In the Northeast tri-state area, as in the rest of the country, there are signs of economic slowdown such as layoffs, dwindling Wall Street earnings and slowing consumer spending. Despite these warnings, the Northeast real estate market has played its hand well in the past few years, according to industry sources. The tight markets of New York, New Jersey and Connecticut exemplify restraint, a far cry from the sins of the late 1980s when overbuilding was rampant.
The jam-packed real estate market in New York has made room for other areas to prosper, such as Jersey City, N.J., and Connecticut's Westchester and Fairfield counties. The real estate markets in these areas experienced highs in 2000. This year the market is expected to level off, but industry players predict the good times aren't over.
According to a market report from Newmark & Co. Real Estate, a Rutherford, N.J.-based, full-service brokerage company, “The city's [New York] economy is still running at a high level, with a tight labor market and solid consumer spending. Barring a severe and sustained stock market correction, the city's economy is sufficiently healthy to weather any weaker times ahead.”
“As far as the rest of the world and the rest of the country, New York will be the last to see the effects of an economic slowdown,” said Faith Hope Consolo, vice chairman at Garrick-Aug Associates, a retail brokerage firm in New York.
Tim Welch, executive managing director for the financial services group of Cushman & Wakefield, New York, agreed that investors still look favorably on the area. “New York City is going to be stronger than the rest of the country in terms of investment sales,” he said. “All of the real estate fundamentals are as good here as they are anywhere.”
Strong fundamentals in the Big Apple also bode well for the real estate markets in the neighboring states. David Solis-Cohen, principal of Lend Lease, New York, points to the development activity along the New Jersey waterfront. “That's sort of an alternative to New York, and it will continue to develop as much as it has in the past year,” he said.
The Federal Reserve is doing everything in its power to keep the economy afloat. It has dropped interest rates by 50 basis points five times this year. According to a Newmark report, “Economists predict that the Northeast will be the first part of the country to benefit from the recent lowering of the federal funds interest rate to 5.5% [now at 4.5%], which will inject liquidity into financial markets.”
‘Start spreading the news’
This 24-hour city doesn't show any signs of sleeping. The Manhattan office market is still flourishing in the midst of an economic slowdown. “The market was white hot, now it's just hot,” said Michael Laginestra, vice chairman of Insignia/ESG, New York. “The economy is still thriving with no overhang of offices being built.”
The Class-A office market continues to be healthy. According to an Insignia/ESG Commercial Market Report, Midtown office space hit an all-time high asking rent of $62.85 per sq. ft. in September 2000. A month earlier, the Midtown availability rate touched a 20-year low of 3.1%. In the first quarter of 2001, Insignia reported that the Midtown availability rate had inched up to 5%, while Downtown's rate inched up to 5.1%. Asking rent prices in these areas remained stable, but they increased to $48.03 in Midtown South.
George Twill, president of CSFB Realty Corp., New York, said dot-coms have spurred more subleases, and the additional space will offer traditional firms more incentive to pick up space. “What's happened with the evolution of dot-coms that were gobbling up space in Manhattan when space couldn't be found?” Twill asked rhetorically. “Many dot-coms are now downsizing dramatically, or not honoring lease agreements. Landlords are now remarketing some of the spaces. Established companies are now identifying space and have appetites for leases.”
Laginestra agrees that in 2000 dot-com companies were a financial boon to real estate. “In the last 12 months, a lot of real estate has made a lot of money from dot-coms. The city is not supported by dot-coms; instead finance, advertising and media markets support it.”
New York's outlook is favorable, according to Solis-Cohen of Lend Lease. “We think it's one of the brighter spots in the country,” he said. Solis-Cohen added that taking into account the tight market and low vacancy rates, the landing would be a soft one if the country does enter a recession. “You'll see vacancy rates increase, and rental rates won't moderate that much,” he said.
Welch said that as the dot-com sector began showing signs of a meltdown, it affected the buyer's view of value. “Buyers became more cautious. Beginning last fall, they watched what was happening in dot-coms,” he said. “They became more conservative about bidding on properties.”
That didn't stop the sale of some of Manhattan's landmark properties. Deals included the sale of the 5.8 million sq. ft., 10-building Rockefeller Center, which was bought for a reported sale of $1.8 billion by the New York-based real estate investment firm Tishman Speyer and the Chicago-based Crown family. In another major deal, German investment firm TMW purchased a 75% interest in the 1.2 million sq. ft. Chrysler Building for $300 million.
