Commercial Observer | By Michael Weiser
February 3, 2016
As investor interest in New York City continues to grow unfettered, we often hear about the dreaded prospect of a real estate “bubble.” But this perspective fails to acknowledge that there are real indicators showing that as the city’s product is retaining its value, there are still opportunities ahead.
The reason that the New York City market has remained strong is largely due to solid fundamentals. For example, despite the high levels of new development, there is a supply shortage for affordable and mid-level multifamily product. In the next several years, we should also expect to see an undersupply of quality office properties, as demand for this type of product has increased.
In addition to the limited supply and sustained demand that’s attracting local investors, New York City continues to attract a significant amount of foreign investment. When compared to several other leading international cities, New York City is far ahead of the curve in regard to favorable yields.
Even if we do see an indication of a reversal of real estate prices, it’s extraordinarily unlikely that they’ll dip to previous lows. In this respect, commercial real estate price fluctuation will mirror the movement seen in various other sectors, from residential real estate to consumer goods.
For example, a decade and a half ago, gas prices were consistently in the range of $1 to $1.50 per gallon, and had been in that range for the better part of two decades. Then, prices started climbing to $2, $3, $4 and more per gallon. Now, even when prices go down, as they certainly have, they surely won’t plummet to the previous floor of $1. Ultimately, we just don’t think of the floor for gas prices in the same way as we did just 13 years ago.
Residential real estate tells a similar story. Some 30 years ago, many houses in southern Brooklyn were on the market for approximately $50,000. Prices have obviously climbed tremendously and irreversibly since then. While we still have ebbs and flows in the market, it’s clear that the floor price for single-family homes in Brooklyn has risen to a much higher point than where it was in the 1980s.
Commercial real estate—at least in New York—is another compelling example of market truism. Just a few years ago, when land in Manhattan was selling for approximately $300 per square foot, many observers thought that those prices were high and were bound to come down. Instead of decreasing, they have continued to rise, in some cases beyond $1,000 per square foot, completely changing our point of view on what land should cost. At this time, we can certainly say that, even if we do see prices decline somewhat, they will settle at a new floor that is much higher than the previous one.
The beauty of the New York market is that it has everything. It attracts local investors who have a deep understanding of the city and its real estate, as well as foreign institutional capital that flocks to New York because of its yield and stability. The price increases that we are seeing are not the result of a false, temporary over-valuation that will reverse itself. Instead, it is actually a correction of years and years of undervaluation.