The hotel market will remain very strong certainly throughout 2007 because of market fundamentals. There is a very limited amount of new full-service supply and hotels continue to perform at exceptional levels.
What’s one telling statistic about the current market?
One of the most telling statistics is the amount of international capital pursuing New York City hotels. Four of the largest New York City hotel sales were done with international hotel capital.
What’s the next big trend in real estate?
Some residential developers are looking for ways to convert all or part of their buildings into hotels. We advised on the conversion of 485 Fifth Avenue, which was an office building in the process of being converted to condos that we made a deal to convert to a hotel instead. We’ll see more office to hotel and more residential to hotel. We’ll also be seeing residential developers try to incorporate hotel components into their residential buildings.
What’s the most underrated aspect of real estate?
I think that in many hotels retail space, public meeting areas and restaurants are not fully utilized. Those areas should be leased out and run by professional restaurateurs as opposed to hotel managers as part of the overall hotel.
Most overrated?
The lending community has seen a very aggressive movement in terms of financing New York City hotels. Some hotels were financed multiple times in 2006. The average hotel has doubled in value in the last 24 months. It’s a function of the competitive market because cash flow is so strong.
Benjamin Fox
principal and executive vice president, Newmark Knight Frank
Where is the market now and where is it headed?
The retail market in Manhattan remains strong with many retailers out there looking for space. The challenge is to uncover availabilities on the main streets and avenues where most retailers want to be. Yes, the rents are high, but that’s always been the case when it comes to prime locations.
What are you most worried about?
Unemployment.
What’s one telling statistic about the current market?
While not necessarily a statistic, there appear to be far fewer restaurants going out of business than in past years. The restaurant sector continues to thrive.
What’s the next big trend in real estate?
Retailers owning their own space rather than leasing.
What’s the most underrated aspect of real estate?
The emergence and strength of the Hispanic market.
Most overrated?
The notion that big-box retailers cause local merchants to go out of business.
Paul Massey
founding partner, Massey Knakal Realty Services
What’s hot?
Retail is hot, especially in Brooklyn, Queens and the Bronx. Bigger box and national tenants are coming into the market when they weren’t there before. Residential land for development won’t be hot for a while because of the sufficient supply of condos built. Affordable housing should increase the value of land that’s appropriate for affordable housing. The influx of population in the next few years will definitely drive the need for affordable housing,
What’s one thing you’ll do differently this year from last year?
I’ll have more of a focus on affordable housing sales. There are still pockets in the city and in the Bronx where they’re selling lots of land for affordable housing. There are also pockets in Queens and Brooklyn. We are about to close on an entire block, the old St. Mary’s Hospital Complex in Crown Heights.
What’s one telling statistic about the current market?
Investors are spending over $1,000 a foot to buy office buildings. There is a general health in the office market.
Joe Harbert
COO, Cushman & Wakefield New York
Where is the market now and where is it headed?
In November, available office space in Manhattan fell to a five-and-a-half-year low. Also, asking rates are soaring to near record levels. The market hasn’t been this tight since the second quarter of 2001.
We think these trends will continue in 2007. Job growth and the employment picture looks particularly strong. Vacancy will continue to go down and rents will continue to rise with possibly some price spikes along the way. Class A space in Midtown and the upper end of the market at $100-plus a square foot will see prices rise more dramatically, but it’s not restricted to that segment. We’ll see it with B and C quality space and in Downtown, Midtown South — all around. We may see large tenants not be able to move from Midtown [to elsewhere in Manhattan] and start to look at New Jersey and Brooklyn.
What are you most worried about?
I’m worried that the price increases will continue at such a pace that we could experience a real estate stagflation where prices may rise too quickly and demand goes down. We may face a time where tenants have sticker shock and develop price resistance. Tenants may not be able to adjust and choose not to rent space.
What’s hot?
Hot is Class A. Hot is desirable locations and the interesting thing is, it’s about perspective. The Meatpacking District and Chelsea are extremely hot. And any new products like the Bank of America tower, the New York Times building and 505 Fifth Avenue.
What’s not hot?
Midtown South.
What’s one telling statistic about the current market?
Average asking rents are up in this market 22 percent in a year. In a short period of time in which these numbers have occurred it’s a steeper slope than you’ve seen before — prices have risen more quickly.
What’s the next big trend in real estate?
Split operations. When prices rise to such a level, most companies would like to be in contiguous space, but they can’t afford it. Companies are becoming much more flexible and taking relatively adjacent space. When vacancy rates decline, it’s harder and harder to find large blocks of space. At some point soon, every major corporation will have a due diligence on who needs to be here and most corporations will find they need to be here or nearby. But it may ultimately resign itself to a lot of companies moving out to Downtown, New Jersey, Brooklyn and even Queens.
John Powers
chairman of the New York tri-state region, CB Richard Ellis
Where is the market now and where is it headed?
It’s hot. It’s a very hot market with lots of leasing activity. Pricing in the best buildings is moving disproportionately to the overall market. There is no more supply in the short-term and no other product coming on the market for a few years. The investment market is moving into the leasing market. Investors are buying at low cap rates and looking to lease at high rates. The market is acting like it’s at a lot lower vacancy rate than 8.4 percent. Just last month, the asking rate in Midtown went up $1.25.
What are you most worried about?
There is concern for the long term. The market can move quickly but big tenants move slower. A lot of people are looking at how to avoid taking space in Manhattan. When prices get this high, there is financial incentive to move some people out of the city.
What’s the next big trend in real estate?
More firms in the financial industry want high-end but not huge blocks of space. They aren’t so sensitive to the price. Many of these buildings are tight in space and landlords are more creative in what they offer when they have vacancy.
Richard Hodos
founder and principal, Madison HGCD
What are you most worried about?
We are most concerned about premium spaces becoming unaffordable for most retailers. Banks artificially inflated many of the prime areas as they aggressively competed for space with each other, literally creating bidding wars for space in the past few years. Virtually no retailer could compete for space if a bank was interested in a location. Though the banks’ expansion plans have slowed considerably, the rent thresholds remain at an all time high with no end in sight.
What’s hot?
As rents for premium spaces in Manhattan continue to rise, retailers are looking for new emerging areas to grow their brand. Areas like Downtown Brooklyn, Brooklyn Heights and Park Slope have enjoyed a resurgence.
What’s the next big trend in real estate?
The return of the department store as a “one-stop” shopping experience for time-starved shoppers is becoming a trend as they provide better assortments of products and add back departments such as small electronics and toys.
Jonathan Mechanic
partner and chairman of the real estate department, Fried, Frank, Harris, Shriver & Jacobson
Where is the market now and where is it headed?
The real estate market is white hot right now. On the leasing end, rents are topping $100 per square foot in a number of Class A Midtown properties; space can barely be found in Midtown South; and office space Downtown has run up in value enough that a number of residential development sites are being reevaluated as office sites. On the investment side, buyers are lamenting both the dearth and competitiveness of opportunities in New York and throughout the tri-state region. And pricing records have been broken three times in the last three months.