Manhattan Economic Indicators
Summarizes the last quarter of activity in Manhattan’s real estate market. This report shows historic trends in commercial building sales and available sublease space as an indicator of the leasing market. The report also highlights recent New York City employment figures and how those numbers factor into the national economy.
There are numerous anecdotal stories confirming how New York’s economy is thriving, yet the commercial real estate statistics were disappointing in the first quarter. Property sales volume fell significantly, but this was expected given the rush at the end of 2012 to close deals before the capital gains tax increased as it did at the 11th hour. The office leasing statistics were flat overall and have been tepid for three straight quarters due largely to a lack of demand from Wall Street and other office-based industries. Yet New York City’s economy grew at a strong, steady pace as indicated by the added 23,900 jobs in the quarter.
As per Chairman and CEO, Peter Hauspurg, “To no one’s surprise, sales volume fell in the first quarter but investor interest has been strong. Because prices are climbing every day, more sellers are bringing properties to the market. While we will not see the same fourth quarter 2012 volume in the next quarter or two, the statistics will start to reflect the high demand we are seeing in the market.”
The enclosed report reviews all of the New York City real estate-related statistics: commercial property sales, employment and office leasing. One of the most compelling findings in the enclosed report is that despite steady growth in the City’s office-based sector, total office occupancy has not changed since the start of the recovery. Moreover, not only did office rents stay flat in the quarter, but a historic look at the data shows that the average Manhattan office rent when adjusted for inflation is nearly the same today as it was 15 years ago. These and other findings are discussed below.
New York City ended the year on a solid note as a flurry of commercial property sales were closed in the final days. By the time the deeds were recorded, more than $13 billion in sales traded hands in Manhattan. The motivation behind the jump in activity came from the imminent change in capital gains taxes that prompted building owners to cash out on their properties before the higher tax rates went into effect.
Outside of the commercial real estate market, the economy was plagued by the effects of Hurricane Sandy that destroyed or damaged a lot of properties on the southern fringes of the City and knocked out power in the lower half of Manhattan, which suspended most business activity in the area and dislocated a number of offices, residents and stores. The preliminary employment numbers showed that the City lost 10,200 jobs in the fourth quarter, although many of these lost jobs could be replaced in the next quarter. On a positive note, the construction industry will likely see significant gains from re-building on account of the storm. Finally, the office leasing market was flat in the quarter as few tenants felt any pressure to close deals before the end of the year.
The biggest impact on the economic statistics has and will continue to be the fiscal changes at the federal level. At the 11th hour, Congress agreed to raise rates on upper income Americans to 39% from 35%. They also agreed to raise capital gains taxes from 15% to 23.8%, including the medicare surcharge. Many have suggested that higher taxes, coupled with uncertainty on the debt ceiling will impede the economy this year. However, there is much to be optimistic about. First, the tax changes will not have a significant impact on most Americans so overall consumption should steadily improve. Secondly, the tax deal is finished so investors and business owners that had put off decisions until a firm deal was done can now move forward. Finally, the European debt crisis has been contained, at least in the short run, so less are worried about Greece or other European countries defaulting on their debt.
All of these concerns – the tax deal, debt ceiling and Europe – affect New York City’s economy primarily through Wall Street which has been the most stagnant part of the City’s recovery over the last five years. Wall Street has weathered these past tumultuous years better than most had expected but the outlook for the industry remains bleak as a number of firms continue to announce layoffs. That said, with tourism, private education, media and now construction looking strong, the outlook for New York City remains favorable. As per Chairman and CEO Peter Hauspurg, “We had thought that the market would slow down in January, but it has not. Investors from around the world still regard New York City real estate to be among both the safest bets as a store of value as well as one of the best vehicles for future appreciation.”
In New York City, however, job growth remained robust. More importantly, the diversity of job growth was broad, although Wall Street lost jobs in the quarter. For decades, the biggest criticism of New York City’s economy was that it was too dependent on Wall Street and needed to diversify away from it. While the finance industry is a significant contributor to the real estate market and the City tax coffers, the evidence from the 2012 statistics shows that New York has indeed diversified away from Wall Street.
