Trends Watch: New York City Real Estate

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Jonathan Litt, Founder & CEO, Land & Buildings Investment Management.

What is your outlook for real estate?

Real estate is going to benefit from a lower Ten-Year Treasury yield but it will impact various sectors differently. 

Single-family homes will be the winners because people are migrating out of the cities, which has been prominent even before the COVID-19 pandemic. Apartments are left in the middle since we anticipate seeing more stress in the income generated from apartment draws. And finally, malls and offices will be the losers.  

Specifically, the New York office market is facing an existential “hurricane” and Empire State Realty Trust, which owns, operates and manages many office and retail properties in Manhattan, is expected to bear the brunt of the storm.

Numerous headwinds have weighed on New York office landlords in recent years as rent growth has stalled and values plateaued. A “hurricane” began to form in 2018, as the $10,000 cap on the state and local tax (SALT) income deduction hurt New York’s competitiveness. Things continued to worsen in 2019, as WeWork, New York City’s largest office tenant, began its implosion. Now in 2020, this existential “hurricane” has become a Category 5, as New York City is the epicenter for COVID-19 in the U.S. and Empire State Realty Trust is poised to bear the full brunt of this storm.

In the midst of the pandemic, many companies have begun to question the need for physical office space at all, as the necessity of work from home (WFH) provides a real-time and real-life look into a potential future with fewer workers in offices.

New York City office vacancy could reach 20% or more. During the last two recessions, the vacancy rate increased by 600-900 basis points. Considering that the current Manhattan office vacancy rate is 11.3%, a 20% vacancy rate estimate could actually prove conservative. Moody’s Analytics forecasts national office vacancy rates rising to 20% by 2021 with rents in New York City plummeting as much as 25%.

What trends are expected to continue?

People are expected to continue the trend of moving out of cities and buying homes in the suburbs.

In addition, offices will continue to face challenges. While I don’t think people will WFH forever, once they return to offices, it will be more of a hoteling concept where workers schedule their use of workspaces such as desks, cubicles and offices.

Additionally, a significant portion of New York City office rents and value is derived from the street retail at the base of these assets. Given the multitude of issues with brick and mortar retail tenants, this real estate is likely to see outsized rent and value deterioration.

Finally, nursing homes will also be quite challenged, especially after COVID-19, where the elderly will be reluctant to reside there.

What keeps you up at night?

Inflation comes roaring back after we printed a $4 trillion relief package for assist with the detrimental impact of COVID-19.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.