Between mega-projects in emerging neighborhoods and major shifts in the retail and office markets, the New York commercial real estate landscape is changing. After 40 years in New York’s real estate business, including 30 as president of the city’s eighth-largest residential brokerage, I’ve found that movement in the market can mean big opportunity — but not always in the ways investors might think.
Here are three coming events investors would be smart to watch over the next year, and how best to respond:
Large-Scale Projects Will Bring Opportunity To Outer Boroughs
Across the five boroughs, mega-projects are reshaping once-quiet neighborhoods by increasing property values, tax revenues and the variety of potential tenants — but that doesn’t make all of these projects good investments.
Hudson Yards is a great example. Although the $25 billion project has brought in retail, condos and desirable corporate neighbors to a previously sleepy neighborhood, now is absolutely the wrong time to invest in the surrounding neighborhoods, including Chelsea. In fact, with related recent recapitalization, one might argue that this is the worst time to invest as the “smart money” is already on its way out.
However, as these mega-projects relate to the outer boroughs (no fewer than 10 are in development across Brooklyn, Queens and the Bronx), I think that almost any locale, particularly along the areas touched by mass transit, will be an excellent long-term investment. The key for investors is duration. For the Japanese in the 1980s and Chinese in the 2000s, a plunge in the value of real estate and accompanying withdrawal led to massive losses. Those who stayed in the market were rewarded with excellent long-term gains.
Investors with a long-term mindset toward emerging neighborhoods will see better returns than those who look for a quick gain with a particular project.
Retail Will Face A Reckoning, Then A Reset
As more major retail chains announced new closures at the start of this year, it’s become clear that the traditional retail industry is on life support. Changes in consumer behavior combined with rising rents have made it tough to be a retail tenant in New York, but the number of shuttered storefronts doesn’t mean the death of the retail market — it just means retail is too expensive.
Any transaction in the last seven to 10 years is probably over-leveraged based on retail rents at the time, and that legacy debt is driving up rents. In the short term, this is leading to the vacancies we’re seeing in many parts of the city. Third Avenue is a wasteland, but it doesn’t have to be — we just need to reach the right prices again. Eventually, we’ll have a reset as over-leveraged owners fall into default, rework their loans with new terms or see lenders take back their properties.
All of these scenarios will help guide rents back to market value. When properties aren’t so over-leveraged, we may even see a scenario that looks more like the New York I knew growing up, including mom-and-pop stores.
For investors, the first real opportunity to buy retail property is probably in the next three to five years as owners start to renegotiate leases, but the smarter bet may be to wait five to seven years for foreclosures to start.
Tech Growth Will Bring New Opportunities
Amazon’s decision not to build in Long Island City may have paused New York’s growing prominence in the tech industry, but I believe Silicon Alley is here to stay, particularly if the city changes the way it views revenue-generating companies.
The impact of turning away companies like Amazon goes beyond the loss of high-paying jobs. Rejecting large employers also means rejecting the alternative revenue sources they bring students, dishwashers, baristas, construction workers, teachers, police officers and others who residually benefit.
In this sense, it’s short-sighted to say to any company, “We don’t want you here.” Despite the initial cost, once these companies take root in a city, they stay — and continue to generate tax revenue.
For investors, focusing on New York’s long-term growth (rather than the arrival or departure of a single company) will lead to the biggest returns. Even without Amazon, New York has remained a thriving center for tech companies and talent. The Savills Tech Index still ranks New York the world’s top tech city. Google is investing $1 billion in its West Village campus, and Facebook is expanding its own footprint in Midtown. Many of the city’s own “unicorn” startups (those valued at $1 billion or more) have kept their headquarters at home. So despite the disappointment of Amazon, tech opportunities within the city are continuing to grow because New York is continuing to grow. This bodes well for investors playing the long game.
When assessing any major market shift, rational investment in real estate mirrors rational investment in the stock market. Buy investments you believe in, and be prepared to hold them until they take root.