Wall Street analysts and investment managers predict that the steady but moderate economic growth expected in 2011 will have positive implications for commercial real estate. In a January market perspective, Prudential Real Estate Investors said conditions “finally seem ripe for an extended recovery [in the sector] after a long period of fits and starts.” It cautioned, however, that the improvement in market conditions remains dependent on the “fragile economy” and will probably be inconsistent in coming months. The Network Journal turned to members of the trade group African American Real Estate Professionals of New York (AAREPNY) for their take on the commercial real estate market — its current conditions, challenges, opportunities and outlook. Their responses are below.
Dwayne Jeffrey, president, AAREPNY
“There are four main categories of commercial real estate:
Residential (multifamily). “Any residential property larger than four units is considered commercial property because it is purchased for investment purposes. Multifamily is generally the most attractive due to its leveragability and the variety of banks and government-backed institutions that will finance a purchase. Since it is so desirable it usually holds its value better than other categories. Nationwide, the current lack of financing, coupled with higher interest rates and the weak dollar in the future, will have a very strong effect on the value. Stronger cash flows will come as demand increases for rentals, but values are still struggling. The outlook for the New York City market is warm. In New York this category will always be the strongest because values follow income and population. If you need a job, where better to be in a recession? The only places that seem to have jobs are New York and Washington, D.C.”
Retail. “From a single-tenant building to a shopping mall, retail is very attractive to investors mainly because tenants are married to the location and because the tenant is a corporation and usually requires less management than residential properties. Although Dollar and Walmart stores are doing fine, the rest of the retail business is in a fight with the Internet for customers. With little pressure for space, the category has to fight for good tenants, resulting in downward pressure on property values in tertiary areas and stable prices in great locations. The outlook for New York City is warm to hot. Retailers are always looking to enter New York, but it is the most expensive location in the country. If you’re a retailer, it’s a great time to get deals done. There is also interest in the surrounding boroughs. Downtown Brooklyn, Williamsburg, Long Island City and Harlem have become hotbeds of leasing activity.”
Office. “Considered the most volatile of all, the outlook for this category is cold. As companies downsize in hard economic times, the need for office space diminishes and values start to drop. When the economy is boom, however, this category leads the gains in value. Subcategories include medical offices and hi-rise buildings.”
Industrial. “This category includes everything from small warehouses to industrial parks. Tenants are businesses that manufacture, warehouse or ship products. Manufacturing has been hit hard by the recession and properties that house these companies have felt the blow to their value. The value in New York City industrial property often lies in its convertibility. These properties were largely located near waterways and close to highways, making them prime candidates for conversion. But values for existing industrial property are not as sexy or attractive to investors as the other categories, thus it tends to trail in value, but has reliable cash flows.
“Major subcategories are mixed-use buildings, hotels, storage and special-purpose properties such as theaters, car washes, churches, stand-alone restaurants and garages. With value heavily weighted on management, hotels are more of a business investment than a real estate investment. They face tough competition from the Internet and other communication technology. Why fly and spend a night in a hotel if you can have a face-to-face conference call? The outlook for the New York City hotel occupancy is warm, however, as the low value of the dollar keeps more Americans stateside for vacation and attracts tourists from countries with higher-value currencies.
“Storage has become very hot in urban centers over the past fifteen years as apartments got smaller and renters refused to part with their stuff. Storage requires less management and has strong value, but tends to take a much harder hit in a downturn than
residential and commercial properties. Special-purpose properties are business specific and their risk and value are based mainly on the viability and strength of the tenant. Small-business owners are having such a hard time financing new initiatives that they’re sticking to increasing cash flow without expanding and taking on new space. If there is no demand for space, values don’t rise.”
G. Lamont Blackstone, principal, G. L. Blackstone & Associates L.L.C.
“My focus is shopping center (retail real estate) and mixed-use development and the provision of energy services to property owners and businesses.”
Trends/key issues. “Many urban markets are deemed to be underserved by retail amenities, and mixed-use development has become a priority for some cities. Energy is a key operating expense for properties and small businesses may be vulnerable to volatile electricity pricing.”
Biggest worry. “The restricted flows of capital to real estate and the volatility of energy prices.”
Biggest challenge. “Adjusting to the deflationary environment impacting the retail real estate industry.”
Investment opportunity. “Finding new revenue streams for income-producing property, such as providing energy services to residential and commercial tenants.”
Walter J. Edwards, CEO, Full Spectrum of NY L.L.C.
“Full Spectrum NY L.L.C. focuses primarily on Green and sustainable, mixed-income, mixed-use urban residential development. Our developments usually have a public/private component, which allows for the use of a wider array of financing options.”
Trends/key issues. “The current environment has begun to slowly recover, but financing options have remained somewhat limited. Multifamily developers have used the HUD FHA financing window as a lifeline and as a result the process has slowed significantly in many instances. With respect to commercial development, financing for office projects remains tied to the level of pre-leasing obtained
for a proposed development. Green LEED (Leadership in Energy and Environmental Design)-certified buildings are beginning to bear fruit for investors now that there’s enough of an inventory to prove out the higher rents and energy savings associated with such buildings.”
Biggest worry. “Developers by nature aren’t scared. “We try to look at the current economics as challenging and try to look for solutions to help us with any financing gaps that may arise. That means our folks look for every source of capital available (traditional financing, tax credits, grants, etc) to fund our projects. We’ve had as many as 11 sources of financing on some of our projects in order to make the project work successfully for Full Spectrum and the investors.”
Biggest challenge. “As with most development companies, the biggest challenge revolves around the delicate balance of managing cash (existing book of business, corporate overhead) and obtaining financing for new projects at a time when financing isn’t readily available.”
Investment opportunities. “As with most residential/commercial development, the opportunities for investors are usually in markets with strong fundamentals (both primary and secondary markets). Our approach both domestically and internationally is to have offices in or near locations where we do business. Domestically, we have development opportunities in New Jersey and New York (the location of our main office) and Louisiana and Mississippi (the location of our Southern office). More recently, we have turned our focus abroad (emerging markets) and we now have development opportunities with local joint venture partners in Senegal and a few other West African countries. We believe our experience in Green sustainable development and the strength of our core team allow us to find excellent investment opportunities in slower economic times.”