Three Strikes And It Could Be An ‘Out’ For Commercial Real Estate
As we enter into the baseball playoff season, I thought I would review three strikes that could be an “out” for commercial real estate and especially the investment sales market.
This column will review threats to what has been a thriving sales sector. These scenarios, particularly together, would have a very negative impact on the market. As a broker, I generally don’t think so negatively (having optimism injected into my DNA at birth), but I am probably feeling low, because my beloved New York Yankees did not make the playoffs this year, which is only the second time this has happened in the past 19 years.
The low interest-rate environment has been a boon to the commercial real estate sales market and continues to be. To the extent that interest rates go up significantly, which can be caused by a number of factors, it would certainly have a tangible negative impact on our sales market. Why rates go up will determine how negatively a rate increase would hurt. To the extent rates rise because there is significant traction in the economy would be a good thing. If rates rise for any other reason, the impact on our market would be quite negative.
As we head into the November elections, a scenario, which is not unlikely, would be to have Bill de Blasio as mayor, Leticia James as public advocate and Gale Brewer as Manhattan borough president. This slate, in conjunction with a notoriously liberal city council, could create challenges for our industry, the business community at large and our local economy. Those challenges come in the form of public safety and real estate taxes.
To the extent that the police department’s procedures are stifled, it could have a tremendous negative impact on our quality of life and our market conditions. The NYPD is the best police force in the country and has worked tirelessly, and diligently, to keep us safe.
Since a judge’s decision that has neutered “stop and frisk,” we have seen 140 shootings in the following month, a 13 percent increase. We are on track for a second consecutive month of double-digit increases in violent crime. This result is something that was an obvious outcome. Notably, this is the first time there has been this type of increase in violent crime since the Dinkins administration. Public safety is critical as tourism is a huge economic stimulus for our city.
With the next mayor having the task of negotiating 153 municipal labor contracts, and many promises made to labor both in terms of contract provisions and retroactive pay, finding money in a budget that is already in a deficit position prior to these items will be difficult. An easy solution would be to simply increase real estate taxes yet again. With top-line revenue growing modestly and net operating incomes flat, increasing our real estate tax burden would not be welcomed.
With the dysfunction in Washington, almost any scenario could play out relative to the debt ceiling and budget debates. One scenario is that a grander bargain could be negotiated, which could include tax reform. Proposals being discussed in our capital include lowering corporate taxes and reducing the number of marginal tax brackets, which would be positive. However, the reduction, or elimination, of tax exemptions, including the mortgage interest deduction, charitable deductions and the deductibility of state and local taxes, could be painful. The last issue is one that could do significant damage to New York and its economy. Having the highest tax burden, on a state and local level, in the nation and for New Yorkers not to be able to deduct those taxes from their Federal tax return could significantly impact our local economy.
High income earners are already being driven out of the city by tax burdens as evidenced by reduced tax revenues in the face of more jobs than prerecession levels and higher population. To the extent state and local taxes were no longer deductible, the flight of high income earners out of the state, particularly given technological advances that are available to everyone today, would be terrible for the city.
I certainly hope these three scenarios do not play out. We currently enjoy wonderful momentum in our commercial real estate markets, something we would all like to see continue. For my Yankees, as the saying goes, there is always next year. For commercial real estate, all we need is for the market next year to be just like this year. Let’s hope the strikeouts stay only on the baseball field.