Quite possibly the biggest deal involved a joint venture between Silverstein Properties and Westfield Properties, which recently purchased the 99-year lease on the World Trade Center for $3.22 billian. The seller in the deal was the Port Authority of New York/New Jersey.
A Class-A office development in lower Manhattan will be constructed for the first time in 10 years. Edward J. Minskoff Equities is developing 5B, a city-owned site of 90,565 sq. ft., located Downtown on Greenwich between Warren and Murray streets. Minskoff will build a tower with 1 million sq. ft. of Class-A office space and 25,000 sq. ft. of retail space.
New York retail
Consumer confidence isn't quite as high as it once was, according to the Census Bureau's revealing data that retail sales in March fell 0.2% from its already lowered level in February. Survey data released by the University of Michigan shows consumer confidence fell to its lowest level in eight years. In New York, the recent decision made by the Gap Inc. to close six Manhattan store locations could indicate some troubled times ahead.
According to Consolo of Garrick-Aug, there hasn't been much of a slowdown in demand. “There is still a strong demand in Manhattan for retail space from both national and international retailers,” she said. “There's a demand in all the segments of the retail market, including luxury and discount.”
In the first quarter of 2001, Consolo said rents stabilized. She predicts that in the third quarter of 2001 the rents will be back on an upswing. “Retailers have plans on board for 12 to 20 stores. No one's backing out, and we haven't seen any retrenching on the leases,” she said. “Every retailer is a big company with multiple divisions, and if they're already here they're expanding to other neighborhoods. If they're not here, they want to be here.”
Retailers in New York not only have access to the 8 million people counted in the city by the 2000 Census, but also to the multitude of tourists that crowd its streets regardless of the season. Last year, tourist numbers registered an all-time high of nearly 39 million, according to the New York Convention & Visitors Bureau. This year, the number is expected to increase to more than 40 million.
Bruce Spiegel, senior managing director at Rose Associates, a New-York based retail broker, hasn't seen signs of a slowdown either. “You'd never know it from my end,” he said. “There's a dramatic interest in the space that's available, and we've got two to three vacancies out of 100 stores.”
“Hundreds and hundreds of stores are looking at Manhattan or wanting to be here,” he said. Spiegel added that the approach is different this year. “Last year at this time, the difference was that everything was kind of haywire as far as pricing,” he said.
Spiegel sees the possibility of pricing going up for service retailers. “Starbucks has cleared the way for local operators to take the view that people will pay for a better product.”
New York multifamily
Urban living in New York is a way of life, as all the city's neighborhoods are brimming with people. The supply and demand levels run at about a 2% vacancy rate, year-round. The New York Times published an article at the beginning of 2000 stating that prices were starting to fall. Industry players disagree on this assessment, but they do agree that multifamily properties remain robust.
“Over the last year, the multifamily real estate market has been nothing short of a roller-coaster ride,” said Andrew Heiberger, CEO of Citi Habitats, a New York-based broker. He said that in January 2000, the inventory started to accumulate, then Federal Reserve Chairman Alan Greenspan lowered the interest rates and demand picked back up.
According to Heiberger, prices did inch down through November 2000 to January 2001. He saw about a 10% to 20% sales correction. Heiberger said that this change in prices might affect people's decision of whether to live in the city or move to the fringe neighborhoods of Jersey City. “The fringe/secondary neighborhoods are going to suffer more than Manhattan,” he said.
According to a report by Feathered Nest, a New-York-based rental property database, with a slowdown it's projected that the number of new rental projects will decrease. This report also stated, “The Wall Street area has supplied the bulk of new rental development since 1994, with 5,480 units converted.” There aren't many sites left for conversion. The report predicts that the sales market will slow, thus transferring some additional demand into the rental sector.
New Jersey blossoms with activity
New Jersey office markets are showing few signs of decline. “The first nine months of 2000 were as active as we've ever seen,” said Mark Yeager, president of Gale & Wentworth, a Florham Park, N.J.-based commercial real estate firm. “We've seen a lot of activity in 2001, but 2000 was so dynamic, with so much going on, that I don't think most people think we can get back to that level.”
One area that is meeting the overspill needs of the Manhattan office market is the Waterfront, which is referred to as the Gold Coast. Places on the Waterfront, such as Jersey City, N.J., are brimming with development activity. For example, Mack-Cali Realty Corp., Cranford, N.J., is developing Harborside Financial Center Plaza 10, a 575,000 sq. ft. Class-A office building on the Hudson River, which is entirely pre-leased by Charles Schwab.
