There are strong pockets of acquisition opportunities across the commercial real estate market, with veteran investors and brokers citing specific examples in New York’s office market and niche sectors like medical office and student housing. But at the same time, industrial investors may be taking a step back from a sector that’s been on fire in recent years.
Sale prices for New York City offices have leveled off despite better leasing fundamentals and strong economic drivers, said Greg Kraut, a managing partner at K Property Group. “GDP and consumer confidence are high, unemployment is down, and large tenants are expanding. Last year, New York had its best leasing year in 17 years,” he said. “We think there is a huge market dislocation, which creates an opportunity for buying. Everyone thinks New York City offices are overvalued but I’d argue that they don’t really understand the market.”
Kraut cited long-term market drivers, including Amazon’s decision to move into Long Island City and an expanded Google campus that’s being plotted in Hudson Square. “The office market in Manhattan is like nowhere else in the region, sustainable and steadfast, with a strong knowledge-based workforce and efficient transportation. We think that now is the best time to be buying office properties again,” he said. While there are concerns about the vast square footage that’s coming online in Hudson Yards, 75% of it has been accounted for and the city has been creating roughly 34,000 new office jobs per year since 2010.
Craig Meyer, president of JLL Industrial, Americas, noted that after nearly eight years of sustained net absorption, vacancy rates in the industrial sector are now at a cyclical and secular low. The vacancy rate for industrial assets is sub-5%, and the sector has seen strong and continued rent growth year-over-year. “But we’re seeing a little trepidation on the demand side, which means that 2019 will likely feel a little flat. There’s nothing catastrophic going on but we are seeing a slowdown,” he said.
There are a number of reasons behind the shift, including changes in how product is being warehoused and noise around what’s going on with NAFTA, the Trans Pacific Partnership, and tariffs with China. “It’s all having an impact on decision making and there’s a lot of uncertainty about how it will all settle out. The rhetoric coming out of Washington is confusing and, if you’re a business planner making huge capital bets, you want to know how it will play out. But the positive thing is that we’re on an inexorable journey toward e-commerce,” Meyer said.
Meanwhile, more investors are expressing interest in niche assets. “As we are getting later in the cycle, there’s an idea that niche sectors are connected with longer, secular trends in the economy,” said David Bitner, head of Americas Capital Markets Research at Cushman & Wakefield. “We’re constantly having conversations with key clients who are more interested in niche assets.” Sectors that are being discussed include medical office, where the trend is to move care toward the consumer, data centers, and student housing. “We have a large Millennial generation with higher college penetration rates,” he said. “We’re seeing higher enrollment and are expecting to see that continue.”
Affordable housing is another key area of interest, particularly as the number of rent-burdened individuals rises. “The affordable segment of the market is very attractive and, from the investor’s perspective, almost guarantees 100% occupancy,” Bitner said.
There continues to be a tremendous amount of dry capital from foreign and domestic investors and a lot of this money is oriented toward being able to accept a higher risk profile, Bitner said. “There’s more money to buy than is looking to exit.” This phenomenon has been part of the move toward niche assets, which made up about $60bn of trades over the last year.
A final factor for investors to consider is the dislocation between REIT prices and the valuation of the underlying securities, including New York-focused companies. “The public markets are discounting the strength of the Manhattan office market and are doing that at their own peril,” Kraut said. “New York has a very broad-based, diversified economy and is still the strongest market in the world. There’s no more space in New York but everyone wants to have an office here. I have a feeling that now and in 30 years, people will still be paying up for New York.”