The Biggest Concern for Commercial Real Estate Is…
Robert Knakal July 9, 2015, 12:16 p.m.
One of the constant topics of conversation in the commercial real estate world these days is whether the investment sales market is in a bubble and how long the market can run at this elevated level. To be sure, there are great arguments to be made on both sides of the issue.
Pessimists point to the tremendous gap between the performance of underlying fundamentals and property values. They also point to the fact that an extraordinarily low interest rate environment has fueled this surge in value and that the low interest rates have been artificially manipulated. With the federal funds rate at or below 25 basis points for nearly seven years, who could argue that we have been in a long period of low interest rates? Lastly, there are all the new buyers who continue pouring into the market, purchasing properties and land at ever increasing prices and who don’t really understand what they’re doing.
The optimists believe that since the Great Recession began in 2008, the recovery has been much more moderate than would typically occur after such a severe downturn. They believe that the leisurely pace of recovery means it will continue for a much longer period of time. This dynamic should also continue to keep interest rates low in the short- to mid-term. Optimists also look at all of the capital that is chasing commercial real estate today and feel it will be years before this appetite is satiated.
Both optimists and pessimists agree that the commercial real estate market is cyclical and cannot escalate forever. So the question many are focused on is what will precipitate the next downturn—and a consensus has emerged.
No, it’s not interest rates. No, it’s not all of the new buyers. It is something that many are reluctant to talk about: crime.
Yes, crime, which is increasing like wildfire. Shootings and murders are escalating at double-digit rates. This led me to think that maybe bankers on Wall Street were pistol-whipping each other at lunchtime. Or maybe fashion designers were having shootouts during happy hour. My concerns were alleviated by the mayor who remarked that the increase in shootings and murders wasdue to increases in gang activity. (No kidding!) Glad to see law-abiding citizens are not turning to a life of crime.
Something is happening in concert with shootings and murders—an alarming degradation in quality of life issues, which mayors Giuliani and Bloomberg worked so hard to improve. Over the past several months, squeegee guys have consistently appeared around Manhattan. They don’t appear well rested or tanned, which was surprising given they have been on vacation for over 20 years.
On a recent walk from East 40th Street and Madison Avenue to East 49th and Park Avenue, my northern route was up Madison, and I was surprised by all of the unfortunate homeless folks lying on the sidewalks. On the way back, I took Park, then Vanderbilt and the condition was actually worse, particularly around Grand Central Terminal. It was reminiscent of the early 1990s when David Dinkins was the mayor and the city was riddled with dangerous elements. We have become so used to a different way of life over the past 20 years that this adverse reality really stands out.
These conditions should be huge concerns for commercial real estate market participants. Tourism has been tremendously economically stimulative for our local economy as visitors want to come here because, among other things, the city was considered safe. And young people from around the country and around the world want to come live and work here. This has led economists to predict that the city’s population will grow by one million people by 2040. This population growth will enhance market fundamentals significantly. However, if the city is no longer considered safe, visitors will go elsewhere. And if our quality of life deteriorates, not only will potential residents not move here, existing residents may move out. As wonderful as New York City is, and I believe it is the greatest city in the world, its fortunes can change and change rapidly if these trends continue.
We should all be encouraging our mayor, and other elected officials, to be more cognizant of quality of life issues and to support the police department to make it more difficult for those who break the law to continue breaking the law. The future of the commercial real estate market depends on it.