Interest rate hikes will not dampen Manhattan market - Brief Article

The reality of Manhattan's commercial real estate investment market at midyear 2000 is incongruous with what one might expect. As interest rates climb from near historic lows, and uncertainty abounds about the near- and long-term prospects of the stock markets, one would have thought these factors might have had a softening impact on the investment sales market. Yet we see buildings are continuing to trade at incredibly high prices, and demand for properties remains tremendously strong.

Experienced opportunistic investors, like The Benenson Capital Company, are pursuing investments in markets local and far-flung. In Manhattan, demand for office space continues to exceed supply. New construction is taking place -- but only with significant pre-leasing, so pent-up demand and competition for space among tenants are pushing rents to new highs. The stability of this market sector makes it an attractive investment, by both owners and lenders. Financing is plentiful, despite a recent pullback from a few international pension fund players.

The only drawback for experienced investors and long-term New York City players is that pricing for commercial investments often seems to be spiraling out of the realm of common sense. When experienced bidders are knocked out of the competition after just the first round, finding themselves literally millions of dollars behind, market pundits tend to begin predicting adjustments. However, in the case of our market at mid-year 2000, I believe the trend of rising prices and steady demand will continue through at least the rest of the year.

Out-of-reach prices are causing opportunistic investors to look beyond the island of Manhattan. In our case, we've recently made investments in Westchester, Chicago and Atlanta. In fact, our horizons have expanded globally to include four recent development projects in Paris. We also continue to make investments in multiple property types, from office and industrial to multi-family.

On the residential front, we remain bullish on development of housing in Manhattan. Clearly, as a principal in the development of 150 East 44th Street (now on the rise over Third Avenue), we are confident that this market is also fueled by strong and unmet demand. Even with many cranes on the horizon, the number of new residential units being added to our housing stock is far smaller than the number created during the building boom of the 1980s. One reason for this controlled cycle of residential development is the lack of available development sites. A recent thorough survey of the market revealed few opportunities for development. And, the old adage "Land: they're not making any more of it" does hold true (even in Battery Park City) today. While we do predict continued strength for new residential developments, we do think rental rates in Manhattan may be reaching their ceiling. Holding steady at approximately $50 per square foot is a healthy pattern that we believe will remain through year-end.

Back on the general investment side, as more investors join the fray and capital remains plentiful, these factors combine to continue to drive up prices - despite climbing interest rates and volatility in the stock markets. Given New York's diverse and strong economic base, which is fueling demand, and the lack of new construction, constraining supply, I expect the Manhattan commercial real estate markets to remain vibrant through year-end, and probably far beyond.

Richard Kessler, Chief Operating Officer of the Benenson Capital Company.

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