Trends Impacting New York Commercial Real Estate

Tenant behavior on the market for commercial office space as well as regulations in multifamily and an increased cost of capital, have contributed to the drop of 43% from New York City investment sales up to $12.8 billion during the 1H 2023 compared to 1H 2022 as per research conducted by Ariel Property Advisors.

But, the drop was anticipated as we started to notice a slowdown towards the end of 2022 because of rapidly increasing interest rates. In the end, even though the first quarter wasn’t particularly impressive, the market did improve over the second quarter when intelligent investors made the most of the opportunity to purchase repriced investments.

Office: Letting Go, Holding On, Recapitalizing and Repositioning

In New York City, with the office occupancy rate hovering at 50% of levels pre-Covid, The volume in dollars of office transactions decreased 48% over a year to $2.4 billion in the first half of 2023. That’s one of the most negligible levels of the last ten years.

Mortgage Maturities Force Decisions

Although the maturities of mortgages and their emergence are an issue on the market for office space, they offer an insight into how owners and investors see the world of the commercial office. They decide the assets they want to keep and the ones they can let go of. In other words, if the foundations are strong and there’s little possibility of a positive outcome, the asset keys are returned to the lenders.

Investors with a long-term view and the capacity to weather the ravages of time are well placed mainly after they’ve shed their most inefficient assets. They’ve managed to refinance successfully, acquire new capital and leverage the repriced value of their commercial properties and are likely to benefit significantly from this approach in the long term.

Letting Go

Major landlords who have let the assets they own within the first six months of 2023 include RXR’s Broadway at 61; the L&L Holding’s Metropolitan Tower at 142 West 57th and Related’s 210049th Avenue, and 2109 Borden Avenue in Long Island City, Queens as well as Blackstone’s 1740 Broadway.

Holding On

Many of the tenants, however, tend to hold onto office buildings that have solid fundamentals increasing their loans and drawing in capital. They include modern, well-located and occupied buildings that have very high rents, like The SL Green’s 245 Park Avenue; Tishman Speyer’s 300 Park Avenue; RFR’s 375 Park Avenue; RXR’s 601 West 26th Street; Blackstone’s Willis Tower in Chicago.

Recapitalizing

The office tower located at 245 Park Avenue is an excellent illustration of not just holding up but also pulling the new investor for a fraction of the purchase price of 2017; that is a fantastic illustration of the value of investing in high-quality properties.

Repositioning

Office properties with weak economics, yet a promising future, are traded well for a bargain over the past six months for investors or user organizations convinced of the office market in New York City for the long term. They include the acquisitions from 40 Fulton Street, 126 East 56th Street and 529 5th Avenue by David Werner Real Estate Investments, Sovereign Properties and Namdar and Namdar, respectively. Owner-users took the initiative to the plate, with Hyundai buying the 15th floor of Laight Street, NYU acquiring 400 Lafayette Street, and Enchante purchasing 150 Madison Avenue.

Multifamily: One Asset Class, Three Different Outcomes

The volume of multifamily dollars fell to $1.1 billion in the 1Q of 2023, but it jumped 242% year-over-year to $3.9 billion during the 2nd quarter of 2023. This is according to Ariel Property Advisors’ Q2 2023 Multifamily Quarter The Review New York City. Each property’s performance was different, depending on whether the asset was affordable or rent-stabilized housing.

Multifamily dollar volume dipped to $1.1 billion in 1Q 2023 but soared 242% quarter-over-quarter.

Free Market

Free market multifamily was responsible for 51% of multifamily money during the first quarter of 2011. Some notable transactions include GO Partners’ purchase of 265 East 66th Street for $402 million, Slate’s purchase of 600 Columbus Avenue for $120 million as well as Namdar’s acquisition of $100 million from 552 West 54th Street, and Stonehenge and Carlyle’s investment of $114 million in the 408 East 92nd Street.

There is a large pool of private, public and international capital for investment in open-market property. Apartment buildings are a benefit of the city’s positive factors, including job growth and policies of the government that deter expansion and therefore create the housing gap that’s increasing rents by 10% per year. New York City needs an estimated shortage of 376,000 housing units, which could increase to 560,000 by 2030.

Rent-Stabilized

Rent stabilized building prices during the 1H of 2023 fell to the lowest levels since the 1H of 2015 due to increased interest rates, in conjunction with the significant structural changes triggered through the Housing Stability and Tenant Protection Act of 2019 (HSTPA). This law eliminated the incentives to remodel buildings and vacant apartments. This is why the buildings bought in 2014, 2015 and 2016 sold within the first six months of 2023 at an average discount of 30 percent.

The lower prices of rent-stabilized assets have attracted smart, private capital and high-net wealth families and individuals who understand the products and believe they will see changes to the rules since they’re not sustainable and want to keep in the long run.

Affordable Housing

Affordable housing was a big part of the overall multifamily pie during the first one-half of the year. The investors in this class are driven by a single bottom line, aiming to combine financial prosperity with social responsibility. Opportunities include fewer taxes on property, opportunities for value-added that permit rent increase with time, especially to tenants with vouchers, and the possibility of agency financing.

Several notable affordable deals occurred in the initial part of 2018, which included Nuveen’s purchase of Omni portfolio for nearly $1 billion. Then there was the sale for $150 million of Sea Park, an 818-unit previously owned Mitchell Lama property with an opportunity for land, coordinated with Ariel Property Advisors. In addition, Ariel is currently marketing more than 5,000 affordable apartments to be sold in the coming year or during the beginning of 2024.

Land of Opportunity

New York City land sales fell 30% from year-to-year, to $2.5 billion during the first quarter of 2023 compared to the beginning of 2022. This could be due to several reasons, including the inability of state legislators to pass an extension of the tax abatement plan 421a the last year. The dramatic increase in construction costs includes both hard costs and labor and the slowing down of residential sales due to increased interest rates.

The lower land cost also provided the opportunity for developers, such as Rockrose, which bought its St. Francis College campus in Downtown Brooklyn for $160 million and other investors who acquired properties to utilise the land for banking.

The land in 421a, eligible to be tax-free before expiration in the year 2000, could also be traded at a price and affordable housing projects backed by the city and the state. Furthermore, rezoned sites within Queens’ Jamaica, Astoria, and Willets Point zones of Queens helped the borough in seeing an increase of 80 percent in transactions for land year-on-year.

What to Watch For

In the future, we hope to witness:

• Private lenders are stepping up to fill in the gap that regional banks have left, which are now under more oversight from regulators after the failures of banks in the first quarter of this year.
• The maturities of mortgages can result in additional rent refinancing, and office stabilized multifamily assets. This allows investors to buy a property with solid fundamentals for a lower price. The FDIC’s auction of the Signature Bank portfolio later this year will also present the potential for an investment opportunity.
• Though state lawmakers could not adopt an overall housing policy during the previous legislative session, Governor Brown announced a new plan that provides certain tax breaks to developers in the Gowanus part of Brooklyn. This is a positive development as it may be expanded into other city areas.

Even though there are issues but the indicators of economic growth in New York City are strong. Intelligent capital, which is plentiful, will re-appear significantly within the next 6 or 18 months.