The commercial real estate market in New York City is set to see a big surge, a major investment firm based in the city is projecting.
It comes from KPG Funds, which sees property values, particularly in the next 12-18 months, skyrocketing between 50 and 60 percent. CEO of the company, Gregory Kraut, said that anticipated lower interest and demand for premium office spaces in The Big Apple is expected to lead the charge.
With the stock market tanking, and unemployment rising for the fourth consecutive month, it might be fair to expect multiple rate cuts implemented going forward by the Federal Reserve. That will of course lower cap rates. In the next 12 months, KPG, which invests in the transformation of properties into office spaces in the CRE market, estimates the central bank to reduce rates by 200 basis points in the next year.
While there’s been some recovery this week, the Nasdaq Composite is still down about 1,000 points since last Thursday. But Kraut told GlobeSt that NYC will be the “golden age of investing.”
“With that market volatility, you’re seeing now, a lot of institutions that have started calling us today and over the last few weeks, saying, hey, let’s look at going into private real estate,” Kraut told GlobeSt.
He added that companies are considering “taking their chips off the table,” and trying to figure out how “to spread it out in the private market.”
Plus, leasing demand has been going up in NYC. In fact, Manhattan saw leasing velocity reach 15.5 million square feet in the first half, up 8.9 percent year-over-year, according to Savills.
Plus, Kraut said a pullback from the pubic to private markets could ”raise a huge distressed fund for office space.”
Of course, the Sunbelt market, which includes many Southern states like Florida, has been one of the hottest trends in CRE thanks to the significant population growth. In an ideal world, companies would be wise to leverage both New York City and areas like Florida, but Kraut thinks the “level of talent” that’s coupled with employers puts The Big Apple on top – at least right now.
“You have the best employers, the best employees, and you’re the biggest batch of that all put together,” Kraut noted of NYC.
Plus “75% of the workforce in New York City lives within five miles of Manhattan. And 75% of the workforce is under 45 years old. They want to be in a place like New York City, where they don’t have to drive a car.”
Specifically, Kraut thinks that firms involved with technology, biotech, and the financial sector will see the biggest growth in NYC in the lower interest rate environment. In technology, in particular, the metro area already dominates. The region’s sector is valued at $189 billion and is home to the second biggest tech hub in the world, according to nonprofit, New York City Economic Development Corporation.
But not everyone will thrive. Kraut believes industries that are not “interest rate sensitive” will see the least demand. So think of government entities and union institutions.
“Any that are government, maybe even, healthcare, those are the kind of industries that won’t do as well as the other companies that are really kind of interest rate dependent,” Kraut said.
One area in NYC that KPG highlighted was Soho, which the firm projects will “show strong interest for both tenants and investors,” it said in a statement.