20/20 Vision: A Closer Look at Commercial Real Estate TrendsFebruary 19, 2020
By: Darya Shneyder, CPA | Erin Kiernan, CPA
Last February, in a study of the trends that seemed poised to shape NYC real estate in 2019, it seemed that the retail market would face continued uncertainty, infrastructure projects like the L train shutdown were looming overall New Yorkers, and the news of Amazon coming to NYC was everywhere. Retailers and landlords were experimenting with creative ways to drive sales and keep storefronts from sitting empty. Brooklyn neighborhoods Bushwick and Williamsburg had prepped for a disastrous L-train shut down, and though it was eventually called off, it was affecting property value and rental opportunities. Amazon was supposed to spur a boom in Long Island City, only to change their minds about moving to the Big Apple after public outcry. Now that 2020 is here, many of these trends show no sign of slowing down, and commercial and real estate owners, developers and investors may find themselves adapting to their impacts. For example, Owners of retail space, still burdened with empty storefronts, continue to explore creative ways to maximize their investments and/or structure leases. And while Amazon did not build a tech headquarters in Long Island City, its imprint in New York continues to grow alongside other tech, IT and life science companies.
Stalled infrastructure projects may have not seen much motion, but now, sweeping legislative changes related to local and global politics could be what reshape this city in the near future and for decades to come.
CREATIVITY REIGNS IN RETAIL
The year 2019 brought a continuation of the decline of retail chains in NYC, a trend that doesn’t look to be slowing down.1 However, smart brands have figured creative ways to bolster sales and attract both online and in-store shoppers. In 2019, e-commerce brands that had already proven themselves online were experimenting with brick and mortar locations, and in 2020, that trend will continue as well. (Popular brands like Rent the Runway, ThredUp, Warby Parker and Peloton are just a handful that have chosen this path.) Big-box stores are also experimenting with their business models in new ways that will mean new retail space needs—recently, it was reported that Target is rolling out smaller-format stores in areas like Manhattan and around the country. It will be interesting to see if this model is adopted by any of the other big-box giants. Somehow, even as retailers scale down, it seems like “megaprojects” like Hudson Yards are expected to continue cropping up.
TECH GIANTS INCREASE THEIR PRESENCE
You may have noticed Amazon Go stores popping up in former retail spaces, growing the tech giant’s footprint in New York. These stores provide shoppers the “Amazon experience” of virtual buying in a retail setting. As you might expect, the model is to provide little in the way of sales personnel interaction but an easy e-checkout process, and though it is still very unclear if this will entice consumers, Amazon currently has 18 store locations across major cities, including New York. It appears that the flood of other tech, life science and IT tenants seeking space in Manhattan will continue, and these tenants often have their own specific needs, such as remarkably large square footage requirements. One other consideration for owners of commercial property: changes in lease structure as shorter leases become the norm (with possible concessions). These adjustments demonstrate just one way that tech giants are flexing their enormous reach and creating shifts in the real estate market.
POLICY RESHAPES THE FUTURE OF NEW YORK
Whereas last year, large scale infrastructure projects like the L-train repairs and shutdown were affecting development and growth, this year, new legislation has been introducing the largest changes into the real estate industry. Marks Paneth has extensively covered the new rent regulation laws passed in June. Lawsuits pertaining to these changes continue to be filed on behalf of the industry, as the new laws create an environment favorable to tenants over landlords, which will have far-reaching implications over time. Already, the Wall Street Journal reported there was a 44% decrease in the number of renovation projects started for rent-regulated apartments, and between July and November spending on apartment renovations decreased by $71 M. In an environment inhospitable to landlords, the inability to properly maintain and/or improve units will continue to be monitored as the industry looks to measure the lasting effects of the new laws.
Another major piece of legislation introduced in 2019 was the Climate Mobilization Act, aimed at improving energy efficiency in NYC by significantly reducing greenhouse gas emissions over the next few decades. The Climate Mobilization Act necessitates building greener, more energy-efficient buildings and/or retrofitting existing properties with energy-efficient updates. It will have a significant impact on commercial and residential development and buildings in NYC for decades to come, with the first level of regulations taking effect in 2024. For now, it’s too early to tell exactly how the industry will react to and navigate these laws, but owners and developers are already beginning to familiarize themselves with them and plan for the future in order to be in compliance by 2024, so as the year develops we should see more. C-PACE financing for energy-efficient projects, which is being introduced to New York this year, is an example of one way we already see the “green” trend beginning to impact the industry.
The year 2020 seems ready to bring more changes to the use of retail space (and commercial space in general), with retailers introducing significant changes to their business models and needs, and landlords realizing the need to be flexible to accommodate these needs. Amazon and the emergence of the tech, life science, and IT industries are continuing to drive growth in NYC real estate, even without the new Amazon headquarters in Long Island City. And sweeping legislative reform has brought changes that many of us in the industry expect to be monitoring for years—or decades—to come. Given that 2020 is a presidential election year, it will be a very interesting time to watch things unfold in the real estate world, as global and local political events will continue to impact the market at an accelerated rate. Builders, owners, and developers in New York City are wise to monitor these trends and developments, as they can sometimes offer insight into what opportunities or challenges are still to come.