Marcus & Millichap 2022 Investment Outlook: Forecast for the New York Market is Bright

Is the “new normal” for commercial real estate investment finally here? The answer is an optimistic yes, according to Marcus & Millichap. As one of the leading investment real estate brokerages in New York City, it has its finger on the sector’s pulse and expects 2022 to be a banner year for buyers and sellers.

“It’s a unique time in my career as we are seeing equal amounts of motivation on both the buyer and seller side, which creates a very productive market,” says Matthew Fotis, a multi-family and mixed-use specialist with Marcus & Millichap in New York. “We will certainly be watching activity in the first quarter to see if the scales tip in any one direction, but we are not expecting that to be the case, which means that transaction volumes will increase, along with values.”

Office Space: A Tale of Two Cities

Eric Anton,  with Marcus & Millichap’s Global Capital Group, has over 20-years in the marketplace, and focuses on investment sales and equity placement transactions. Anton echoes the positive sentiment but predicts that buyers will be more selective, particularly in regard to office space.

He is confident that office tenants will be seeking physical space: “It’s become crystal clear that permanent work from home isn’t the future,” he says. “There is so much lost in translation via virtual work, and companies have found it damages the esprit de corps and loyalty that is so essential to success.”

However, that doesn’t mean any office space will do. Instead, he sees the industry moving away from the traditional designations of “A” “B” C” and “D” space that they have used for decades. In the past, there had always been a market for B and C space for tenants who wanted to cut costs by moving to a less desirable building, but now Anton sees buildings divided into two categories. “There are those that people want to be in and those they don’t. You can’t even give the space away in buildings that fall into the second category.”

Today employees have the upper hand in declaring their preferences, thanks to the so-called “Great Resignation,” as well as a reshuffling of job functions. “Whether you’re in finance, tech or law, you’re competing for talent, and to attract and retain the best employees, you have to have the type of office that is appealing enough to make employees want to show up,” Anton says.

“That’s exactly the sentiment my clients have toward office space,” adding that characteristics they favor include outdoor amenities, sleek lobbies, prominent signage and plenty of open space.

Apartment Market on the Rise

Much was made of the momentary dip in rents in key New York areas during the pandemic, but that’s another sector seeing a comeback, says Fotis, adding that it’s driven in part by FOMO. “We are seeing a surge of people motivated to get back in and sign a lease before rents potentially rise again. The market has become far more competitive because of this momentum, which in turn is fueling investment interest.”

Part of that demand also stems from the fact that many would-be investors have been biding their time since 2019 in order to assess the possible negative impact that the Housing Stability and Tenant Protection Act would have on the market. Given its limited effects, Fotis doesn’t see it affecting values for buyers or lenders. [could cut]

As people returned to the city and signed leases, I’ve seen a host of investors looking at new opportunities, buoyed by the positivity in the rental market, primarily in buildings that have been deregulated where the average rent is perceived to be below market value.

Retail No Longer on Clearance

Retail is another sector Fotis believes will continue to improve in 2022, following a correction in 2018 and 2019 that was accelerated by the pandemic. Now, with retail sellers understanding the current conditions and pricing things right, he is seeing brands and entrepreneurs enter the market with confidence as they take advantage of more attractive rents. “I think we will continue to see a productive retail market with new creative businesses deciding it’s a great time to open up in Manhattan or the boroughs, which will help fill lingering vacancies.”

He also sees an increase in owner-users commensurate with current values.“Before the retail market corrected, values were too high for it to be feasible for most companies to buy their own building, but now they can run a business out of the ground floor and either use or lease the remainder of the space.”

The Next Hot Area

While downtown and the eastside have been the story for a long time, Anton believes Grand Central is poised to make a comeback. “It’s analogous to Tokyo in the ‘70s where everything was great up until the mid-to-late 90s when those buildings were considered antiquated and other quality buildings were being built in nearby business districts.” 

Currently, office buildings in the Grand Central area near the train station are being demolished and rebuilt to today’s more modern standards, he says, citing a 72-story building he predicts will be arguably the most technologically advanced building in the world. Another prime development site  is the Grand Hyatt Hotel (formerly the Biltmore Hotel) which is slated to be more than 2 million square feet of Class A trophy space right on top of the commuter trains.

Another booming district is the neighborhood north of Madison Square Park, known as NoMad. Situated at the northern end of the Broadway entertainment corridor, it is fast becoming the place to be for young people, with boutiques, nightlife and other amenities. “We’re focused on Broadway from 3rd Street to 32nd Street,” Anton says.

He compares its renaissance to that of Bryant Park, which was sparked by an overhaul achieved via a public-private partnership that cleaned it up with new lighting and security, thereby boosting the value of the buildings around it.

Time to Sell?

Fotis finds a continued perception that now is the time to get a great deal, which is a meaningful and strong driver for a lot of decisions. That means it’s also the right time for sellers to consider putting real estate on the market to capture the energy and momentum.

Sellers are hearing news of legislative changes and recognizing they should make a move as it might be a mistake to wait for a better payoff. My advice is that for the first time in a number of years, there’s some froth in the market because of so much buying activity, and they should take advantage of it.

And, he believes this increased supply will be met with strong demand. “There continue to be more buyers than real buying opportunities; people have had plenty of money to invest without seeing much transaction volume until the second half of 2021 so their appetite is strong.”

An Investment for Everyone

While the pandemic has sent the sector on a wild ride, Fotis saw a thawing in the springtime that was evidence of tremendous pent-up demand, with the sentiment permeating both the rental market and the investment sales market.

The goal, says Anton, is to determine the highest and best use for each property – today’s parking lot could be a hotel or an office, while a hotel could be converted to apartment buildings. “I’ve done a number of adaptive reuse and mixed-use projects, which is really fun and proves there are opportunities for anyone with a vision,” he says. “Investors who see a great deal will make a move and say they’ll figure it out later. If you’ve been sitting on the sidelines to buy or sell, now is the time to get in the game.”