By Gary H. London
The market and the economy are doing just fine. New York City is doing even better. That was the ‘take home’ message from the fall conference of the Urban Land Institute (ULI) during the week of October 20, 2014. Because real estate and land use are mostly local, the best that one can hope for at a national conference is to draw some lessons from others’ experience elsewhere and hope to apply it when you get home.
The best lessons were on the streets of Manhattan. New York City is on fire. Construction is everywhere. First, here are a few highlights from my personal experience:
- The Highline is the highlight, and not just because it is a brilliant adaptive reuse of an old elevated freight rail into natural habitat and urban walking trail. I have walked it in years prior, and it remains a great, unique urban walking experience. But its actual brilliance is that it is the Manhattan version of the Pacific Ocean: it has become the ‘premium’, on both sides of which many, many buildings are being constructed and rehabilitated. Moreover, those buildings are not part of some master plan. These projects are the result of independent entrepreneurs discovering the new urban frontier of Chelsea and the meat packing district.
- But there is a master plan now under construction. It is Hudson Yard, a 28 acre site around which circles the third and final phase of the Highline. Development of this master plan by Related Company is taking place on a platform that is roughly the height of the 30 story Highline, and below which the train rail yard will continue in its function, with hundreds of trains parked at ground level. Above that platform, Hudson Yard will be transformed into 16 skyscrapers containing more than 12.7 million square feet of office, residential, and retail space. I saw a scale model of it in the lobby of the Time Warner building at Columbia Circle. It is truly astounding and will obviously complete the transformation of the long neglected western, mid-Manhattan.
- A whole new renaissance is just about complete in the multiple building new World Trade Center complex. I visited the empty 57th floor of ‘baby’ WTC (called 4), which even at that modest height offered impressive views of the big one (1) now welcoming its first tenants, as well as greater Manhattan to the north.
- The tallest residential structure in Manhattan, 432 Park Avenue, at 104 stories is being completed at 57th Street: Its two story penthouse is rumored to be in escrow for around $90 million. From a distance, this building is so large, and set apart so far from the Empire State building a mile to the south, and the new World Trade Center tower 1, yet another mile to the south and west, and you are now seeing three enormous Manhattan towers in distinctly different parts of town. That’s the sobering thing: if nothing else this is testimony to the rather equal valuation of virtually any location in this City. Astoundingly, there are three other residential towers now under construction which will be even taller!
- Yours for $110 million is the 9,403 square foot seven floor pinnacle of the iconic 101 year old, 60 stories Woolworth building, located at 233 Broadway, and thus sandwiched in between neighborhoods, which gave Blackrock (the financiers) and Alchemy Partners a lot of heartburn in terms of how to identify comps and price this adaptive reuse. This is a top half conversion only, consisting of only 34 units beginning on the 29th floor. (The bottom half remains commercial.) There are reportedly three bidders for the Pinnacle as of this writing. This is a big step from ‘five and dime’.
All of which leads me to the ‘elephant in the room’ point about Manhattan: everything is so expensive. It’s even expensive by traditional NY expensive standards. Housing is so astoundingly high priced – even in formerly marginal neighborhoods that have now gentrified– that one wonders where all of these people are coming from who can afford housing. It feels like nowhere are new units selling for less than four digits per square foot. It’s no wonder that the crusading mantra from new Mayor de Blasio is to build ‘affordable’ housing.
Well, the guy in escrow for the penthouse is reportedly a foreigner. That’s both the blessing and the problem. NYC real estate has been gifted as the sanctuary investment of choice by foreigners. Mostly, it is Asians, Europeans and Middle Easterners who are bidding up prices.
The places that I didn’t visit, including Brooklyn and Harlem, are among the other NY Burroughs also on fire.
National Market Update
So, with the backdrop of the cloud scrapers and craziness which is NYC, let me try to summarize what’s going on in the market:
- While there is a lot of unevenness throughout the real estate sector, both in product type and geography, the general recovery cycle continues and appears to have considerable legs, which we can practically translate into several more years of increasingly good metrics including valuation and occupancies.
- The rest of the globe is faltering, particularly Europe, which might be on the precipice of a ‘double dip’ recession, and China, which couldn’t possibly sustain its torrid growth. Brazil and other formerly high growth nations have also been slowing.
- This bodes well for the U.S. as we remain the safe haven for the world. It brings oversea investment into the U.S., much of which finds its way into domestic real estate investment (and the stock market). One day this excessive valuation might collapse (I expect that this is going to happen in the hotel sector first). But for the foreseeable future, this homeland investment boom differentiates the U.S. from the rest of the globe.
- Interest rates, however, are not going anywhere. And if they do, it will be down. Concern over an unstable globe will cause the money markets in general to continue to put out cheap money. Even the end to the “QE” programs is not expected to deter economic growth. Inflation is low, deflation actually remains the greater danger.
- Speaking of deflation, look at oil prices. Their decline to levels not seen in four years is particularly significant, especially in light of the continuation and now elevated discord in the Middle East. Maybe with domestic reserves increasing and alternative energy sources emerging, the Middle East oligopoly has been broken? If that sounds Pollyannaish, and I may very well be ascribing too much of a temporary good thing into a game changer, it certainly has come sooner than expected. It puts money in American pockets and is certainly the ‘feel good’ story of the fall.
- All of this will facilitate affordability, particularly if we see a continuation of the drip, drip, drip barriers going down on those impossible underwriting standards of the past eight years. Stated another way, cheap money has been here for a while. But it was inaccessible. That has been gradually changing. This translates into more available money for home buyers, small business owners and others put on the margin for almost a decade. Real people have access to money. It’s cheap. And they will use it to grow business, to move up and to build.
This phenomenon will continue to fuel real estate development. Thematically, most of the action is in the urban transformation. From Milwaukee to Memphis, from South Carolina to San Diego.
We development types are talking mixed use, TOD, infill, brown field, rehab and repurposing.
And that’s why NYC is important. Yes, it’s so much bigger, more expensive, higher and even more complicated than anywhere else. But it does serve as a primer to the capability of Homo Sapiens to be freakishly creative, take risks and break all kinds of rules and records.
In Manhattan, there no longer is such a thing as an ‘unsafe’ neighborhood. What other City can say that? This is a model for the rest of the nation. It’s a sort of invitation from the Big Apple that it is OK to be bold, loosen the obstacles, dare to dream big, and eliminate the barriers.
We can only hope.
Gary H. London
October 30, 2014