As the U.S. economy passes through the third largest expansion cycle in the economic history, every sector in the economy has seen phenomenal growth over the last six to seven years. The growth in other industries has had a trickle-down effect on the real estate sector. U.S. real estate has seen rents surging and even surpassing the previous expansion cycle, as well as an increase in leasing and absorption activity and a record rise in the value of sales transactions. Manhattan has always been at the epicenter of this real estate growth. With the combination of developed market and investment-grade properties, Manhattan has regularly attracted the majority of foreign direct investment in the real estate sector throughout the country. Increased demand from TAMI (technology, advertising, media and information) and FIRE (finance, insurance and real estate) sector tenants have made these properties an attractive investment option for both the local institutional investors and foreign direct investment.
Palak Raval, Transwestern
The Manhattan commercial real estate market has seen a 33 percent (see footnote 1) increase in the transactions above $1,000 per square foot over the last seven years. These values are no longer limited to only trophy properties in Midtown but have spread across both Midtown South and even Downtown. The chart (to the right) shows this increase in high-value transactions from 2010 to 2016.
Comparing the absolute dollar value of sales during the last two years does suggest a fall in volume in 2016. However, the year 2015 was an anomaly in the growth cycle, and the increase in transaction volume was due to a couple of portfolio transactions. The number of transactions above $1,000 per square foot also dropped marginally from 88 in 2015 to 72 in 2016. Sixty-five percent of the sales were concentrated in Midtown, followed by Downtown and Midtown South in 2016. Retail space drove the sale prices up in the majority of these transactions. (See table for a list of the prominent deals in 2016.)
Continuing with the trend in earlier years, foreign and institutional investors dominated the investment market in Manhattan. Cross-border investments grew from 18 percent in 2015 to 21 percent in 2016. Investors from countries such as Canada, Germany, the United Kingdom and Japan have traditionally invested in Manhattan real estate market in the last 10 to 15 years. Post-2009 recession, Chinese investors have almost dominated the market, and their share is increasing substantially every year. In 2016 cross-border investors were mainly from China, Germany and Canada.
As political and economic uncertainty and instability continue to rise in economies across the world, Manhattan will remain the desired destination for investors, and we anticipate seeing a continuous increase in foreign investment. The restrictive policies on the capital outflows by the Chinese government and the growing scrutiny in the EB5 visa processing by the Trump administration might moderately slow the Chinese investments in the coming years. Overall, foreign direct investment is expected to remain in core properties in gateway cities across the U.S. Additionally, if interest rates increase as expected — after a decade of no activity — it will have a slight dampening effect on the real estate investment market.
Footnote 1: 33% Compounded Annual Growth Rate (CAGR)
— By Palak Raval, Research – Capital Markets & Leasing, Transwestern. This article first appeared in the March/April 2017 issue of Northeast Real Estate Business magazine.