Household finance office

When writing an article about the future of New York real estate, I always review my earlier predictions.

In 2003 I wrote, "With economic growth returning in 2003 and looking favorable for 2004, interest rates will rise with the demand for investment.

Additionally, the 2003 reviews of investment returns in all stock markets should attract capital to the stock market, possibly reducing the current demand for investment property.

"Offsetting the negative effects of rising rates and investment alternatives to commercial real estate, economic growth will cause the vacancy rates for commercial property to decrease and the subsequent job growth will spur household formation and demand for residential property."

It looks like the prediction for rising rates; new interest in the stock market and decreasing commercial vacancy rates seems to have come true. The suggestion there might be a reduction in the demand for investment property was either wrong or premature.

As a provider of real estate loans in the New York Area, I have seen prices that reflect initial capitalization rates of 5% on the buyers' predictions.

A more conservative view of expenses would indicate initial capitalization rates of 4% and below. While the lowest capitalization rates have been for rent stabilized apartments and apartments for conversion to cooperatives and condominiums, slightly higher rates have been achieved on sales of other commercial properties.

Rates have hot yet increased enough to dampen the ardor for purchasing real estate, both for investment and personal occupancy.

There is still an ability to gain positive leverage on an initial purchase by borrowing on a floating rate basis.

Among buyers there is a great belief among buyers in their abilities to increase net income or sell apartments (in the case of converters) to the public before interest expenses consume all free cash flow.

While many of our clients have this ability, only a few are finding buying opportunities. Many prefer to wait for prices where positive leverage tan be obtained with five or ten year fixed rate financing.

There are still opportunities created by improvements in transportation, including the re-opening of the World Trade Center PATH Station, JFK Monorail and the Secaucus Junction.

Other anticipated improvements including the 2nd Avenue Subway, the new Penn Station and development near the Convention Center will also improve the real estate market in Manhattan.

As the residential market Downtown reaches a critical mass, improvements in retail and commercial leasing will occur.

Predictions for the remainder of 2004 and 2005 are risky, since I will be held to my statements in the next article.

I expect capitalization rates to rise with interest rates for properties at maximized net operating income levels.

For properties with upside potential in rents and the ability to increase net operation income, initial capitalization rates should remain at or below available interest rates for 5 to 7 year terms.

As the economy continues to improve, Manhattan office buildings and well located retail will offer upside as older leases are renewed at improved market rent levels.

Landlords with the ability to achieve market rents in regulated apartment buildings will continue to bid up of the prices of buildings with below market rents.

At M&T, we will continue to serve out clients with the demonstrable ability to find opportunities and improve the economic performance of their investments in real estate.