NEW YORK CITY—The CBRE year-ahead forecast noted economic conditions will determine how 2018 unfolds.
Macro Economic Factors
Spencer Levy, head of research, Americas at CBRE, said the larger economy provides an optimistic view for New York’s office job growth for the upcoming year. CBRE researchers cite the tax reform and relaxed financial regulations as stimulating economic growth which will benefit office leasing.
He referenced the International Monetary Fund’s recent upward revision of its global economic growth forecast. Pointing to the US tax reform, the IMF upgraded the rate that the US economy is likely to expand from 2.4% to 2.7% for this year and to 2.5% for 2019.
“The ability to project office use job growth is the single most important statistic in all of real estate,” said Levy. “New York scores very well based upon a recent CBRE study.”
It is in the top 10 cities for total number of jobs created. Factoring in the quality of the jobs and the quality of the employees, New York ranked number three in CBRE’s Tech Talent Report. This sector is creating high paying jobs and hiring talented professionals. Many of these jobs are force multipliers because every job created paying over $100,000 typically creates two or three more jobs elsewhere in the economy.
“The biggest risk factor out there right now is the so-called black swan event, one thing we don’t know,” said Levy. “But the one that everyone is talking about is a stock market correction.”
Levy countered this concern citing a CBRE study comparing New York, London and Hong Kong. In the event of a stock market correction, New York performed better than the other cities because its economy is far more diversified than many of its international counterparts.
The tax reform provides a significant economic stimulus, according to Levy. He says it will increase liquidity by encouraging more capital to come back from overseas; lower the cost of capital by reducing the corporate tax rate; and encourage capital spending by extending bonus depreciation for people for certain capital expenditures.
Levy also asserts that the new tax law protects CRE interests, in the following ways:
(1) It did not eliminate the 1031 exchange. This allows people to trade equity from project to project without tax consequences.
(2) It allows the continuation of the deduction of commercial mortgage interest. Real estate companies need to choose whether to make this deduction and if they do, they cannot take the capital expenditure depreciation. Levy considers this a neutral, open question as to the costs to real estate businesses.
(3) It continues to treat carried interest (an investment manager’s performance fee) as capital gains at a lower tax rate instead of ordinary income. However, the new law extends the period of time for holding the investment from one to three years before the lower capital gains tax can apply.
As to concerns about the projected $1 trillion increase to the deficit, Levy said, “If the optimistic growth expectations are wrong, the deficit goes up and then we have a problem down the road. But if the growth does go up, then we don’t have a problem.” He added that interest rates are unusually low, even arguably for an infinite period of time, which should help with a higher deficit. However, he said that economic growth would be the best solution, not low interest rates.
With 2017 as a starting place from where the New York office market is headed—office employment reached 1.66 million. The sector grew 3.1%, adding 49,400 jobs from the prior year.
Last year was also the year of the big deals, with leases over 100,000 square feet making up 26.5% of the all annual lease transactions, totaling 7.54 million square feet. Leasing activity, excluding renewals totaled 28.43 million square feet of office space. This was an increase from 22.90 million square feet of office space leased in 2016.
In addition to pointing to those statistics, Nicole LaRusso, director, research & analysis at CBRE, underscored how in 2017 employment in the FIRE (finance, insurance and real estate) sector was particularly strong, reaching 477,000 jobs, increasing 3.7% from the prior year. FIRE tenants accounted for 38% of New York City’s office market rentals.
The CBRE report noted the TAMI (technology, advertising, media and information) sector continued to grow, although only at 1.6%, providing 346,000 jobs. This represented growth but was a slowdown from the prior years’ growth of 3% to 4%. TAMI tenants accounted for 22% of the office market rentals.
Asking rents were level but taking rents declined and landlords increased concessions. Concessions for new space under a 10-year lease included tenant improvement allowances averaging $89 per square foot. This was a 14% increase from 2016. The average rent-free term given as a concession was 13 months.
New York City unemployment was 4.3%, with labor force participation reaching 61.1%, almost a record high. The CBRE report predicted that a tight labor market could slow down employment growth and hinder office leasing.
Paul Amrich, a vice chairman in the CBRE New York office, noted the construction boom including developments both at Hudson Yards and in midtown, and renovations at older office buildings is unprecedented. This has contributed to the greater concessions and has also driven the question on whether there could be an oversupply of office space decreasing rents.
“There are those landlords when they have older product and they are not willing to be ahead of the curve and invest,” said Amrich. He described the phenomenon of “A Tale of Two Cities,” contrasting the new construction and the people who are reinvesting, where rents are good–with passive landlords which are losing tenants, chasing down rents or sitting with unoccupied vacancies.