Current Market Conditions: The NYC Real Estate Market in Context By : James D. Kinsey

Online, August 1, 2011 (Newswire.com) - As the global economy continues to evolve there are naturally contrasting forces of great cooperation toward a common good and protectionist reflexes of self-preservation. This is coupled with greater inter-market complexities and growing pains in the emerging markets. We are still in the somewhat early stages of economic recovery and there is plenty of bumpy road ahead. For those of us in the investment property market, it is critical to understand how what is happening on the larger global and national stages is likely to impact our industry at the local level.

Real Estate In NYC: Well-Positioned And Moving In The Right Direction

Due to the inherent illiquid nature of real estate as compared to stocks and bonds, the real estate market moves more slowly. The bottom lagged behind the stock market bottom and the recovery will come more slowly as well. The good news locally, as reported in an annual study conducted by the Partnership for New York City and PricewaterhouseCoopers, is that New York City emerged from the recession with its ranking as the top global business center intact. Conversely, our traditional rivals - London and Tokyo - fell out of the Top 5. New York City's ranking bodes well for job recovery, and consequently for property demand.

National Snapshot Part A: Economic Hangover Lingers

To give some national perspective on where the residential marketplace is, note a recent report by Core Logic (NYSE: CLGX) that 23.1% of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010. The Fed has estimated that the value of household real estate has fallen $6.3 trillion from the peak and that it continues to fall in 2011. They also published reports that household net worth is still off $8.8 Trillion from its 2007 peak.

Renters aren't faring any better. A recent Harvard University study reported that about 26% of renters spent more than half their pre-tax household income on rent and utilities in 2009. Recent reports have shown the apartment vacancy rate is falling rapidly and rents are rising, so this situation is probably even worse now than in 2009.

National Snapshot Part B: Limited Supply, Increasing Demand

In a recent investor conference call by national REIT Avalon Bay Communities (NYSE: AVB) in which they discussed the supply and demand for residential rental units in light of the recovering job market, they noted, "It's both the magnitude and the composition of the jobs that matter and importantly, a disproportionate share of the new jobs created have been in the under 35 age cohort." These newly employed young adults who will be seeking their own apartments instead of living with their parents are facing a tight market for two reasons. First, in many areas of the country there has been significant demand for rental units in recent years by families who lost their homes to foreclosure. Second, supply is tight and does not appear to be getting better in the near term.

In the same investor conference call Avalon Bay also reported on recent supply trends and near term expectations. They noted that over the 10-year period from 1998 through 2008 there were an average of 240,000 new rental units completed annually. This number dropped to 160,000 in 2010, and Avalon Bay expects it to be lower than 80,000 this year, which would be a 50-year low and a net zero increase in light of loss of units due to obsolescence.

New York City Snapshot: Strong And Growing Demand, Supply Constraints

The limited supply / high demand situation is not just a national phenomenon. Edward Glaeser, in a piece on The New York Times' Economix blog, looked at the number of new housing units created in the city in the last decade. He notes that despite the supposed building boom, New York added only 170,000 new housing units in the 2000 decade, an increase of 5.3%. Moreover, the high prices that persist in New York City suggest that the demand for city living isn't falling. But the combination of economic strength and high prices need not lead to population growth if an area doesn't build many more units. In that case, high housing demand leads only to higher prices not more people.

As noted in my article "Current Market Conditions: Advantage NYC" in April, I believe there is an upcoming spike in residential rents in Manhattan in particular. In addition to limited supply due to the lack of construction financing over the last three years, and a recovering job market that has added almost 11,000 jobs in the financial services sector alone in the 12 months ending February 2011, Manhattan rents are pressed upwards by zoning that restricts density outside of Mayor Bloomberg's redevelopment areas, and rent regulations.

As hiring continues to improve in New York City it will be strongest in the younger demographic, increasing strain on the low supply of units, especially studios and one bedrooms rather than the larger units that were in demand over the last couple years from both new parents and those looking to save on housing costs through cohabitation.

Bottom Line: An Active Investment Property Market Moving Toward Stability

The big question for New York City commercial real estate is why are there so many buyers and so few sellers? Uncertainty in the news regarding national housing market weakness, government budget constraints, and monetary policy grappling with nascent growth and blossoming inflation has people scared. Questioning income and expecting higher expenses is uncomfortable and creates anxiety. This perception is causing the majority of deal velocity to come from distress related activity rather than voluntary sellers. In reality, New York is where the majority of the private equity money is being raised and trying with great difficulty to be placed; this, in conjunction with low interest rates is causing any available product to be quickly absorbed. In contrast to New York, I expect Washington DC, which has seen strong growth over the last couple years of expanding government, to begin to decline as the government goes through its painful pruning.

I would like to close with a comment on inflation. Recently there was a steep decline in commodities, including oil. I had previously mentioned that rising headline inflation would drive NYC real estate values higher. I feel that some of the recent increases in commodity prices were speculation driven, but, with the exception of mania style trading in silver, there is still strong upwards pressure on prices and this will only be a short reprieve. Monetary policy makers are still in uncharted territory trying to find stable ground. Fortunately we are moving in the right direction and the commercial real estate market is consistently gaining strength.