Rendering for a proposal to develop portions of the John D. Caemmerer Rail Yard, also known as Hudson Yards, in New York City. The proposal for the 26-acre site would create 13 million square feet of developable space.
NEW YORK — There are few better barometers to gauge the health of the U.S. economy than commercial real estate.
"Office buildings are the ecosystem in which American business lives,” said Daniel Geiger, who covers the industry for Crain's New York Business.
CoStar Group data show commercial real estate accounts for a $12 trillion chunk of the U.S. economy. During the financial crisis, market value dropped 25 percent as many businesses shut down and left offices empty. But recently, demand for commercial real estate has strengthened. Prices are coming back, rising especially fast in big cities like New York, Houston, Boston, Minneapolis, Phoenix and Seattle.
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In Manhattan prices have surged by nearly 60 percent in the last three years, far outstripping the national average of 16 percent, according to the New York Building Congress.
"I do not find that at all surprising, nor do I see it as a warning bell,” said Darcy Stacom, a real estate broker who has been behind some of the city's biggest office transactions. "We have a great deal of liquidity in the market because of (global) economies (seemingly) printing money. So if you can buy a great office building or a great apartment house and collect good rents … and get yield, (that’s) driving prices (up)."
Buyers who purchased so-called trophy towers like the GM Building in New York at the height of the market are now able to sell those properties and make 20 percent or more on their investments, say sales experts. The growth is most visible at the high end of the market, with a number of large towers selling north of $1,000 per square foot. Some of the same properties traded at the peak of the market in 2006 through '08 and are now selling again at significantly higher prices. That trend is luring in more developers keen to capitalize on increasing demand.
Nonresidential construction in New York City is expected to reach $10.8 billion in 2014 and $13.6 billion in 2015.
Signs of a resurgence are popping up all over the city, including high-profile projects such as the World Trade Center towers near Wall Street and the Hudson Yards development on Manhattan’s west side. Combined, the two projects account for nearly 8 million square feet of space, the equivalent of three Empire State Buildings.
Despite these jaw-dropping deals, commercial real estate faces an uncertain future. Since January the Fed has been reducing the billions of dollars it’s been spending on its bond-buying program, and market watchers believe that move will raise borrowing costs.
"Clearly, the low interest rates have only facilitated the rise in values of commercial and residential real estate. If you see an increase in interest rates, it will likely have a strong impact on values," said Geiger.
However, there is a silver lining. Analysts say the Fed will likely cut back slowly on its stimulus. Such a cautious approach should give capital and real estate markets more breathing room to adjust to the new financial landscape.