Why does every downturn feel like the first time?
New York City has always had a deeply cyclical economy, going back to the first Dutch settlement four centuries ago. But history has also shown that time and again, downturns have laid the foundation for change and, ultimately, have regenerated our city. Historically, those who acted wisely at the bottom of the cycle have looked brilliant at the top.
There are so many examples of people and companies who got it right:
• John D. Rockefeller Jr. started Rockefeller Center in the depths of the Depression.
• In 1992, Mutual of America acquired 320 Park Avenue for $175 per square foot. It’s still Mutual of America’s headquarters, and the space that the company doesn’t occupy has been a major revenue source for the firm for more than 15 years.
• In 1996, the Dursts bought the Broadway and 42nd–43rd Street blockfront for $50 per square foot; merged it with a site they’d been assembling for generations; and built 4 Times Square. Today, the Condé Nast Building is a billion dollar–plus asset for the family.
For businesses seeking the moment to strike in the Manhattan market, that moment may well be upon us. Certain indicators suggest that rents are bottoming out and concessions peaking. Midtown has posted two consecutive months of positive absorption. Average asking rents continue to edge down, but the pace of decline has slowed and the spread between asking and taking rents is starting to narrow.
For a company confident in its long-term business model, it’s time to go long with a lease. For firms uncertain as to their industry’s 10-year profile—but faced with near-term expirations—landlords are now more accommodating of short-term deals than they’ve been in decades.
At the same time, New York has become a more affordable destination for talent seeking opportunity. We’ve seen a drop of more than 10 percent in the average rent of a two-bedroom apartment in Manhattan over the past two years, with generous concessions sweetening the deal for residents. This may not necessarily be good for landlords in the near term, but in the long term it serves to stabilize our city’s middle class while revitalizing our ranks with new talent for companies looking to recruit.
During a downturn, the availability of construction resources and government spending for infrastructure projects can enhance our city. In the mid-1930s, the Federal Works Progress Administration spent about one out of every seven of its dollars in New York City. Those dollars, combined with the Public Works Administration, gave us the Lincoln Tunnel, LaGuardia Airport and other improvements, and fundamentally improved the landscape of our city.
Today’s infrastructure projects include the No. 7 train subway expansion; ongoing work on the Third Water Tunnel; and the Fulton Street Transit Center. When construction costs are lower—and in the past 18 months, construction costs have dropped 15 percent to 20 percent—it’s time to redouble efforts on infrastructure improvements.
Downturns also attract new investors to New York, diversifying the city’s ownership base. Historically, it’s out-of-towners who’ve reminded us of the intrinsic value of New York real estate. In the dark days of the late 1970s, for example, it took a Canadian company, Olympia & York, to step up and buy the 10 million–square–foot Uris portfolio, for which they paid $32 per square foot.
The same thing is happening now. Last year, foreign investors dominated our market, accounting for more than half of the total dollar volume of large Manhattan office sales, compared to less than one-fifth in earlier years. A number of factors contributed to this increase, favorable exchange rates included. But like the German, Japanese and, most recently, Middle Eastern investors of previous cycles, overseas capital will continue to look to New York as a safe haven.
From a developer’s standpoint, opportunities to acquire or complete assemblages are rarely so favorable as in a downturn. When the time to build is right, those who bought sites on the dip have the real estate and vision in place to move a project forward as soon as the cycle turns up.
History teaches us how to profit from a downturn. It is at times precisely like these when the smart minds—and the smart money—do truly remarkable things, and ultimately transform New York City for the better.
Mary Ann Tighe is the chief executive officer for the New York Tri-State Region of CB Richard Ellis and the chairman-designee of the Real Estate Board of New York.