New York’s real estate market is about to wake up to a new day.
Ariel Property Advisors
Coming out of a year full of public health, social and economic adversity, New York’s real estate market is showing encouraging signs of life in 2021. The initial stages of the vaccine rollout signal a game-changer across the world—and New York City is no exception. Still, while we look forward to brighter days ahead, it’s important to learn from the past year about market risks no one had considered and how real estate professionals can ensure resiliency and responsiveness for whatever comes next.
It’s increasingly said that Covid-19 didn’t change the real estate industry so much as accelerated changes that were already underway—and there is a lot of truth to this. Retail has quickly embraced more convenient consumer strategies and technology, while the office market has been influenced by more flexible and remote workplace strategies. Meanwhile, the industrial and distribution sectors have ramped up quickly to deliver on growing e-commerce needs. These adaptations are helping to ensure the recovery.
Similarly, data shows improving fundamentals and capital is being deployed as investors show increasing eagerness to make moves. 2021 is poised to be a pivotal year for New York City and by this time next year we will be looking at a very different real estate landscape.
Investment Sales Transactions
2020’s lackluster investment sales transactions, lower rent fundamentals in every sector of the market and closures of schools and businesses presented a jarring halt to the city’s economic momentum. Even as the stock market improved, investment sales trading slowed drastically as investors waited for others to move first to provide pricing discovery. This was the case during the fallout from the 2008 financial crisis as well—and the chart below shows New York City real estate investment transaction volume from 2007 to 2020.
If the pattern holds, the worst is behind us. Bolstering this view, the residential rental market has been showing similar trends. Given that the pandemic was extrinsic to any market fundamentals, it’s not unreasonable to expect a speedier recovery than in 2009.
Historic Investment Sales Transaction Volume and price per square foot
Ariel Property Advisors
Working against the recovery is the unemployment rate, which as of November is 12.1% in New York City (as compared to a national rate of 6.7%), according to New York’s Department of Labor. High unemployment will exert downward pressure on residential rents and increase vacancies, neither of which is good for property values, retail, offices or the economy in general. While employment numbers may not recover at the same rate as investment sales figures, businesses will want to fill out their teams to take advantage of both the improving economy and the deep pool of available talent. The vaccine and the strong stock market right now, combined with an expected uptick in investment activity in 2021 and a pent-up demand for in-person retail and dining, will drive employment growth, which will ultimately help bolster the real estate investment market across sectors.
Residential Rent Found its Footing and Expected to Grow
In some ways, a down economy becomes its own antidote. Enticed by lower monthly rents, renters are returning to Manhattan, according to the latest joint figures released by brokerage Douglas Elliman and appraisal firm Miller Samuels. More than 4,000 leases were signed in November, marking not only a 30% year-over-year increase but also the highest November leasing volume in 12 years. Meanwhile, Brooklyn continues to be an active market bringing stability to the ecosystem, with residents overwhelmingly opting to stay, especially with lower rents available.
Old and New Capital
The largest multifamily transactions in 2020 included capital from KKR, Goldman Sachs, UBS and pension funds represented by local operators and family offices. Q3 of 2020 indicated this trend of diversified lending sources that should continue through 2021 as 2020 saw the entry of a range of new boutique capital players looking to deliver on the need for real estate financing where traditional lenders were being more conservative.
This burst of new life in the capital ecosystem is not new. Following the financial crisis, 2009 to 2011 saw a swarm of new capital in New York City looking for lower-basis properties or to provide rescue capital, followed by some massive investments in the years to follow. As of Q3 2020, there has been a demonstrable increase in activity from multiple national and international capital providers as well as more local firms entering the New York City commercial real estate market for the first time by originating funds or opening local family offices. In Q4 and now in 2021, these firms are reviewing assets and are deep into discussions with operators in need of capital.
Investors waiting to see how distressed assets have been impacted in the market will most likely have their opportunity in 2021. There were only 18 foreclosure transactions in New York City in 2020 but 2021 will likely see a massive uptick in opportunistic acquisitions as there are currently more than 200 properties with mortgage foreclosure filings. Clearing distressed transactions out of the market is the first sign of a recovery and will yield increased activity as well as give more clarity to investment pricing. As stated before, a downturn can become its own solution, and low interest rates and lower sales prices in discovery are going to cause a wave of activity in 2021.
With the current plan for vaccines to be deployed to not-at-risk populations this summer, September 2021 is targeted to be the major turning point for the city as schools will be back in session and offices can open in a meaningful way.
In order for dining, retail and the office market to recover, young people returning to the city is key. Especially in Manhattan, Brooklyn and Queens, many struggling industries will see recovery with the return of in-person experiences that will make young people enthusiastic to be back, An improvement in employment rates will also be key to this. With businesses looking to ramp up and get people back to the office, even on flexible schedules (which may be a more permanent trend), New York City is once again going to be the place where young professionals look to be.
The last quarter of 2021 should present the tipping point needed to bring New York City back in a big way. A successful vaccine deployment and the holiday season will mean the City is poised to kick off a protracted era of recovery similar to the last ten years before anyone had heard of Covid-19.