Dear Friends,

Now that 2017 is behind us and we are settling into 2018, I wanted to share a few thoughts on the accomplishments and challenges of the passing year and an outlook for the year ahead.

This year, we are leaving behind an exceptionally action packed year, one that began with the inauguration of a new US president, and concluded with a surprising comeback of cryptocurrencies and a controversial tax plan which left many scratching their heads.

In the New York Real Estate market, the year began with fears of a market crash and resulted in a fairly active and healthy year. These fears stemmed from the anticipation of another cycle coming to an end, after nearly nine years of a strong market. Softening at the higher end of the market contributed to that notion.

While I can certainly understand the train of thought, given the painful memories of the last recession, from a personal standpoint, I can say that today's real estate market is not exhibiting the symptoms or manic energy we saw leading up to the last recession.

Still, the question remains: Are these fears misplaced for 2018?

To address this and other trends to watch out for in 2018, this month we will focus on a report by the Urban Land institute, “emerging trends in real estate” for 2018. The report speaks to these concerns head on, with experts noting that our immediate future may resemble a smooth glide path as opposed to a nose dive:

“Many in the industry point to signs, such as the very low unemployment rate, a policy shift toward tightening at the Fed, and high asset prices in real estate, as positive indications that investors are getting more defensive and conservative as the cycle stretches out. By achieving more balance, the market may have reached a “new normal” of slow and steady growth.”

Another trend that continued throughout 2017, was the enormous valuation of tech companies. The “new normal” here is that younger companies, who often own no real assets, are valuated as equally, if not higher than older established companies with real estate all over the world. We can use the Related Companies vs. Wework as an example. The former is one of Americas’, most established Real Estate companies, currently building Hudson Yards, with assets all over the world. The latter, is only seven years and only recently purchased their first building.

AirBnB, Uber are some others, not to mention the world’s overlord quintet; Facebook, Amazon, Apple, Google and Microsoft.

The main challenge here is that we are comparing apples with oranges; one, an asset – Real Estate - is attached, considered safe, with value, which can be determined fairly simply, and easily; the other is a concept, an idea with an often-arbitrary value...

Stay tuned to what is promised to be a hot topic in the New Year.

Looking back at Urban Land’s report, one of the most relevant topics in real estate for both 2017 and 2018 is the short stock of affordable homes nationwide, with a surplus of potential buyers and no scalable solution. It states:

“Whether it’s urban row houses, transit-oriented development, or a new type of tract housing, practical and affordable mid-market homes, as well as starter homes and affordable rental units for young adults, remain potential goldmines for developers who figure out the right balance of price, land costs, location, and amenities. The higher-end market remains well-served. While margins are still good for those types of projects, building affordable housing at scale, in nearly any urban market in the country, would be welcome.”

Shortage of affordable housing and well-served high end of the market is pretty much the same trend experienced in Manhattan. In this case, I would equate “affordable housing” to the “resale market”; inventory comprised of existing or older apartments, that are not in new development and are usually priced lower.

The latest market report from Douglas Elliman indicates the same trend, citing a 10.9% drop in total inventory from the last quarter. I would argue that this number would be even higher when separated from new development inventory.

There is no relief in sight for that type of product, and while demand is still high, the reduction of real estate taxes and mortgage interest deductions with the recently approved “Tax cuts and Job act” plan will limit current homeowners spending abilities and force them to stay put, reinforcing the cycle as a result.

These are just some of the trends we anticipate in 2018.

I encourage you all to read through this report, which covers a variety of other hot topics including:

· Gen Z joining the fray while Baby boomers at large are not able to retire.

· The rise of the “secondary markets” topped by… Seattle (+ other surprising cities that top the chart)

· Possible opportunities resulting the “Retail Apocalypse” of the last few years.

You can also check out the Real estate blog curbed, which did a good job dissecting the report, in case 123 pages are too long.

On the whole, we anticipate a steady and healthy market throughout 2018, and look forward to follow these trends we’re seeing as they play out.

With that in mind, I’d like to extend a slightly belated Happy New Year to each of you!

Best,

Ariel

2018 | What is the "New Normal"?