Avison Young Executives Present an In-depth Briefing on Trends and Outlook for NYC CRE

BOMA New York’s “2023 State of the Market” event delivered an up-to-the-minute and highly optimistic message for the future of the city’s commercial real estate market. In sum, the post-pandemic recovery is in full swing, and it’s improving every day.

The presentation featured two of the nation’s leading experts on high-level investment sales and financing, Avison Young’s Scott Singer, Principal, Co-Lead of Tri-State Debt & Equity Finance; and James Nelson, Principal, Head of Tri-State Investment Sales. The panel was deftly moderated by Glenn Waldorf of Bell Environmental, who zeroed-in on present-day conditions related to the work-from-home phenomenon and the federal government’s aggressive campaign to combat inflation with higher interest rates.

Both Nelson and Singer offered hard and anecdotal evidence that workers are returning to the office. In addition, despite increased interest rates, capex spending and deal closings are trending upward for both sales and leasing across all building classes. Both panelists credited New York’s global business allure as an overarching influence on the resilience and robustness of its commercial real estate industry.

Waldorf asked the panelists what made New York City so different from other global business centers. Singer said, “New York is distinct from other cities because of our diversity and range of industries and opportunities. People of all ages want to be in New York.” Nelson reinforced that observation, stating, “We have such an incredible and deep talent pool now. A lot of people who left have come back.” He added that the city expects an influx of a record 61 million tourists this year.

Both experts observed that the owner/tenant dynamic has changed for the better, driven by owners’ desires to make their buildings more attractive to tenants. Nelson said, “Class A and trophy buildings are performing better,” citing a trend that office tenants now realize that their prospective employees will be drawn to better buildings.

To that point, both Singer and Nelson agreed that office occupancy statistics were significantly higher than those reported by news media. Indeed, the misperception that roughly 42% of workers had returned may have been linked to a published survey taken by a building services provider that collected data only from its customers’ properties. The Real Estate Board of New York recently issued a report that 61% of workers had returned – and that number is increasing — based on a far larger and diverse sampling.

To be sure, the market is nowhere near its $68.5 billion peak sales volume of 2015. Nelson acknowledged a significant 59% decline in the dollar volume of financings for the first quarter of 2023. Only four major office properties changed hands in that period.

However, pointing to a bright side of today’s market, Nelson said, “There are deals that are happening. End-users are actively buying.” He cited Hyundai’s March 2023 purchase of 15 Laight St. in Tribeca for $275 million in cash because the property and the location were, in Hyundai’s words, “Exactly what we want.” Nelson also pointed out “Institutional buyers are on the sidelines, but end users are buying.” He added that, as in the 15 Laight St. sale, deals are being based on buyers’ specific needs.

On the financing side, Singer cited the fluctuations in commercial mortgage interest rates over the past several decades. As a career financial intermediary, Singer cited the early 1990s, when “eight percent” was considered an attractive interest rate. He said, “The lowest long term rate we have ever locked was 2.64 percent, and for a few years the expectation became something in the threes.” When the Fed started raising rates in 2023,  “The first five percent quote was shocking. Then in a few weeks it went from five to six to as high as seven.” But, Singer said, “Memories are short, and so now that most borrower rates are back in the fives that sounds low!” In other words, despite the shock of recent interest rate moves, deals are still getting done. Not too many years ago, today’s rates looked quite favorable.

Singer said, “We’re seeing an active market. There is liquidity in the market.” Asked by Waldorf “whether New York is ‘on sale,’” both experts said that while the market is seeing some short sales, they also seeing strong deals, where pricing has held. In essence, each asset stands on its own but it is likely there will be some investment opportunities the market hasn’t seen in decades.

On the leasing side, both presenters said that although Class A properties comprise only 15% of New York City’s 500 million-square-foot office inventory, they account for 71.8% of leasing activity. Across all office classifications, at present, there are 102 million square feet available, 24.3% is sublease space. The retail sector, which took a shocking nosedive during the pandemic, is also recovering.

Nelson pointed out that today’s market conditions are highly asset-specific and should not be painted with a broad brush. “It’s not just the sub-markets,” he said, “but the actual buildings.”

Returning to the subject of financing, Singer reported that senior financing at present is at the “55 to 65 percent loan-to-value (LTV) range.” He said it had been as high as 75 to 85 LTV during his career.

When asked by Waldorf about the severity of the recent regional banking failures, Singer responded that much of the media had misreported that small regional banks hold most of the office property mortgages. “We do business with all sizes of banks and many other types of lenders too. Over time the (mortgage) originators change.” He said that the overarching issue, once again, was the nature of each individual deal and the motivation of the interested parties.

He cited a recent financing transaction on behalf of Rose Associates, one of New York’s most respected real estate families. “We received fewer proposals than we would have a year ago, but the ones we received were seriously interested, and we closed an attractive deal.”

In conclusion, both experts agreed that the market dynamic is evolving for the better. So called “low cost providers (owners)” who offer lower rents in exchange for less professional management are becoming obsolete. Nelson said, “(Instead) owners and tenants are establishing relationships to attract workers to come back.” Both experts were bullish about the commercial real estate market. Singer, citing historical perspective, summed it up: “People have wanted to congregate in urban centers for thousands of years.”