RCA Insights

New York: Should I Stay or Should I Go?

By on August 27th, 2020

“Should I leave New York?” That is a question I am asking alongside tens of thousands of other knowledge sector workers. Many have already left and the city feels empty on my masked excursions across the bridge from Brooklyn into Manhattan. With so many of these high income workers tackling the question, commercial property prices are going to be hit. How much of a hit and for how long is the big issue.

The uncertainty around the future of knowledge sector workers in the region is driving a disconnect on pricing expectations. Owners of properties are fixing their hopes on favorable outcomes in the future, with prices not so different from the recent past. Potential buyers, however, do not want to be the butt of jokes about that being that one investor who jumped into the market before the city collapsed. Which side is right is open to debate, but one can measure how far apart each side is on pricing.

The team at the MIT Center for Real Estate Price Dynamics Platform did some work to measure this disconnect. For New York metro region commercial properties, potential buyers have price expectations 27% lower than that held by current owners. This figure is calculated by backing into the price adjustments necessary today to keep deal volume constant given historical trends in the supply and demand for real estate investments.

New York price changes RCA CPPI MIT

Despite this gap on price expectations, in Manhattan itself prices have barely budged. From February to June 2020, the RCA CPPI for office properties in Manhattan has fallen only a 2%. Buyers do not want to take a risk on high prices when they see a largely empty city, boarded-up shops, deserted office buildings and a steady drumbeat of stories noting people decamping elsewhere. However, unless owners are forced to sell into the panic, they will try to hold out until the city sparks back to life.

And there are reasons to expect that the city will come back. People have paid a premium to live in a city like New York. Many smaller cities that people talk about moving to in the face of this pandemic offer lower costs of living, especially with respect to housing and taxes. The amenities those cities offer are limited, however. The job markets are smaller, cultural attractions are few and far between, and younger folks have a smaller social pool. These amenities that New York offers are simply on hold with the pandemic.

For some, putting those amenities on hold for any period of time is too long and they have decamped. For myself, like the owners of existing properties here, I am just stubborn and waiting out this pandemic. When it is over, some may work remotely or only part-time in the city, but the benefits that the Big Apple offers will draw people in again. The longer it takes though, the more people will leave and more property owners will be forced to take pricing they do not want.

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To learn more about the RCA CPPI (Commercial Property Price Indices) and to sign up for reports visit rcanalytics.com

Also on RCA Insights:

US Sales Volume Tumbles Again in July, Price Growth Sags

Cross-Border Investors Into US Retreat in Second Quarter

Jim Costello

Jim Costello

Senior Vice President
jcostello@rcanalytics.com

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.