New York City Real Estate's 800 Pound Gorilla
New York City was and has become one of the most powerful financial destinations in the world. Granted some of New York City has become bland with an extreme lack of experience, which is what made it unique in the first place but what it has become is undeniable. It is an epicenter for not just the US but the world. There are so many positives from being a cultural hub to being one of the safest cities. It has also ALWAYS been the city people want to come to make it because if they can make it here they can make it anywhere. From Broadway stars, fashionistas, wannabe hedge funder's and now tech entrepreneurs. So with all these positives what can possibly be wrong with NYC real estate? How can it ever fail? Usually when the vast majority of people say something can never happen it usually does happen. The 800 lb gorilla in the room for NYC is nothing overly complicated and people tend to look very far for what is usually right in front of them; Debt & Overvaluation. That simple. That is the gorilla.
To be clear NYC will always have something special about it, I grew up here and I love this city like a drug I can't leave it. There have been some pretty terrible things that have happened but I need this city. Its like an addiction you love it when your doing it but when your away you feel a slight relief but then suffer from terrible withdraws. This feeling however isn't in bedded in everyone, other people are perfectly fine with space, air, cars and woods. As long as it has what modern consumers want such as restaurants and shopping. Unfortunately many suburban areas and cities are catching onto NYC's model of success and duplicating it to some degree. This competition really wasn't around in 2009 when NYC really started attracting millennials in droves. This competition is going to hurt NYC's population growth which has been a huge driver in valuations over the past five years. As more people keep moving here the assumption is rents go up and they go up further and further away from the city center. This leads to the assumption that rents go up which is a bad assumption because when you assume you make an ass out of you and me, right. Also tourism is a major driver in retail rent rising and tourists keep coming to NYC in increasing numbers right? You see where I am going with this not everything goes up and it can go down, way down from the heights people saw things at in 2013-2016 because they were extreme and more competition is out there now. These inflows of people can stop and lead to slower growth due to other competition. Driving down prices in the city leaving values right now and after 2013 way to high.
That's simple valuation not factoring in rising interest rates that can hurt cap rates and investor appetite for real estate. That is a whole separate supply and demand factor that can hurt valuations. Now the debt picture in NYC in my opinion is just as bad as it was in 2008, why because in 2008 people were buying a piece of real estate for lets say $1,000,000 with $1,100,000 in debt, that's not good. Well today they are buying that same property for $1,800,000 with $1,500,000 in debt. Whats worse? I get that someone has skin in the game but if the values even just drop to being at a slight increase of where they were in 2008 you are at $1,200,000. You are still at a value over the LAST bubble. Do people not remember when people were giving keys away in NYC in the 70's and 80's because they didn't want to pay their debt or property taxes any more? Now the great thing in NYC is that people were and are willing to take those keys and create value. It just may not be sustainable for a large pool of equity that came into this city in a short period and may take many years to filter out should a correction come. In an age of increasing physical mobility it makes smart buying of physical assets all the more important. People moved here they can easily move out.
These are extreme examples but to say the market can't correct itself in a major way is just plain ignorant. Being in the debt position or the equity position in this market is dangerous. The only thing that protects yourself is the right entry price so you can ride out the upcoming storm. So the real question is not what the gorilla in the room is but who gets wiped out or has to restructure, because that is NYC someone will always step up to bring value. most now may just not like what they have to offer.