January 18, 2017 / 8:44 PM / 7 months ago

'Measured optimism' seen for New York commercial property market

NEW YORK (Reuters) - There are signs that the commercial real estate market in New York is weakening but optimism about the U.S. economy and resilient leasing activity suggest growth is still expected this year and in 2018, brokerage Cushman & Wakefield said on Wednesday.

While land sales and their transaction volume in 2016 slid noticeably, an indication potential buyers see a weak market in a few years, the amount of foreign capital -- especially Chinese -- pouring into New York real estate is double from a decade ago.

New York commercial real estate last year had a better year than analysts predicted at the beginning of 2016 and the outlook suggests a growth cycle now in its seventh year still has legs, the brokerage said.

"There's definitely a sense in the U.S. today of optimism, of change," said Ken McCarthy, principal economist at Cushman & Wakefield. "Small business optimism is up, consumer confidence is up and of course the stock market is up dramatically."

Cushman called it "measured optimism."

Still, employment growth in New York, which outpaced the rest of the United States from 2010 to 2015, slowed last year as new jobs in the office-using sector, such as financial services, accounting, legal and technology, tapered some, he said.

Economic growth will be stronger this year and greater still in 2018, perhaps 1.0 percentage point more, "but you can't continue to grow extraordinarily rapidly forever," he said.

The vacancy rate for Manhattan office space edged up to 9.3 percent in the fourth quarter, up from 8.5 percent a year earlier. Leasing activity rose slightly last year from 2015 and asking rents rose 2.1 percent to $75.16 a square foot.

But the effective rate, which takes into account landlord concessions to keep or attract tenants, fell in a sign of a tightening market. Concessions may include increased allowance to improve offices and an increase in free months of rent.

In addition, a 60 percent premium that Class A office space carried over Class B leases in 2007 has narrowed to only 30 percent, Cushman & Wakefield said.

Other signs of a weaker market include a 34 percent decline in the dollar amount of properties sold in Manhattan to $39.6 billion from $59.9 billion in 2015. Activity slowed in the second half of the year, as value of a square foot sold fell to $1,263 from $1,616 in the first half of 2016.

Still, the market is healthier now than during its previous peak in 2007, said Doug Harmon, chairman of capital markets at Cushman & Wakefield. The market is not speculative as flipping buildings is absent and foreign money is long-term, he said.

While foreign investment in dollar terms fell 40 percent to $15.4 billion in 2016, the Chinese were the largest foreign participant accounting for 30 percent of sales. Although the Chinese might be slow to seal a deal, they have become more competitive and knowledgeable about the market, he added.

Reporting by Herbert Lash; Editing by Sandra Maler

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