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No slackening of pace seen in Manhattan residential rentals.

In the 1998 year-end rental report, one number sums it up. The price of all doorman apartments on the Upper East and Upper West sides increased 8.99 percent over the 1997 level. In the 1997 year-end report, that same number was 8.78 percent.

Apart from the near identity of the numbers, the comparison is notable for several reasons. First, after five years of strong growth in rental prices, a slackening in the pace of increases might have been expected. Second, strong demand in the sale market must have deflected some luxury rental demand. Third, the retrenchment in the financial markets in the fall interrupted demand, but obviously did not impact overall year-end results.

The rental market's continued buoyancy naturally reflects demand, which has become more broad-based as New York's industries have diversified to include telecommunications, computer services and entertainment. Not only are these sectors new to the area, they are among the fastest growing components of the economy. They have brought not only more jobs, but higher paying jobs which, in turn, support the demand for other services.

As businesses of every kind consolidate globally, the number of commercial capitals declines. Where previously there were two corporate headquarters, now there is one. This is one of the reasons for New York's resurgent economy. The other is its unique cultural environment, which attracts the highly creative, highly paid labor force in the new growth industries. More and more, wealth is being generated as an intellectual by-product rather than as a commodities-based development. New York is the native home of the world's intelligentsia. Its increasing importance seems inevitable, given these global trends.

At the same time that demand for Manhattan real estate is increasing, supply, of course, is not. Unlike most commercial centers which can expand radially from their core, Manhattan is uniquely limited as an island. The peripheral boroughs and New Jersey benefit from its growth. When the market is rising, the difference in price levels minimizes. However, when the market declines, the difference in value off the island increases. During periods of decline, demand retreats to Manhattan from its offshoot markets, helping to cushion any devaluation here. In the 1990's, the implications of Manhattan's limited land mass have affected the pattern of residential development.

Whereas in the 1980's, more than 10,000 units per year were added to the Manhattan residential market, beginning in 1993 to the present, a paltry three to five thousand units per year have been added. It is important to note that in the 1980's, the addition of supply at much greater levels did not cause prices to decline in either the rental or sale markets. It was only the advent of a national recession that halted the residential markets. There is little wonder, then, that in a more robust and diverse economy, prices have increased so strongly in the 1990's.

What is notable is why in the 1990's, so little has been built. The answer emerges from noting the markets addressed by recent construction.

By 1996, residential rental prices had surpassed the old highs of the 1980's and financing was readily available for the Manhattan market. Yet, compared to the 1980's, there have been very few new developments in established residential areas such as the Upper East and West sides. Most of what has been developed in those areas was targeted to the sale market. Notably, there were some ultra high-end rental and sale projects. The message is clear: The traditional residential areas are mature markets with few available sites. They are approaching saturation. Going forward, these areas will be devoted increasingly to development in the sale market or very high-end rental market.

Apart from the small amount of development in the 1990's in traditional residential areas, there was some development by neighborhood expansion in the West 50's and East Teens and 20's, but, again, very little. Most of what was built in the 1990's was a new genre of development based on the tax incentivized revitalization of commercial areas such as Wail Street and the Eighth Avenue/Theatre district corridor. These developments were primarily directed to the labor markets around them, but proximity to the subway system and entry level apartment sizes and prices make all such developments competitive with each other for the price-sensitive tenant.

Although the word luxury has become ubiquitous in doorman attended properties, this type of commercial area redevelopment has special characteristics, competing in a very narrow price spectrum for the young, mostly single and share markets. The growth in development in areas around Manhattan, directed to the same markets, makes it clear that much new ground will be broken on the Lower East Side and on the West Side from 23rd to 57th Streets for the young Manhattan bound commuters. Keeping more residences in Manhattan will only further strengthen the local economy.

In looking forward, however, a cautionary note needs to be sounded. Although overall volumes of new units are historically low, still 1998 saw the highest level of new product added to the market since the 1980's. Many new projects which came on line in 1998 were impacted in their initial rent-up by the retrenchment in the financial markets in the autumn. The pace of absorption slowed. For the most part, prices did not change, but many owners offered commissions to brokers and free rent to tenants to compensate for the drag on the market. The holiday season began just as the financial markets' resurgence engendered renewed confidence in prospective tenants. With the annual holiday slowdown, owners have kept in place the broker and tenant incentives to rent.

During the last quarter, there has been a noticeable build-up in the supply of available apartments. If the economy maintains its steady state, this mini-glut will quickly be absorbed. While there are projects in various stages of development which will produce average volumes of approximately 5,000 units per year for 1999 and 2000, the bulk of that inventory will not be ready for market until late 1999 and 2000. For most of this year, new supply will taper. Once again, the real estate market depends on the broader economy. It is in little danger from its own supply cycle.
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Author:Packes, Nancy
Publication:Real Estate Weekly
Article Type:Industry Overview
Date:Jan 27, 1999
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