by Neil A. Dolgin
The U.S. economy made a truly spectacular recovery in 2021 coming out of the Covid pandemic. U.S. gross domestic product (GDP) and job growth were very strong, unemployment fell, wages rose, and retail sales recovered.
Today’s CRE marketplace now faces unique challenges with rising inflation, the risk of a recession, continued fluctuations in the stock market and rising real estate and corporate taxes.
Our customers remain concerned about the economy, the instability in our politics and the war taking place in the heart of Europe. It all adds up to increasing uncertainty for investors and lessors.
“Are we in a recession?”
I’m asked this question daily. Inflation is running around 8% a year. The cost of goods and materials are rising. And the Federal Reserve just ordered the largest interest hike in more than two decades as part of its effort to battle the high inflation.
At the same time, there are also very positive indicators for the economy when you look at the numbers for job creation, household savings, and unemployment, and those bode well for commercial property investment. The job numbers last quarter were the second-best first quarter numbers on record. Unemployment is at 3.6%. Retail sales remain strong, and Americans have $18 trillion in US-based savings accounts and $5 trillion in money market accounts. That’s $6 trillion above normal.
I personally remain optimistic. I don’t believe that we’re headed into a recession because I think the economy is still relatively strong.
How do all of these factors affect the purchasing power of an individual investor? I had a very interesting conversation today with an investor who asked if he should buy commercial real estate with an 8% return now when he can purchase a bond at 5% and reduce his risk. Were three more points worth the risk? He didn’t want to take the risk because he was older and the investment would not have changed his life in any manner. If this was a year ago in more of a certain market, then he would have seriously considered it. Age and risk are the reasons he didn’t feel it was necessary to invest.
In the late 1970s when interest rates were extremely high, people were putting money in the bank and earning 12-13 percent returns versus gaining 7-9 percent returns on a real estate deal. They said, “I am earning more in the bank with no risk” even after considering appreciation and depreciation. Nothing was going to convince them to get into a deal. When people didn’t want to invest and decided to leave their money in their account, they lost out on the long term hold and great appreciation. Markets always seem to come back even if there is a slight dip in the market. Timing is everything and it seems no one can’t predict the bottom.
With rising management costs and interest rates, this is a fickle time, no one knows which way to go. If a recession starts to take hold, it is predicted to be a mild one. And the impacts would likely not be felt until 2023.
Real Estate Taxes
Could the state and/or city drop their tax rates in order to provide relief for owners and lessors? Just as landlords need to work with tenants, city and state policymakers need to work together with industry—via tax breaks and other incentives – to keep the marketplace healthy in these increasingly uncertain times.
Post Pandemic Outlook is Good
The Office environment has picked up slightly as buyers and lessors are able to secure bargains on office space due to unusually high vacancy rates. We are also seeing efforts to redesign office spaces into a more open environment with amenities that will bring employees back to work.
Older industrial buildings are undergoing conversions into more modern and marketable uses. There are also more life sciences buildings on the horizon for New York City in these converted properties. Industrial buildings in all sizes are available to lease throughout the Bronx, Brooklyn and Queens. We’re also seeing substantial sub-leasing going on and more space available for sublease.
Vacant land has become more valuable as construction, telecommunications and cable companies, especially, need parking and storage for trucks and equipment. Logistics companies remain on the lookout for prime locations so they can be closer to the places where their products are used. It’s all about location, size, and what a company is willing to pay for it.
Electric Vehicle (EV) Charging Stations are popping up throughout the metro NYC area. EV companies are seeking 20,000SF vacant land where they can install a block of EV charging stations for cars. They’re eyeing locations that are close to the highways and major streets, and often paying substantially over market rate.
Rents are continuing to soar suggesting that the CRE market is in a bubble. “Most know that the CRE industrial market has been on a tear for the last few years, but the hefty rent increases and lofty valuations are becoming scary,” said Joseph Ori, Executive Managing Director, Paramount Capital Corp. A recent report noted that industrial market rents nationally have increased by 16% since Q1-21. In some markets around the country, rents are up as much as 41%. At the same time there’s a huge amount of industrial space coming into the market nationally and locally.
It remains to be seen how high rents can go. “Property rents cannot go up forever and when they do, it’s only a matter of time before they hit a ceiling and come tumbling back down,” added Ori.
There’s no way to predict where this economy will take us. But we have lived through similar fluctuations in the marketplace throughout our 118+ years in commercial real estate. We approach today’s uncertain economic climate with an optimism founded in years of experience. We are working with investors, owners and lessors to make sense of the current climate and maximize their opportunities and benefits.
Have a question on today’s commercial real estate marketplace? Email me any time.
Neil A. Dolgin is co-president of Kalmon Dolgin Affiliates. Founded in 1904, Kalmon Dolgin Affiliates (KDA) has grown into one of the New York metropolitan region’s leading commercial and industrial real estate firms. Kalmon Dolgin Affiliates specialize in all aspects of real estate services for developing, managing, selling, leasing and marketing commercial and industrial property. KDA’s highly-trained professional brokers offer clients a practical, street-wise approach to commercial and industrial real estate brokerage, leasing and sales, supported by the latest in real estate marketing, management and research technology.