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Low Interest Rates and High Dollar Value Impact Real Estate in Manhattan and the Midwest

Low Interest Rates and High Dollar Value Impact Real Estate in Manhattan and the Midwest By George Grace

What happens when the price of oil hits record lows and the value of the dollar hits record highs?

Macroeconomic issues such as energy prices, foreign exchange rates and interest rates change over time, depending on the economic climate.

  • Increased Asset Value Spurs Economic Growth:
    • Rents for office buildings in New York have increased dramatically in the last 5-6 years. This is an example of increased asset value driven primarily by interest rates. New York is seeing not only organic growth, but also an increasing number of businesses relocating to New York.
    • Among those new businesses, technology and media companies are leading the way, with investors eager to pour money into them.
  • Growth in the Midwest:
    • Far from New York, the industrial sector in the midwest is also being affected by low interest rates and high dollar value. Last week, at a conference in Dallas, we had the opportunity to meet with some industrial developers. Apparently, the market there is white-hot. A large part of the reason is organic growth from US companies, but also growth from foreign companies looking to become established in the United States – and they can achieve much higher profits by selling their products here directly because of the disproportionately high dollar.
  • Manhattan’s Rising Rent:
    • In New York’s busiest borough, the last six months have seen rents increase by approximately twenty percent. New inventory is being created with great caution, often only beginning construction when a substantial amount of it is already leased. As a result, supply has been capped and the demand has grown.
  • Buy Low, Sell High… or Rent Low, Lease Long:
    • Whether you’re in New York or the midwest, these macroeconomic factors can have a big impact on business owners when making real estate decisions. When leasing a new space, our advice to every one of our clients is the same: Avoid signing long-term leases when the market is spiking. Instead, sign them when the market is low.
      • Case Study: In 2008, my client’s landlord asked him if he wanted to take a longer lease than he had originally signed, and in this case the answer was an enthusiastic “Yes.”
      • The initial rent was thirty-two dollars per square foot. The going rate in that building is now fifty dollars per square foot. Instead of a ten-year lease, they have a twelve-year lease. By 2020 they will be paying approximately thirty-five dollars per square foot with escalations for space that could then be going for sixty dollars or more per square foot on the open market.
    • When the market is in the trough, that is the time to take a long-term lease. And when the market is flying high, it is wise to limit the term of a lease.
  • The Price of Oil:
    • The world runs on a commodity that goes through boom and bust cycles constantly. Six years ago, oil was selling for $140 a barrel. Now it selling at $50 and has been as low as $30 – and when you do inflation-adjusted dollars it is even lower. The problem is that real estate decisions are decisions with implications that can last thirty years or more, and it’s very difficult to make those decisions based on a commodity like oil, because the price of oil changes by the minute.

Our Objective

George Grace, Managing Partner at Mohr Partners, Inc. – a national commercial real estate company that exclusively represents tenants – provides and implements tactical and strategic real estate advice for corporations, nonprofits and other organizations. To find out more, call (646) 312-6800 or email george.grace@mohrpartners.com.

George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016