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December 13, 2013

2013 Real Estate Symposium New York Panel Report: Is the Sky the Limit?

The panel “Is the Sky the Limit? NYC Real Estate Pricing Keeps Climbing” discussed recent trends in the local real estate market and whether continued appreciation is likely.

Topics: Real Estate

By Jacob Feingold ’14 and Scott Meyer ’14

Moderator: Paul E. Pariser ’78, Co-Chief Executive Officer, Taconic Investment Partners
Panelists: Jeff T. Blau, CEO, Related Companies
Seth Pinsky CC’93, Executive Vice President, Fund Manager, Metro Emerging Markets and Public Affairs Director, RXR Realty
Wendy Silverstein, Executive Vice President and Co-Head of Acquisitions and Capital Markets, Vornado Realty Trust


Paul E. Pariser ’78 led off the panel “Is the Sky the Limit? NYC Real Estate Pricing Keeps Climbing” by asking whether there are enough buyers for the $50 million penthouse to become a trend. Blau tackled the question first, explaining that there is a dislocation in capital markets throughout the world and that Manhattan and London are safe harbors for both institutional and individual capital. He believes the big unknown to be the depth of demand for apartments that cost upward of $8,000 per square foot. Silverstein believes New York City is still playing catch-up when it comes to demand for ultra-high-end product, noting that top international cities like London, Paris, and Hong Kong are more expensive. Furthermore, the majority of the world’s billionaires live in North America, and 50 percent of the buyers of ultra-high-end condo product come from this continent. Therefore, even if the money flowing into Manhattan from overseas begins to dry up, there is still a solid base for demand. In short, it does not appear that the New York City condominium market will be slowing down anytime soon. As a result, owners of land entitled for residential development currently favor condominium development, since the economics are superior to multifamily. Pinsky commented that cycles are inevitable; when markets go up quickly, a correction usually follows, though it is hard to know when it will occur.

One of the main themes discussed throughout the session is what type of affordable housing legislation Mayor-elect Bill de Blasio will support once in office. Panelists agreed that de Blasio will try to increase affordable housing requirements in new zoning, however, they also believe that his affordable housing preservation mandate will be hard to enforce given where land prices are today. There was consensus that the social and financial fundamentals under the 80/20 Housing Program—which offers tax-exempt financing for rental developments with at least 20 percent of the units set aside as affordable—have been very successful, and the panel is concerned that the economics do not support ratios in excess of 70/30. The panel suggested that de Blasio might find success through increases in workforce housing, which would also have positive ramifications in the labor market and thereby increase office demand.

The discussion then turned to the state of the New York City office market. Silverstein, whose company is the largest office landlord in New York City, believes there is room for significant growth in this sector, as new development has been limited and the market has become extremely tight. While the financial industry has not fully rebounded from the downturn, the tech industry has filled the demand gap. Tech companies have flocked to Midtown South because of their desire for wide open spaces and cheap rents, leading to the submarket enjoying one of the lowest vacancy rates of any submarket in the country.

The biggest trend the panelists see in the office market is a consolidation and densification of tenants. Blau, for example, noted that Time Warner currently occupies 428 square feet per office worker at the Time Warner Center and is contemplating taking half of that space in its next lease. Silverstein noted that this rapid change in worker density is physically straining the infrastructure of existing office supply. Blau noted that even at newer buildings such as the Bloomberg Tower (begun in 2001), with a highest-in-city density of 110 square feet per worker, there can be lines at the elevators and bathrooms. Tenants everywhere are seeking space that can meet this new usage paradigm shift.

Discussion of the need for efficient floor plates segued to the recently stalled Midtown East rezoning plan. Commenting that the zoning should have passed given the vintage of the office supply in that corridor, and noting that the city needs to build modern, efficient towers to compete globally, Blau drew nods from the rest of the panel. Pinsky, who served as president of the city’s Economic Development Corporation from 2008 to mid-2013, believes that both the incoming mayor and the City Council want to pass a rezoning. The proposal was rejected because it was rushed and the details had not been fully flushed out, he added.

The panel also discussed the major challenges the new mayor faces, especially as they relate to the real estate industry. Silverstein voiced concern over commercial property tax rates rising faster than for residential, given that they are passed along to tenants. Pinsky cautioned that managing basic city services should not be taken for granted. Also, de Blasio’s ability to manage the city’s budget will be of paramount importance as the unions will be pushing for dramatic increases in pay and benefits.

In conclusion, the panelists were generally in agreement that the New York City real estate market has enjoyed tremendous growth under the Bloomberg administration and optimistic about its continued appreciation. It seems that the sky may not have been reached yet.

 

The sixth annual Real Estate Symposium took place on December 9, 2013, at the Columbia University Club of New York, drawing 200 attendees representing classes from 1959 to 2013. Please visit the event page for more details and reports on other speakers. Hosted by the Paul Milstein Center for Real Estate and the Real Estate Circle of Columbia Business School, the Real Estate Symposium is an annual educational forum that brings together accomplished Columbia Business School alumni and top industry leaders for a broad-based discussion of topical issues, high-profile transactions, trends, and challenges facing the real estate industry.