For more than a year, Manhattan's commercial real estate market, along with its economy, has been in a funk. Office vacancies have increased while rental rates have declined. The market for condominiums has shrunk and the hotel industry is suffering, even as occupancies have risen since the early days of the financial meltdown. But there are a few signs that a recovery is in the offing. * After years in the works, last September, the New York-based Related Companies began vertical construction on its not-yet-named project located at 440 West 42nd Street, just west of Times Square. The 1.2-million-square-foot development--which will include roughly 700 residential units, including some condominiums, and 163 affordable rentals plus the Signature Theater, a live theater now located across the street--will cost more than $800 million, according to a Sept. 29, 2009, article in Crain's New York Business. On Dec. 1, 2009, Joanna Rose, Related Companies' vice president of corporate communications and public relations, declined to say what the development, which is scheduled for completion in 2011, would cost. * Dan Fasulo, managing director of research at New York-based Real Capital Analytics Inc. (RCA), says that the launching of the Related Companies project is a testament to the resilience of New York's commercial real estate market, in spite of the turmoil over the last 15 months. He also cites the fact that "sublease space is quietly being removed from the office market" as a positive sign for the market. * According to an Oct. 16, 2009, article in trade publication Real Estate Weekly, which covers New York and its suburbs, brokers reported that New York-based Goldman Sachs recently pulled a 260,000-square-foot space (which had previously been available for sublease) off the market at One Liberty Plaza in downtown Manhattan. This move comes at a time when the company is about to move into its new headquarters in Battery Park City across from the new Freedom Tower.
"I am advising my [office] brokerage clients that now is the time for their tenants to make a deal," says Fasulo. "The market will tighten quicker than people expect."
Office market still distressed
But Doug Turetsky, communications director for New York City's Independent Budget Office (IBO), which puts out periodic reports on the city's budget and economy, is less optimistic than Fasulo. He says that partially because of the continuing restructuring in the financial sector, "We expect office rents to continue to fall for the next couple of years."
The volume of commercial real estate sales is way down from where it was before the financial crisis. In the first 10 months of 2007, Manhattan had the highest sales volume of commercial properties (apartments, hotels, industrial, office and retail) since 2001--the year of RCA's inception. During that period in 2007, sales reached $43 billion, according to RCA. By contrast, in 2009, for that same period, sales volume was $2.9 billion--a 93 percent decrease from the 2007 volume. In 2008, sales volume for the first 10 months was $17 billion--an 83 percent decline from 2007.
Among the few office transactions that did occur in 2009, a number involved foreign investors who benefit from favorable currency exchange rates. But that alone is not reason enough for these investors to buy up properties, says Fasulo.
"It is a bonus when the currency is moving in your favor, but that is not the strongest driver of investment decision-making," he says. "Many view this period as the right time in the cycle to pick up assets at attractive prices," he says.
There aren't really that many foreign investors in Manhattan's commercial real estate market, says Fasulo. But the ones who are active go after trophy properties, he says.
The HSBC Bank Building at 452 Fifth Avenue is under contract to Koor Industries Ltd. and sister company Property and Building Corporation Ltd., both subsidiaries of the Tel Aviv, Israel-based IDB Group; and Joseph Cayre, chairman of New York-based Midtown Equities LLC.
"A lot of high-net-worth Israelis who want to diversify their assets have targeted New York to park their capital," says Fasulo. Israeli buyers are seeking investment opportunities in the United States because of the dearth of properties to buy at home, he says.
But Israelis aren't the only foreign investors...