Office leasing was flat in the third quarter as well. Office leasing is still hampered by the uncertainty on Wall Street. A number of media reports are still speculating that finance firms will continue to cut jobs and downsize in New York City. These reports may or may not be accurate, but they are sending a message that future availability may go up in the next year. The statistics below show that rents in Lower Manhattan remain extremely low relative to Midtown, Midtown South and even the surrounding metropolitan areas.
Finally, the commercial real estate market held steady but volume declined from the previous two quarters as a number of investors may have held off from making a decision until the presidential election was complete. The early fourth quarter data already shows a jump in activity as owners want to cash out before the capital gains tax goes up.
- Commercial Property Sales Volume was flat in the second quarter due to a lack of sellers bringing properties to the market; retail property sales volume, however, increased significantly.
- New York City added 19,400 jobs in the second quarter, a pace that once again far exceeded the U.S.
- Office leasing was flat in the second quarter, similar to commercial sales, but the details show that retailers and private education institutions yielded the highest absorption in the quarter.
As per Peter Hauspurg, Chairman and CEO, “our buyers remain optimistic about the New York City economy based on the demand for commercial properties of every kind – from multifamily to development sites to office and retail properties. Still, our sellers are reluctant to sell due to their uncertainty about the global market. We are getting deals done, and expect volume to pick up in the next quarter but doubt that things will accelerate until the national job market picks up.”
Manhattan Economic Indicators discusses the current state of the local economy with an in-depth review of a number of statistics.
Moreover, there is ample anecdotal evidence suggesting that the macro economy is on solid footing. First, the national economy has been growing steadily and across most sectors. Second, the stock market has recovered: the S&P 500 has climbed 20% since its October low and the volatility index dropped 20% in early 2012. Third, while the ongoing news from Europe changes by the week, the European Central Bank and a number of participants are working to resolve the crisis that is still centered on Greece.
The Manhattan Economic Indicators presents the fourth quarter findings and provides a thorough analysis of New York City’s economy.
As per Peter Hauspurg, Chairman and CEO, “Investors have maintained their faith in New York’s property market as the commercial sales market continues to withstand the headwinds from the global banking crisis and tepid national economy. Still, we are keeping an eye on Wall Street to see how the announced layoffs might impact financing and the broader economy.”
As per Peter Hauspurg, Chairman and CEO, “We were pleased to see the return of sellers to the market as investor demand for Manhattan properties had far outstripped supply for several years. The current economic climate of a potential U.S. downgrade, the European financial crisis and dismal reports from Wall Street make me wonder how things will progress in the next quarter or two. But what has become even more apparent from this quarter’s results vis-à-vis the rest of the national economy is that Manhattan real estate is still viewed as one of the safest places to invest money.”
While commercial property sales volume dropped significantly in the first quarter, most of the other economic statistics for New York City showed promise as employment jumped in the quarter and office vacancy rates declined. Still a number of recent announcements from finance firms suggest that Wall Street is not out of the woods yet, and news from the national economy is underwhelming as well. The greatest uncertainty comes from abroad as fallout from Japan’s earthquake has affected global trade and the crisis in the Middle East has sent oil prices through the roof. Nevertheless, the spattering of good news is enough to stay optimistic about the local economy in the near term. As per Peter Hauspurg, Chairman and CEO, “Business slowed in the first quarter after a strong fourth quarter but there is enough in the pipeline to remain hopeful that 2011 will outpace 2010 for the year.”
While the numbers were somewhat mixed, 2010 ended on a decidedly solid note as commercial sales volume soared and office availability declined with the removal of sublease space. Employment, however, declined as holiday retail hiring fell short. While most industries are adding jobs, there still remains some uncertainty in the economy as the financial reforms enacted under last year’s Dodd-Frank bill have yet to be fully implemented. Employment in finance is not likely to increase significantly in the coming year, but nearly every other industry in New York City is poised to grow as more and more evidence indicates that the local economy is on the upswing.