It’s been a year and half since we first entered into the COVID-19 lockdown in New York City. While we’ve come a long way, the real estate market is still seeing impacts of the pandemic, as well as various other forces.
As we’re entering into the fall market, we thought now was a great time to dive into how the real estate market is fairing, and what’s impacting it today.
Interest rates
First of all, it’s important to put interest rates in perspective (again). This is a chart of the 30 year fixed mortgage rate average in this country since about 1970. The red arrow is the rate bump that we saw back in April and May of 2021 that got everyone talking. Let’s be very clear about this: rates are very (very) low and will likely stay that way for the foreseeable future. The current national average for the 30 year fixed mortgage is 2.87%.
Inflation
There has been a lot of chatter about inflation recently. Used car prices are through the roof! My yogurt cup keeps getting smaller – for the same price! The price of building materials is exploding! Oh, my. Look at this chart, which shows a measure of expected inflation (on average) over the five-year period that begins five years from today. Guess what? Five years from now inflation is expected to be where it was in 2018. This is why the 30 year mortgage rate hasn’t budged much, nor do we expect it to for the next 18 months (at minimum). Could we see mortgage rates back in the 3-handle? Yes. In the 4-handle. Not very likely.
Infrastructure
The latest bipartisan infrastructure proposal would allocate $110 billion to bridges and roads and $48.5 billion to public transit. As NYC has the largest public transport system and a large number of bridges and tunnels that are in perilous disrepair, a good amount of that money will be coming here. In short, New York City will be a disproportionate beneficiary of that pool of cash and the resulting employment and quality of life will support real estate values for decades to come.
Retail
The pandemic has accelerated internet retail at the cost of street-level retail. This is forcing changes in the economics of retail investing. To wit: Vornado is selling 5 retail properties at a loss, with occupancy rates around 30% and a negative cash flow: https://www.globenewswire.com/news-release/2021/08/30/2288292/0/en/Vornado-to-Sell-Five-Manhattan-Retail-Properties-for-184-5-Million.html
Work From Home
This New York Times article bears reading.
In short, the Delta variant has sucked the momentum from a surge to return-to-normal that was happening in the spring. Further, the longer the return-to-normal, the more lasting and structural the changes to our ways of working will be. That being said:
“Could this all eventually snap back to the way things were before the pandemic? Enrico Moretti, an economist at the University of California, Berkeley, suggests that remote work will be reined in by employers who fear workers’ productivity will suffer.
Job offers allowing fully remote work jumped from about 2 percent of openings to 6 to 7 percent after the pandemic hit, he noted. But they have maintained that share since then. “It remains a niche phenomenon,” he argued.
He doesn’t expect that to grow much further. Employers may allow working from home a couple of days a week, he said, but Zoom is not a permanent replacement for the kind of interaction and collaboration on which innovation thrives.”
Real Estate
According to data from Miller Samuel and Douglas Elliman, new listing inventory is way down and contract activity has been brisk, in both co-ops and condos.
Mansion Global reports that deals in Manhattan are up, with new signed contracts up 117% over August of last year.
“Brooklyn is still going strong, and “newly signed contracts for all three property types combined rose annually for 14 consecutive months and by more than triple compared to the same period two years ago,” Mr. Miller said.”
What does this all mean?
So where does all of this leave us? It is obvious that the pandemic will leave some lasting changes, and the longer it persists, the more those changes will be permanent in nature. New York City has already shown its dynamic nature, however. Yes, retail spaces will become cheaper. Office spaces will become cheaper. Hotels will not be full again for a while. But then, new tenants will arrive and lease those spaces at excellent rates and a whole new ecosystem of businesses will thrive. In the meantime, interest rates are low, and will remain that way. And New York City remains a highly attractive place for people to live and work.
Manhattan now has 77% of adults over 18 fully vaccinated. The CDC estimates that by April 2022, 90% of eligible people will be fully vaccinated in this country – the number required to reach herd immunity. As a reality check, that is only 7 months away. If that sounds like a lot, remember we have already been dealing with this for 18 months.
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