Forecasting Investment Sales
In many of my Concrete Thoughts columns, and in many of the market reports produced by Massey Knakal, we not only report on what has happened in New York’s investment sales market but forecast what we believe will occur in the future.
In this week’s column, we begin a two-part overview of the indicators that we rely on to make our forecasts. Some of these are very big-picture in nature, but connecting the dots between macroeconomic factors and our local real estate market is what we are constantly attempting to accomplish.
The two main metrics we discuss when talking about the relative health of the investment sales market are the volume of sales and the level of values. These two indicators provide the best snapshot illustrating how the market is currently performing, particularly relative to past performance. The volume of investment sales in the New York City marketplace has clearly been improving steadily since early 2009 (although third-quarter 2010 performance looks like it may have suffered a setback). Additional activity in the distressed-asset market, from both banks and special servicers, has helped with volume increases.
Reaction to tax policy, namely the anticipated increase in the federal capital gains tax, and a return to more normal levels of activity, have helped boost volume in the marketplace.
With regard to value, since hitting what appears to be a bottom in 2009, the trends have been far less clear. After dropping approximately 32 percent on a price-per-square-foot basis on average, we have seen volatility in value as some product types in some submarkets are increasing slightly, and other product types in some submarkets are decreasing slightly. This volatility on the value side is a clear indication of a market that is trying to establish its footing.
The direction and magnitude of volume and value fluctuations are dependent upon many factors. Clearly, fundamentals are a significant component of these factors, and there are several indicators we consistently examine as we try to determine how these underlying real estate fundamentals will be impacted.
Below is a summary of things we keep a close eye on to try to gain insight as to where the market may be headed.
Perhaps the metric that has the most profound effect on real estate fundamentals is the level of employment. The more people who are working, the better for our economy. Simply put, working consumers spend more than nonworking consumers.
As jobs are created and companies grow, the need for more office space is obvious. As more office space is needed, developers must buy land and construct buildings, putting thousands of construction workers to work. This, in turn, puts more consumers in spending mode, thereby further expanding the economy. This is what economists referred to as a positive feedback loop. As the economy grows, people look to upgrade their living conditions, and household formation expands.
For this reason, last Friday’s disappointing jobs report was another setback for those looking for a sustainable recovery in the short term. In September, U.S. payrolls were reduced by 95,000 jobs; private-sector employers added 64,000 workers, but governments and municipalities shed 159,000 workers. As we predicted, state and local governments have been reducing their workforces significantly in reaction to massive deficits that nearly all municipalities are running. Of the 83,000 workers who lost their job from these segments, many were schoolteachers from budget-constrained school districts. This was not surprising given that, for most, the school year begins in September.
Although the economy lost 95,000 jobs, the unemployment rate was unchanged at 9.6 percent. This is due to the fact that the participation rate has decreased as discouraged workers continued to drop out of the search for a job.
A broader measure of the unemployment rate, U-6, rose to 17.1 percent from 16.7 percent. U-6 includes those who have stopped looking for work, and those who are working part-time jobs that desire full-time employment. In another troubling trend, the employment-to-population ratio remained at 58.5 percent. This ratio has been a focus of the Fed and is near its lowest level in more than 30 years.
While an average of approximately 96,000 private-sector jobs have been added each month in 2010, this figure does not even absorb new people entering the job market simply based on population growth. It has done nothing to regain any of the 8.5 million jobs lost during this recession.
In New York, we are much better off than the rest of the nation when it comes to employment. Over 10 percent of the private-sector jobs created in the United States this year have been in New York. This bodes well for our real estate market moving forward. Let’s hope that the City Council uses some common sense when negotiating legislation that could potentially be job-killing, such as the new paid-sick-day initiative that is being discussed.
The magnitude of job growth dictates what is likely to occur with economic activity and, consequently, space demand