The first signs of distress have emerged in several pockets of New York City’s commercial real estate market in recent months, The Real Deal Magazine reports. Retail vacancies, declining hotel revenues and foreclosures are among the indications that the market might be inching closer to financial instability. The influx of troubled loans is a product of the 2007 lending boom, and $90 billion in commercial mortgage backed-securities across the country are set to mature this year.
In Brooklyn and Staten Island, scheduled foreclosure auctions are making a comeback. There were 90 foreclosure auctions in Brooklyn in March, a 125 percent year-over-year increase.
“Retail is a disaster in New York City,” one source told The Real Deal on the condition of anonymity. While part of that situation is due to the continual rise of online retailers, “another part of it is people are too greedy,” the source added in reference to landlords seeking steep rents.
Indeed, brick-and-mortar stores across the country are collapsing due to high overhead, weak sales and mounting debt, and major U.S. retailers including American Apparel and Aeropostale, among many others, have filed for bankruptcy.
Last year, availability rates on Fifth Avenue between 42nd and 49th streets hit a high of 31 percent, Cushman data show.
Most recently, Ralph Lauren announced it would be closing its 39,000 square-foot flagship store at the Coca-Cola Company’s 711 Fifth Avenue.
The hotel industry is also facing an uphill battle to absorb oversupply in the city and combat online home-sharing marketplace Airbnb.
Room rates have declined and are expected to continue to do so.
Revenue per available room fell to $163 during the first three months of this year — its lowest level of the current cycle and a 2.3 percent drop year-over-year, according to a recent report from hotel-and-data analytics firm STR.
A wide range of Manhattan hotels are on the market, though very few have been able to find a buyer quickly. The properties on the hunt include the Park Lane Hotel, the Quin, the Standard High Line and Hotel Wales.
Nonetheless, there are 13,604 rooms and 79 hotels coming online in New York City through the end of 2018, according to STR. That could further drive room prices.
On the whole, office leasing across the boroughs has been healthy. More than 9 million square feet in deals were signed in the first quarter, according to Colliers International. The vacancy rate and absorption in Manhattan are relatively stable — at 10.2 percent and negative 127,000 square feet, respectively, a first-quarter Colliers report shows. However, much of the leasing activity has been driven by concessions by landlords.
While the city’s multifamily market continues to serve as a safe haven for investors, the vibe is definitely not as positive as it was just two years ago. Fewer deals are getting done.
Multifamily properties are often the last to take a financial hit due to stable rent prices and the necessity of housing. And high-end rental buildings are usually the hardest hit when the economy weakens. Several prominent landlords, including the Moinian Group and the Durst Organization, have recently started to cut their rents and even offer concessions to tenants to avoid high vacancy rates.
As of May, there were 2,300 active rental listings in Manhattan and 600 in Brooklyn and Queens offering free rent or brokerage fees paid by the landlord.
Land sales had a pretty damaging 2016, and the number of deals crossing the goal line was significantly diminished. Dollar volume plummeted 74 percent year-over-year to less than $3 billion, according to data from Cushman.
There is a lot of dislocation between buyers and sellers with respect to pricing on ground-up multifamily and land sales. This is causing buyers and sellers to seek alternate structures in the form of land contribution joint ventures and ground leases so that sellers can retain some upside in the project and bridge the price dislocation.
And deals from the past — particularly cases where a developer bought land at high prices in 2014 and 2015 — are coming back to haunt both owners and lenders who just can’t make the numbers work in today’s market.
And it seems as though the opportunities will be in greater supply. There was a 9 percent year-over-year increase in scheduled foreclosure auctions on vacant land in the first quarter, driven by a 114 percent jump in Brooklyn, ATTOM data showed.