When discussing the US economy people usually point to two main areas of weakness – jobs and housing. They are more related than it seems. Even though it was slowed by the repeated extension of unemployment benefits, the US has a very flexible labor market. This is demonstrated but the ability of companies to hire and fire at will and the ability of people to go to where the jobs are (unlike Europe). So what happens if people cannot move because they are in negative equity on their house? They can’t go to the jobs that there are exacerbating the problem.
If people weren’t stuck in their homes the job market could function better.

There was a recent article in the Real Deal magazine that there are only 1,903 new condominium units in the pipeline for New York City so far in 2011.  This is compared to 23,879 in 2006.  There are many reasons to explain this but the fact remains that there is a consistent global demand that is increasing for New York City housing.  A recent Cushman &Wakefield Inc. report indicated that NYC overtook London as the top destination for real estate investment.

Once people decide that the demand is sufficient to merit new projects new units are not instantly generated.  There are many obstacles to construction and renovation in New York. This will put tremendous upward pressure on pricing for any units that are hitting the market.   From a global perspective Manhattan homes (averaging $1,068 per square foot) seem inexpensive compared to Paris (averaging $3,287 per square foot) according to a Credit Sesame report.

There is still considerable uncertainty regarding the economic recovery process.  This is providing investment certainty that well located brick and mortar is both safe and has built in upside.  Whatever can be purchased today and held will prove this as limited supply will continue to push values.

As we continue to ride the ups and downs of the European sovereign debt crisis the question is how will it impact NYC real estate.  The investment property market and high end luxury residential market (often seen as an investment as well), will become stronger then ever. There are trillions of dollars that could flee Europe for safe keeping.  The strategy will no be maximizing return but simply asset preservation.  The dollars that are invested in European sovereign debt are core type investments and are not seeking opportunistic yields.  As that capital comes to New York City which is seen as the top market in the world by many, cap rate compression will become severe as some may be happy with zero return just to preserve capital and hedge against inflation over a longer term horizon. The side effect of this will be people forced to buy opportunistic assets at core or core plus returns.  The next thing that will be heard is “deals don’t make sense anymore.”  They must make sense to someone or they wouldn’t get done.What could happen is a shift from enjoying the income stream of an asset to relying almost entirely on the exit for all of the profit to happen.

The other thing that will be bounced around is “bubble.”  This is a concern people have with rates at historic lows for an extended period of time and people doing deals that “dont make sense anymore.”  The fact is that underwriting standards are still tight and construction money is still limited to most borrowers so there is no great supply chain which is a key component of a real estate bubble.

Between now and the next presidential election there will be more of a leadership vacuum as campaigns heat up and the likelihood of much getting done in the interim is small.  Until people know who will be in the oval office, the senate and the house, people will need what they perceive as safety.  If New York City real estate continues to be the answer for even a fraction of the global wealth, then prices still have plenty of room to increase even without strong momentum in the local economy.

This could have in impact on residential sales in NYC, especially in the boroughs

…can be added to the list of major difficulties that NYC successfully navigated. Being prepared, clear direction from the powers that be, people that will always band together in difficult times, and some plain luck helped New York return to daily life Monday on public transportation with the lights on.  This just adds to the growing list why as globally and nationally the economic conditions are poor but in NYC they will continue to improve as people ask why do business anywhere else if we can avoid it?

The volatility of the stock market last week it builds upon my theory that it is purely macroeconomic forces (or acutally how they are perceived) that drive the market and less the performance of individual companies.  The preliminary August University of Michigan consumer sentiment index declined sharply in July and was well below the forecast. I agree with Bill McBride that the debt ceiling debate most likely played into this more so than the typical forces employment and gas prices.

How people perceive the economy is a self-fufilling prophecy.  The shaky confidence as a result of the endless reports of bad or seemingly bad news.  In the New York City real estate marketplace, confidence has been building and the market is healthy as a result.  People are buying distressed debt, restarting stalled construction sites (either with new or the same sponsor), and the midtown office market is nearing record levels.

I am always touting New York as an exception to the rule becasue of its global draw, but the confidence in the marketplace is contagious.

What would build confidence across other sectors and the country as a whole? Clarity.  Right now people have no clear direction from the government on so many key points that it is no surprise that there is uncertainty.  This was proven by Bernanke’s statement that rates would stay low until mid 2013.  This one simple statement helped the stock market to advance.  The reason? Because investors had some clarity on what the government was going to do.

The recent downgrade of US debt by the S&P was interesting for many reasons but is not the cause of the market turmoil. What people are reacting to is the realization that the economy is not recovering as evenly and quickly as people felt earlier in the year. The Euro Sovereign Debt Crisis is also causing panic. There has been the saying that when the US gets a cold Europe gets pneumonia and that seems to be holding true today.

The slight downgrade of the US debt ironically resulted in people flooding into treasuries pushing the yield down further. At AA+ it is still safer and more liquid than some AAA rated countries.

What does this mean for commercial real estate in NYC? The Fed’s announcement that rate will stay exceptionally low into 2013 give lenders and borrowers/purchasers confidence in their underwriting and DCR for the near term allowing them to unlock value in an asset. This should continue to build confidence and momentum as we have been seeing recently.

As I have said repeatedly NYC is a safe harbor globally and real estate is the safe harbor for investment. Anyone can go “see the bricks” and get a feeling of security they may never feel from reading a 10Q report.  This is further exaggerated by the macro-swings the stock market likes to take.