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Prices May Have Peaked For Now

Joel Ross

In Manhattan, transaction dollars have declined 39% on commercial, and top-end residential transactions and prices are declining.  The flood of new very high-end condos on 57th street and Central Park South has led some projects to now be at risk of the mezz lenders taking control. High end brokers say there is just no market right now, and nobody has any idea who is going to be buying all those units. Stand by for workouts, lenders assuming control or developers suffering real losses.

Overall, the Manhattan residential market is struggling with far too much inventory. The coop market, a unique NYC format, is very tough now because to buy a unit in a New York coop, you are subjected to the board having a right to scrub through your personal financial and other information, including, in some cases, a private detective report. Having been through that myself on two occasions, and having sat on a coop board, it is not an experience buyers want to go through. You get board members who know nothing about financials, or business, asking stupid questions that are intrusive. As a result there have not been any new coops formed for many years and there are too many brand new condominiums now competing. If you like elegant pre-WWII buildings, and close selection of your neighbors, coops are good. As a result, coops are priced materially below condos just because of the process of  approval.

Across the country CRE transactions are harder to justify at today’s prices. Rents are already materially increased, and properties are often stabilized, so there is not, in many cases, a lot of upside left. If an investor is purely looking for CRE assets that pay a steady and decent return, there are deals to do, but the big upside wins are no longer available like they had been. The Chinese government has fully cracked down on capital leaving the country to invest here in real estate, the Russians have pretty much disappeared, and the Canadian dollar is at 73 cents, so US real estate is expensive. The South American money is already mostly here already, and the Europeans now have opportunities there. It is not that there is no capital coming here from any of these places, but the rush to invest here we saw a few years ago is over for now. There are still small transactions occurring, although even those are at a reduced level.

Hotel transactions nationally are also reduced as there is little economic reason these days to buy a hotel. RevPAR is barely above inflation, while labor costs and property taxes rise. In places like Seattle, you have a lot of new supply coming and $15 minimum wages and other left wing regulations to deal with. In many markets, RevPAR is no longer rising. New supply in harmful numbers is now starting to hit the market in some locations, and new brands are proliferating constantly, which just eats into the impact zones of existing franchisees. In several markets, NOI is no longer rising, and the likelihood that will change for the better is very low in the next few years, no matter how well the economy does. The real deals were over in 2013 for most hotels. Despite the pundits and appraisers forecasting continued very good numbers for 2016 through 2018, those projections were just pie in the sky and were off form reality by over 50% on RevPAR, so do your own due dili and ignore all those industry forecasts. Hotels are very market by market. Add to all this that cap rates will rise along with interest rates over the next year, and it is hard to find a hotel to buy that justifies the risk over the next five years.

If you own a good CRE asset now, it is probably a good time to  sit on it, refinance and collect a nice cash flow. If you have cash to invest in buying a building, maybe you should look at special development deals. For instance, I am involved in brownfield land development and there are still good opportunities if you know how to select the sites to work with. Because most developers do not like the risks in brownfields, they stay away, and that limits the bidding for these locations. However, you need to know how to develop real brownfield sites and have patience with regulators.

Despite the chaos in DC and the inability of Congress to do anything, the economy will continue to hum, interest rates will still be historically low after the next Fed increases, so owning solid, well  located real estate is still a good thing to do.

The views expressed are the author’s own.

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