New York, New York (PressExposure) November 17, 2011 -- The national and global economic picture is murky at best these days. Many are saying we are close to entering a recession. Fed Chairman Ben Bernanke said in a recent speech that economic growth has been very disappointing, but the Federal Open Market Committee (FOMC) expects growth to pickup in the 2nd half of 2011. The debt ceiling charade had a substantially negative impact on the economy because the theatrics led to a collapse in confidence, which I would argue is the main ingredient required to a healthy growing economy. In my recent articles I have said that both core and headline inflation were going to continue to increase, but with a slowdown in growth they should subside somewhat (though not completely) for the remainder of the year.
The European debt crisis is also not helping confidence, especially because international banks are the most interconnected they have ever been. Credit researchers at Fitch Ratings found that 50% of the assets of the 10 largest money market funds were invested with European banks. The increasing globalization of the economy is causing confusion amongst economists and politicians because the rules they could always rely upon aren't holding up any more and small growth or deficiencies in certain areas are having increased ripple effects (multipliers can be negative too). Although Bernanke didn't outline additional policy choices, as he did in his speech last year, he said that if the growth doesn't improve the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. I think Bernanke will argue for more fiscal stimulus in the short term and the stock market will have the predictable positive reaction but employment won't change much overall because there is effort towards increasing the Nominal GDP.
In commercial real estate this will translate into investors moving out of secondary markets back to primary markets during the period of economic uncertainty. The money has to go somewhere, and I see New York City as the number one choice for a variety of reasons. Of course, after the pricing expectations readjust in the secondary markets, and the confidence builds in the economy, more investors may opt out of the Big Apple for bigger returns (rule #1 - risk vs. reward).
As I have said consistently, there is still plenty to be bullish about in New York City. The millennial generation (ages 16-27) is powering growth recovery and they are even taking less pay just to be here. According to a recent Crain's report college graduates make up almost 10% of the work force in New York City as opposed to less than 5% nationwide.
There have also been a number of recent records broken in New York City. A surge in office leasing in May pushed the year-to-date volume to 14.2 million square feet, the highest ever according to a report from Cushman & Wakefield Inc. Tenants also snapped up 4.3 million square feet of leased space, the highest one-month total on record. Retail is performing well also with Manhattan found to have 4 of the top 10 retail strips in the world, including the number one overall according to a recent Crain's publication.
In residential properties, Manhattan's apartment vacancy rate was 0.72% in the second quarter, the lowest vacancy rate on record that Citi Habitats has seen since it started tracking vacancies in 2002. Average rents have seen large increases across the board over the past year, regardless of apartment size. The supply-constrained market will not improve with strengthened stabilization laws and lack of new product on the way (rule #2 - supply and demand). A New York Building Congress analysis found that $6.4 billion worth of construction projects were started in the first half of 2011, a nearly 40% decline from the first half of 2010. Continued lack of supply of residential units is continuing to push rents upward. The average monthly rent for an apartment rose 8% to $3,358 from the same month last year, just $36 shy of the all-time highest monthly rent, recorded in May 2007, according to City Habitats. Rents for apartments of all sizes rose. Studio rents were up 7% to $1,953, one-bedrooms increased 7% to $2,672, two-bedrooms rose 9% to $3,754, and three-bedrooms increased 9% to $5,052.
Those concerned about the troubled banking sector and its recent layoffs would be happy to see that Mayor Bloomberg is continuing his push to diversify New York City's economy. Recently, he issued an RFP for an Applied Sciences Campus. Bloomberg said, "We will provide prime New York real estate -- at virtually no cost, plus up to $100 million in infrastructure upgrades, in exchange for a university's commitment to build or expand a world-class science and engineering campus here in our city." This is an area where New York City can compete very well and all of these jobs would have a positive multiplier effect on the economy.
In another example of ingenuity, farming has returned to Manhattan on a 15,000-square-foot stalled East River site called the Riverpark Farm at Alexandria Center (http://www.riverparkfarm.com/) where they will serve up fresh ingredients for restaurant Riverpark.
In addition to the biotech space, Crain's reported on the media and entertainment industry. New York City is home to 23 prime-time programs, 140 news programs, talk shows and reality series. Also, some 200 films were shot here last year. Since January, when the state's Film Production Credit program was expanded to $420 million a year from $350 million, and was extended through 2014, 100 productions have signed on. More than 600 applications have been received. Another example of pro-business measures taken.
Personally, I think the economy will stabilize with mild growth for the rest of the year with further improvements early next year. The next hurdle will be a heated presidential race and the market's speculation on who the victor will be, what power will they have, and what their policies will be. In the meantime, life goes on in NYC, where people will continue to work hard and play hard.
James D. Kinsey
ERG Property Advisors
20 West 20th Street, Suite 703
New York, NY 10011