Crains New York reports that office rents are down and retail remains rocky, but there are still plenty of ways to make a buck from Harlem to Hollis.
Here’s the hit list:
1) Build warehouses
The price of warehouse space has shot up in the past year as investors have rushed to serve growing demand from e-commerce tenants. The jump in values might normally be a warning sign to buyers, but several investors believe demand will only increase. The city’s most recent report on freight movement projected online shopping will grow 15% annually, compounding the need for distribution hubs to facilitate speedy last-mile deliveries. Estimates peg warehouse vacancy rates at below 5%, and developers are betting on surging demand for new spaces that can better accommodate the increasingly sophisticated equipment retailers use to package and sort goods. Innovo Property Group, for instance, is building a 700,000-square-foot, state-of-the-art distribution complex along the Cross Bronx Expressway. Present industrial rents in the high teens don’t justify the more than $225 million project, but Innovo and other developers are banking on rates that will likely reach above $30 per square foot—unprecedented figures in the city’s industrial market.
2) Check out hotels
The City Council passed a bill last week requiring home-sharing providers such as Airbnb to report data about their listings to the mayor’s office. The measure was backed by the influential Hotel Trades Council and stands to strengthen the position of those who own hotels. Airbnb posted roughly 50,000 listings before the bill’s passage, up to 15,000 of which the Mayor’s Office of Special Enforcement suspects of operating illegally. If those units go offline, demand for traditional hotels would theoretically increase. Requirements that new hotels obtain a special permit in certain commercial and manufacturing districts will further constrict supply and thus increase values. There are 12,000 rooms under construction, said Jan Freitag of hotel consulting firm STR, and the home-sharing crackdown’s impact on pricing remains unclear. But with existing hostelries bursting at the seams, there appear to be plenty of guests to go around. “Building hotel rooms in New York City is a pretty good bet,” Freitag said. “You definitely know you are going to get the demand.”
3) Buy in Williamsburg
Beginning next year, the Metropolitan Transportation Authority plans to shutter an East River tunnel for 18 months of repairs, leaving the nearly 400,000 daily L train riders to scramble for other ways into Manhattan. That will depress rents as many would-be tenants opt to live somewhere else during the shutdown. A report from listings website StreetEasy earlier this year showed that rents were already falling even as the rest of the borough held steady. Savvy investors will be looking to buy on the dip as rents will likely rebound once the subway work is done.
4) Get flexible
Retail rents continue to decline across the city, and Manhattan office rents are down around 4% compared to last year, according to a recent report from Avison Young. But tech companies including WeWork, Convene and Knotel have been selling commercial landlords on the idea that they can better manage space through short-term or flexible subleases that includes extra amenities or services. “There is a huge movement toward experience,” Convene co-founder Chris Kelly said. “That is where the returns are right now.” Leasing giant JLL recently predicted that by 2030, flexible commercial office space will account for 30% of the market. British firm Appear Here has recently landed stateside and is attempting to apply a similar formula to fill vacant retail spaces. The company plans to sublease space for shorter intervals at higher price points. Landlords would be wise to heed the trend.
5) Try biotech
The health of New York City’s office market used to hinge on the performance of Wall Street. But in the past decade tech stole the spotlight as tenants, ranging in size from Silicon Valley giants to small startups, absorbed millions of square feet. Now, real estate experts believe biotech will be the next sector to take off. “The trend signs are all positive,” said Joel Marcus, executive chairman of Alexandria, a real estate developer that specializes in building and managing space for life sciences tenants. His firm is close to securing an anchor tenant for its planned 400,000-square-foot building that will be the third and final property in its 1.1 million- square-foot life sciences campus on First Avenue and East 29th Street. Additionally, the company is reported to be a partner in a joint venture to buy an office building occupied by Pfizer on East 42nd Street—a property it plans to fill with life sciences tenants when Pfizer’s lease expires in 2023. Seeing the potential for growth in the sector, the city has solicited developers to help build another biotech campus, up to 500,000 square feet, in Manhattan or Queens.
6) Go public
Building public projects by winning requests for proposals or pitching the city on affordable housing projects can keep developers busy at a time when the market-rate financials do not necessarily pencil out. Maddd Equities and Joy Construction are hoping the state will select its plan for a new soccer stadium in the South Bronx.
7) Catch some rays
The cost of installing solar panels has come down in the past decade, and installing them now makes economic sense on many city rooftops. If these cells generate more than enough electricity to power the building below, the excess energy can be sold back to Con Edison. The cash-strapped New York City Housing Authority is installing a solar array at Queensbridge Houses, the nation’s largest public housing development. And the City Council is looking to mandate solar or other green tech on rooftops of all new commercial or industrial projects. Landlords with big enough portfolios are being encouraged to think of their buildings as energy producers.
8) Make a bid
Foreclosures, an unfortunate result of loose lending regulations and market failures, are nevertheless an opportunity to buy at a discount. Because of a backlog in the state courts—and some banks warehousing properties until values increase—auctions for many New York City homes hit by the Great Recession are only now being scheduled. During the second quarter of this year, 881 residences appeared on the docket for a first-time foreclosure auction, according to PropertyShark, the third-highest number since 2009.
9) Be a techie
The city’s proptech sector has yet to produce a unicorn that rewards its investors with massive returns. But some institutional owners are investing in startups early enough to secure board seats and tailor new products to fit their portfolios. Investing a few million dollars is unlikely to pay off directly in the near-term, but by actually using the innovation, companies can trim operating costs and come out ahead. For the real estate startups themselves, there appears to be more money flowing into the sector. California-based venture capital fund Fifth Wall recently announced a $400 million fund. Brookfield Properties plans to spend around $250 million on tech investments. And Manhattan-based accelerator MetaProp announced a $40 million float. Typically investors are looking for easily scalable ways to unlock value in an industry that has been historically resistant to change. Those who hit on a winning idea are handsomely rewarded.
10) Focus on resale
In the residential brokerage world, new development is king. In addition to the prestige that comes with helping a developer shepherd a new condo project through the planning process, new development brokers also see a bigger commission. Last quarter, for example, the median price of a newly developed home in Manhattan was $2.7 million—more than double the borough’s overall median. But sales are slowing. New development prices are down around 20% compared to last year, and only 352 properties sold during the second quarter, a 38% decline. That’s why many high-profile brokers have started turning to resales, which make up the bulk of the market and have much more stable pricing.
11) Play the long game
If your investment timeline is long enough, more decisions start to make sense. Asset management firm Brookfield has been one of the city’s most successful players recently. Even though executives there believe the commercial and residential markets are late in the cycle—meaning values will soon start to decline—the company has not been shy about acquisitions, most recently agreeing to buy out the Kushner Cos.’ stake in a Midtown office tower. The key is thinking long term. “The simple answer to think about when investing,” said Ben Brown, head of Brookfield’s New York office, “is sticking to buying high-quality assets and leverage them conservatively. These properties tend to weather storms and retain their value more than inferior properties.”
12) Make it rain
In 2004 the city enacted Local Law 26, requiring landlords to install sprinklers in all commercial buildings 100-feet or taller. With the deadline to comply set for July 1, 2019, many owners are now rushing to get the systems in, creating a surge of work for sprinkler installers. Richard Jantz of Cushman & Wakefield estimates that 2,000 of the 7,000 covered buildings still need sprinklers, and Jantz put the total cost of completing those jobs at $1 billion. “You’re starting to see out-of-town firms you’ve never heard of because there’s so much work,” he said.