The Waterfront's Class-A office availability fell from 4.5% to 0.4%, according to a Julien J. Studley report. Many financial companies such as Paine Webber, Charles Schwab and Chase are locating their second offices in the vicinity. “There's still some space there, but it's limited, especially if you're looking for large blocks of Class-A space,” said Dan Loughlin, managing principal of the Murray Hill, N.J., office of Dallas-based Staubach Co.
Yeager said that one emerging trend is that corporations are driving the sublet market. “There's still a lot of new user interest,” he said. “That's the one issue we've seen over the last six months.”
Loughlin has observed another developing trend due to the dot-com crash. “We're seeing an increased activity in subleasing availabilities, and there are some corporate dispositions,” Loughlin said. Consolidation in various industries is partly the culprit, he said. “I think it's a cutback in people's budgets and growth projections.”
Both Yeager and Loughlin agreed that the slowing economy could have an effect on the office market. “The market may not be quite as vibrant as it has been over the last few years, but it's healthy,” Yeager said.
Eric Witmondt, CEO of New York-based GVA Williams, a real estate services firm, said that New Jersey's diversified job base — including industries such as pharmaceutical, financial, bio-tech, telecommunications and insurance — should help sustain the region's economic vitality.
“The good news is that New Jersey has strong fundamentals and the state's real estate market should withstand the downturn better than most major markets around the country,” Witmondt said.
The industrial market in New Jersey is well-poised to deal with an economic slowdown. With a vacancy of around 4%, the sector is at historical lows, according to Michael Nachamkin, president of Whitehall Industrial Properties, an industrial development company based in Chatham, N.J.
The market is constrained, and Nachamkin anticipates that trend will continue. “The levels that we're seeing from the user side are still strong,” he said. “There's still a high level of activity for the big-box market.” Nachamkin said that there are more users than supply in areas such as exit 8A, located off of the New Jersey Turnpike, and the northern part of the state.
New Jersey, like the rest of the country, faced double-digit vacancies in the industrial market in the early 1990s. The difference this time around is that vacancies are low and users face the difficulty of obtaining space, Nachamkin explained.
Even with the dot-com shakeout, the office market in Fairfield County, Conn., remains tight. Priceline.com has given back chunks of space, but with a 6% vacancy level, it is quickly gobbled back up, according to Jim Fagan, senior managing director of CB Richard Ellis in Stamford, Conn.
According to Cory Gubner, president of Chase Commercial Real Estate/TCN Worldwide, based in Stamford, Conn., “Fairfield County is the most durable spot right now.” He pointed to the low vacancy rate, high demand and rents averaging $40 per sq. ft. for Class-A office space and $70 per sq. ft. for retail space.
Fagan predicts the strength in the office markets in Fairfield County will continue. “In a counter-intuitive manner, the slowdown has made the office market tighter,” he explained. He predicts that new construction will level off because of the economic slowdown.
Fairfield and Westchester counties have both developed niches to attract different segments of the market. According to a Newmark report: “Fairfield, with its high-profile image and rental rates that are not too distant from the rates in some areas of Manhattan, has developed a tenant base of more traditional, corporate firms that covet the prestigious locations of such areas as Greenwich and Stamford. Meanwhile, Westchester continues to be a viable option for a diverse group of smaller companies seeking inexpensive options.”
The office market has cooled off a bit, Fagan said. “It's not as hot as it was back in August. I don't think rents will continue to grow as much as they have.” Office space in both Fairfield and Westchester counties is mostly occupied by service firms.
“This will be a year when everybody proceeds with caution,” Fagan said. “It's my opinion that nobody has a clear vision of what the future holds … hard landing, soft landing, disaster, what will determine that in my opinion is layoffs.”
Tenants in the Connecticut multifamily market range from renters-by-choice to renters-by-necessity, and renters moving to renovated older buildings in urban areas, according to Steve Witten, senior director of the national multi-housing group in the New Haven, Conn., office of Palo Alto, Calif.-based Marcus & Millichap.
The big trend unfolding in the Connecticut market, according to Witten, is apartment buildings being purchased by buyers as value-added properties. He sees more transactions occurring as REITs and other institutions sell non-suitable properties, or properties not meeting yield rates.
On the supply side of the equation, the market is tight. “The multi-residential sector posted another banner year as demand strengthened and supply of new product subsided,” Witten said.
“Connecticut is viewed as a supply-constrained market for apartments,” Witten explained. He said what's driving this market is high occupancy, record rental growth and the highest per-unit values the state has experienced.