Commercial real estate activity remains resilient in New York City, even with macroeconomic headwinds persisting, such as unknowns about the war in the Middle East and where interest rates will wind up. However, Louis Puopolo, division head of Douglas Elliman Commercial New York City, wonders if the mood could sour if rates stay high for a prolonged period of time.
"It's hard to be aspirational when the rates aren't being cut, or when they're in the five and six range, or the six and seven range," he told GlobeSt.
In an ideal world, buyers and sellers want to transact in the sub-to 5% cap range — but Puopolo admits that isn't the reality right now.
While this hasn't slowed activity, at least in New York yet, and rate cuts aren't expected — it's all about sentiment. A good measure is the 10 Year Treasury, which keeps swinging — but has remained above 4.4 % by and large for the past month-plus. This is, of course, much higher than the pandemic lows and pre-Covid levels.
Add that to the fact that new Fed Chair Kevin Warsh did little to calm the markets last week, warning that rate hikes are on the table.
CRE Spending Could Halt
If current bond rates are sustained or worsen due to hotter-than-expected inflation, this could lead to a pullback in the market, according to Puopolo.
"People are going to stop spending," Puopolo warned if hotter inflation persists.
"[If] people need to do deals, they're going to have to just take less, or they're just going to rework the transaction. Maybe instead of two openings or three openings, a store [may just] do one."
That said, a slowdown hasn't taken place yet. In fact, Puopolo, who mainly focuses on office in retail in NYC, said he's been just as busy now as he was five years ago, as investors have adjusted to the interest rates before the post-war spike in inflation.
"We're just seeing a lot more activity and a lot less availability," he revealed.
Chelsea Shows Promise
One submarket that Puopolo finds interesting currently in NYC is Chelsea. He cites a change in demographics, with professionals flocking to residential product in the area, anywhere from Fifth Avenue West to Ninth Avenue.
He noted that the submarket is drawing attraction for its food use. "The Eighth Avenue Corridor has changed," he emphasized, adding that the area specializes in restaurants and heavy liquor, as opposed to bars that stay open late. The offerings are prevalent in Mexican, tapas bars and sushi, according to Puopolo.
"It's mostly food-driven; it's not bar-driven, it's food and cocktails," he added.
Right now, he said that Chelsea is certainly a target for local investors, with Puopolo noting several residential developments occurring between Eighth and Seventh Avenue.
Worst Could Be Yet to Come
While New York has yet to lose its bright lights appeal, we'll have to see how investors react to geopolitical headwinds in the coming months. The U.S and Iran agreed to an MOU that includes reopening the Straight of Hormuz, where roughly a third of the global fertilizer passes through and where up to 25 percent of the oil supply is handled.
However, tensions have picked up in the Middle East and Iran has reportedly closed the Straight again. It's unclear if and when traffic will return to pre-war levels, impacting supply and prices. It's possible we may not have seen the worst yet, although oil prices have been trending down over the past month.
"I feel like we're going to still have to go through a period of time where our pricing is going to be affected and that affects the operations of buildings, operations of transportation, the infrastructure of how we ship and receive and we go about our day-to-day. And that's on a global scale," Puopolo feared.
Puopolo also signaled out worries about packaging, manufacturing and warehousing — because those sectors rely heavily on oil.
The outlook remains unclear and we'll have to wait and see if the MOU gets reinstated and how traffic rebounds through the Straight of Hormuz. Elevated inflation likely isn't going away anytime soon and it becomes a question if the Fed decides to hike rates or keeps them where they are in the short-term — rather than cuts — and if that will deter sentiment.
But for now, business is booming in NYC.
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