Many financial advisors tell their clients that past performance does not guarantee future results.
While they make a good point, they ignore the reason there are so many predictions and forecasts out there: It’s fun. That is why I was glad to sit down with my own data recently and come up with some predictions about the trajectory of the real estate market in New York.
The Federal Reserve’s raising of interest rates is a significant policy change with many implications. Low interest rates for long periods of time tend to create a surplus of real estate, both residential and commercial. That is because real estate is one of the industries that is very sensitive to and dependent on interest rate loans; low rates create incentives for builders to build. As the Fed raises interest rates, we are likely to see a construction slowdown, as well as tapping the brakes on other sectors that serve as growth engines for New York City, including technology. Projects need a greater rate of return to support higher interest rates. Marginal projects will be canceled. In addition, investors will not be seeking yield in riskier investments because they can obtain higher rates of return in “safer” choices.
Coming into 2016, there is still a lot of momentum and growth, and real estate prices will continue to be robust. I anticipate this strength to continue through 2016 and probably into 2017. This makes for a market that remains advantageous for landlords, but not tenants. The good news for tenants is that the real estate sector is cyclical, so rent will not keep climbing forever. In the meantime, we have seen a spike in moves from Manhattan into the less expensive markets in Brooklyn and Queens where the younger workforce can live and work.
An important mitigating factor in the exodus from Manhattan is a spate of recent zoning revisions along the East River. Many former commercial and industrial zones on the western shores of Brooklyn and Queens have been reclassified as residential. As a result of this decreased inventory, even the outer boroughs are becoming expensive for many companies.
2016 is also a presidential election year, which brings its own set of challenges and opportunities. Typically, the year before an election tends to be very good economically. My explanation for this is that all of the promises that are thrown around by the candidates create a certain optimism about “the art of the possible.” Unsurprisingly, what goes up must come down, and the year following a presidential election tends to impair asset valuations as the “new” administration begins setting its own policy goals.
If your company is in need of space or considering relocating to the outer boroughs, contact me to discuss the trends driving the market today so that you are ready for 2016, 2017, and beyond.
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016