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The New York City Real Estate Market: My 5 Takeaways

I visited New York City this past Wednesday and Thursday to network and to put my ear to the ground in order to understand what everyone is saying about the game that is Real Estate:

The first event was related to debt and capital markets – I attended this to get a better gauge on capital markets as they correlate highly with real estate. The second event was held at Bloomberg – “The Real Estate Outlook: 2017 and Beyond.”
Both events were very insightful in regards to what the big players are seeing and what their strategies are going forward in 2017 and beyond.
The general consensus right now is that the market is on FIRE, not only in NYC, but in most markets and asset classes. Some are moving forward full-steam while others are being cautious in their investments and asset allocations – the thinking here is that we are getting close or are at the peak of the market. The main and most immediate issue to keep an eye on is what kind of tax reform is coming from this administration and how that affects the real estate market (Since Trump is still a heavily invested real estate guy – we can probably assume this means more benefits for our industry).
Here are my 5 takeaways from my trip…

1) The NYC market is on fire and that is positive for other markets as many are derivatives or reflections of its activity.

The school of thought here is that NYC leads all real estate markets by six months or is ahead of any cycle by six months. Simply put, this means if there is a crash or a hiccup in a real estate cycle, NYC will be the first to show these signs of distress and foreshadow it. This is largely because it is the most desirable real estate market in the world and has the highest liquidity for all asset classes.
Marc Holiday of SL Green Corp echoed these sentiments as they continue to move forward with the acquisition and development of office property in NYC – primarily One Vanderbilt in midtown. SL Green Corp is an S&P 500 company and New York City’s largest office landlord. They are also a fully integrated real estate investment trust, or REIT, that is focused primarily on acquiring, managing, and maximizing value of Manhattan commercial properties.
SL Green seems very bullish about the growth of NYC and surrounding markets as they copycat what is happening in the big apple. There is 12M square feet in commercial projects over the next five years and HALF is already pre-leased! That is around 2.6M sq. ft. of commercial property and 10,000 full time jobs added per year. While NYC has struggle with its ultra luxury condo sales as some projects are in a standstill, practically every other asset class is still robust.

2) Every real estate cycle is different.

This is something that sounds simple, but I noticed that everyone is trying to compare this market expansion and where we are at in the cycle to 2007 or 1999, 1989, etc. It is a good metric to use the past as a benchmark or an indication of where we are going in this current cycle. It seems likely that every 10+/- years there is some sort of retraction or hiccup in a market, but timing is extremely important in real estate. Usually, you will see warning signs if there is a crash upcoming but I have been hearing the sky is falling numerous times since the 2008/2009 crash (i.e.: CMBS loan maturities were going to cause a commercial RE market crash in 2012) so I’d be wary of the doomsday prognosticators. What I am saying here is that you can get deals done in a real estate project A-Z anywhere from 6 to 24 months. I think everyone should be riding this hot market as there is plenty of money and demand for real estate and fear of a crash could mean you are leaving money on the table – my advice is to continue to be aggressive this next 2-3 years. This leads me to my next point..

3) Don’t buy into the fear.

A wise man once said – fear causes hesitation and hesitation will cause your worst fears to come true. This quote hits home for me as I hear the main concerns right now are that the market is too hot and thus something bad has to be around the corner – whether it’s a crash in the market or some geopolitical concern that will have a major impact on financial markets. I started out my real estate career in 2008 and I was told by everyone that I was crazy to get into it – I was told: there’s a crash…no one is doing deals…you can’t get financing…and the sky is falling, etc., etc. While I did not get too many deals done in my first year or two as a real estate investor, I learned and built my underwriting and evaluations as if we are still in that type of market crash. This means I am very conservative in my valuations (no growth assumptions) because I simply don’t know any other way. Talking with people who have been in the business for years, they tell me how they aggressively modeled their deals and took crazy levels of leverage pre-2008. Which leads me into my next point…

4) We’re smarter now in this real estate market.

I was pleasantly surprised that I heard a few of the speakers discussing how banks and lenders are being a little more critical and selective with construction loans because of all the perceived product coming on line. This is great news – the capital markets are responding better and faster to potential issues of over supply and easing demand. In core and urban areas there is a consistent demand for new and somewhat affordable housing with the luxury rental and condo market easing up a little bit. This is very good. We are being a little bit smarter now in this part of the cycle and not just churning out loans for some quick fees up front. It is a wonderful thing to hear given that this hyper-greed factor is what caused our most recent crash.

5) Expect ebbs and flows. Be open to change.

The market will most certainly contract as this is the natural flow of real estate, but that doesn’t mean you can’t be profitable and find good deals. I hear a lot of complaints on the street that pricing is too high and you can’t find any reasonably priced assets. You need to use your third eye of perception and think of where the next opportunity lies. You can stack capital away in preparation for a down market and stay in your current market/asset class OR you can use that third eye and maybe identify a different market, a different asset class that could make sense.
I personally like urban real estate – I predict you will continue to see the paradigm shift from the ‘burbs’ to the city and population growth continue to rise in urban corridors through 2030. My personal favorite play right now is industrial real estate with a potential for residential conversion in the next 10 years. Traditionally seen as a boring asset class, industrial is becoming the hottest sector in real estate because of changing consumer trends. The driving factor behind the flourishing demand for industrial space is e-commerce. Demand is measured not only in square feet, but also new facilities with higher ceilings heights (typically 32′ and above as there is more vertical stacking these days with machinery needs) with modern technology and in locations closer to population centers. That will led to robust development and unusual growth in rents and property values for the coming years.
In my next blog I will be discussing industrial real estate in more detail in addition to what other asset classes you should be considering for investment and what to avoid. Until then, keep that third eye open.

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