Threats to the Investment Sales Market

Almost two years ago in this column, I discussed what were, at the time, perceived threats to the health of the investment sales market in New York City. The market was moving forward but was somewhat “uneven” as sales in some sectors, and in some submarkets, were doing much better than others. Here’s how I described the risks:

“Moving forward, there are three distinct threats to the health of our commercial real estate market. They include interest rates, real estate taxes and who the next mayor of New York will be.”

Today we will take a look at these three issues two years later.

The potential rise in interest rates did not occur since the Fed has continued a quantitative easing policy far longer than anyone anticipated. Many months ago it appeared that rates were going to rise but after a few months of elevated levels, rates backed up and retreated to what has now become a long-term average. Notwithstanding the unprecedented government intervention we have seen, the economy has only been limping along and job creation has been mediocre at best. With the lackluster performance of both of these key metrics, the Fed has been required to keep easy money policy in place. Even with the present tapering, the amount of assistance is substantial and is helping to keep rates down.

Interest rate risk is still a huge concern for the investment sales market. At some point, rates will rise. The key question is why they will rise. If it is because GDP is growing nicely and private sector job growth is in the 300,000 to 400,000 per month range (where it should be), rates will rise and that will be a good thing. Companies will be doing better economically and will be able to pay higher rents. Folks who work for these companies will make more money and will be able to shop more frequently in retail stores, will be able to pay higher rent for their apartments and will be able to spend more money to purchase homes. Let’s hope rates rise for these reasons.

Conversely, if rates rise because the government has tripled the money supply and the Fed’s balance sheet has mushroomed without a commensurate resurgence in the broader economy, it will be horrible. It would be this circumstance that would significantly hurt the commercial real estate market.

Real estate taxes could still be a threat to the investment sales market. It appears that Mayor de Blasio will not be able to convince Albany legislators to raise income taxes on city residents. The mayor wanted to raise revenue on those making over $500,000 per year to pay for universal pre-K. When the governor came up with the money out of the state budget for the program, the mayor still wanted to raise taxes and use the money for other initiatives. If Albany won’t help him out, his only choice may be to substantially raise real estate taxes to pay for the increases he is likely to give city employees who are negotiating 152 new labor contracts.

And now we know who the new mayor is. Mayor de Blasio ran away with the election by a margin of 49 percent. This was the third largest margin of victory in the city’s history. However, the mayor may be a bit reluctant to follow through on many of his campaign promises for the reason of popular opinion. In the election, only 18 percent of registered voters actually voted. If we assume that maybe half of city residents are registered, less than 10 percent of New Yorkers voted for the mayor. This explains his lack of support for some key issues. For instance, a Quinnipiac poll of New York City voters published late last month in the New York Post found that 54 percent of city residents oppose the mayor’s desire for a new tax that would go toward pre-K.

Nearly two-thirds of city residents disagree with the mayor’s desire to get rid of horse-drawn carriages in Central Park. And 79 percent of New Yorkers disagree with the mayor on the issue of charter schools. He has already changed his position on charter schools due to this overwhelming opposition.

So the question is, will Mayor de Blasio stand firmly behind those progressive positions or will he realize that a more moderate slate of policies will make better sense with regard to his re-election bid (which is crazy to already think about, I know)?

Two years since my last column on clouds hovering over investment sales, interest rates, real estate taxes and the mayor’s policies remain threats to the health of our market. The more things change, the more they seem to stay the same.

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