2Q19 State of the Market: Glimmers of Hope in the Numbers
By Gail Donovan
For this month’s Nelson Report, I turned the role of interviewer over to my colleague, Gail Donovan, Senior Director of Marketing at Avison Young, who asked me about the findings in Avison Young’s 2Q19 Property Sales Report and why I’m still bullish on New York City real estate. – James Nelson
Avison Young released its 2Q19 Property Sales Report in July, which showed that overall investment sales volume in New York City declined year-over-year to $14.1 billion in the first half of the year. The report, however, also highlighted opportunities in the office, retail and development sectors that James Nelson was happy to discuss in our interview.
“The office market has performed really, really well,” Nelson said. “Even though the dollar volume was down, the price per square foot on average was actually up 23% in the second quarter in Manhattan, when you compare it to the trailing four quarter average. So that was an increase to an average price of $1,135 per square foot.”
Nelson noted that while the report showed that the price of retail properties dipped slightly to an average $2,006 per square foot in the second quarter, cap rates have reached nearly 6 percent, signaling that retail is due for a comeback.
Nelson also believes that there are opportunities in land sales, where he predicts an uptick. The average price rose to $767 per buildable square foot for nine development sales totaling over 200,000 square feet in Manhattan in the second quarter.
“We are seeing an appetite, a renewed interest in some of these asset classes, which will not be a surprise after we talk about what's happening in the multi-family sector,” Nelson said.
In June, New York passed the Housing Stability and Tenant Protection Act of 2019, which eliminated the option of decontrolling apartments and the ability to pass on the full cost of improvements. Nelson went into detail about the new law in Part 1 and Part 2 of the July Nelson Report, where he interviewed four landlord tenant attorneys-- Nick Kamillatos, a Partner at Rosenberg & Estis, Christina Smyth, Founder of Smyth Law, Douglas Heller, Counsel at Herrick Feinstein LLP, and Craig Price, a Partner at Belkin Burden Wenig & Goldman, LLP.
On July 15, the Rent Stabilization Association (RSA) and the Community Housing Improvement Program (CHIP), along with seven individual landlords, filed a federal lawsuit alleging that the law violates the U.S. Constitution; giving owners hope that the regulations may be overturned.
“The market was already sensing that there were dark clouds on the horizon and as a result in the second quarter, (multi-family dollar) volume was down by 23%,” Nelson explained. Average pricing per square foot declined 17% to an average $952 in 2Q19, but cap rates rose to an average 4.2%.
Nelson said investors today are paying more attention to fair-market and 421-a regulatory agreement buildings that are exempt from the new regulations. Nelson’s group is marketing a number of these properties including an eight-building portfolio in Brooklyn launching soon.
“We’ve been big believers in the boroughs,” Nelson said, adding that much of his optimism stems from New York City’s extensive transportation network and the ability to easily commute to Manhattan from the outer boroughs. He also noted that the Opportunity Zone program will continue to drive significant investment into these areas.
New York City’s economic indicators also are positive, in some cases exceeding the national average. “Job growth is the number one driver for the real estate market because when people show up, jobs are created, [employees] need apartments to live in and they need more office space. Despite everything that's happening with the political climate, some of the most successful companies are looking to grow because they know that we have a talented workforce.”
In May, New York City gained 95,000 new private sector jobs, year-over-year. Between 2012 and 2019 the number of jobs in New York City increased by 17% to its current total of over 4.6 million. Total venture capital investment in the New York metro area rose 64.9% in 1Q19 from 1Q18 to $4.46 billion and the Gross City Product increased to 3%, according the 1Q19 NYC Quarterly Economic Update issued by the New York City Comptroller.
Historically, New York City was very dependent on Wall Street and the finance industry to power job growth, but now TAMI companies are moving in and expanding. Google announced a $1 billion, 1.7 million square foot campus at St. John's Terminal and purchased Milk Studios at 450 West 15th Street for $594.5 million and Chelsea Market for close to $2.4 billion. Currently Google has 8,000 employees in New York City and reportedly wants to add 1,000 employees each year.
“That is a number one reason to be bullish about New York,” Nelson said of the increased number of tech jobs in the city, “because that is going to drive the demand that isn't just going to filter through to office, but clearly residential. [Employees are] going to go out, they're going to be shopping, so that's going to benefit retail and ultimately hopefully get our development sales back on track.”