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Inflation and rising interest highlighted at real estate forum


As seen in the Westchester & Fairfield County Business Journals

By Peter Katz

Fordham University’s Real Estate Institute and The Business Council of Westchester joined in hosting a virtual forum that examined the outlook for the New York regional real estate market.

Richard Haggerty of the Hudson Gateway Association of Realtors said that real estate is a driving force of the economy and it is recovering from the pandemic that turned the market upside down and resulted in brokers facing extraordinary challenges.

“We endured. We saw the opportunities of regionalization and worked collaboratively,” Haggerty said. “Now more than even we all must work collaboratively and collectively to move our industry forward.”

Kathleen Corton, CEO of Hillcrest Finance LLC said multifamily rents are up pretty much across the board.

Kathleen Corton

“They may have slowed down more recently but they’re still much higher than a year ago so very positive news on the top line but the cost of capital has gone up as well so we think values of multifamilies are down, not by a lot but they’re down,” Corton said. “Office is … very troubled. Partially as a result of that the capital market with the availability of debt for the office market is also. Equity is very tough to come by because people aren’t really sure what that’s going to look like so office values have gone down a lot and it’s very difficult to refinance. Retail … is oddly more positive than it was in the last couple of years just because it was beaten down so hard and I think industrial is fundamentally very strong and probably the darling of the capital markets as well. On hospitality, values have gone down a lot. Hotels got hit first and badly.”

Eamonn D’Arcy, professor of international real estate at the Henley Business School in England, said that in London rents have been increasing but vacancies have been increasing at the same time, which doesn’t usually happen.

Eamonn D’Arcy

“We have a lot of evidence of a flight to quality,” D’Arcy said. “As a result we now have quite a lot of office space, which is maybe not Grade B but has got some problems and that’s why the vacancy rate is increasing. There’s been a big debate in the UK about people returning to work. The interesting data certainly earlier this year for London suggested that the busiest day on the tube (subway) is now Saturday, so people prefer to go out and socialize with their friends but maybe are not prepared to go to work, which is an interesting paradox.”

D’Arcy said that the residential market remains quite good and that reflects supply side issues in the UK.

“There’s been a lack of supply in the UK for a very long period of time and that’s really resulted in a very buoyant and a very stable residential market particularly when it comes to capital values,” D’Arcy said. “I think inflation is a huge issue at the moment in the UK. We just got a new prime minister and we’re all waiting on what the policy response is going to be on that. People are talking about real estate as a hedge against inflation.”

D’Arcy said a big issue with respect to office real estate is whether people are going to continue working from home two or three days a week and what the demand will be for home offices.

Christopher Deutsch

Christopher Deutsch, vice president China CITIC Bank International Limited said banks are including an interest reserve when writing construction loans. He said that a lot of interest reserves are being recalculated and borrowers are being told they have to fund any increases in interest over the length of their construction project.

“If you’re a developer you have very little choice as to whether or not you’re going to fund that because time is your enemy,” Deutsch said. “You will come up with the funds, you’ll put them into the reserve. That affects your return on the project. If you bought the project or bought the land in 2018, 2019, you bought it with a certain equity return in mind. You’re not going to meet that hurdle.”

Charles Dougherty, vice president and economist at Wells Fargo said interest rates being raised by the Federal Reserve will slow down economic activity.

Charles Dougherty

“Economic activity slowing is likely to have a big impact on commercial real estate across the board,” Dougherty said. “We are forecasting that a recession is likely in 2023. We’re putting the probability at 60%; it’s not 100.”

Dougherty expects commercial real estate in New York City to be especially affected in event of a recession.

“New York City is still kind of getting up off the ground from the effects of the pandemic,” Dougherty said. “Recession would only make that process even slower.”

Tim Jones, CEO of Robert Martin Company, said Covid forced a couple of trends that were underway in real estate into overdrive, namely the trends toward work at home and e-commerce.

Tim Jones

“As we’re leaving the pandemic, it’s going to make it very tough to go back to the old ways of doing business,” Jones said. “One of those big trends has been the replacement of the baby boomers with Gen Y, millennials, as the biggest portion of our working cohort. Those people have very different expectations.”

Jones said that a significant impact has been caused by a lack of truckers not only on construction activity and construction costs but also on retailers. He pointed out that Walmart is now paying $120,000 a year to truckers.

Jones said that demand for industrial real estate is very strong as is demand for multifamily.

“When they drive up interest rates, construction costs are already very high, you’re going to see a big reduction in creation of supply,” Jones said. “You’re going to curtail economic activity. You’re certainly going to curtail economic activity in the for-sale housing markets. In the short term I think you actually could create more inflation in multifamily housing and maybe even industrial.”

Nicole LaRusso

Nicole LaRusso, senior director for research and analysis, U.S. North Region, CBRE Group Inc., said that rising interest rates and economic uncertainty are a headwind on office demand in the near term.

“The economy is cyclical and will go back on an upswing at some point but in this moment I think the combination of how much office space do we need, maybe we don’t need quite as much office space, combined with economic uncertainty and higher costs for occupiers, that is going to push back on office demand in the near term,” LaRusso said.

BCW President and CEO Marsha Gordon moderated the Sept. 7 forum.


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