A Once-in-a-Decade Market for Long Island Real Estate InvestorsJanuary 21, 2021
By Maya Khan, CPA
While much has been discussed regarding the impact of the COVID-19 pandemic on Manhattan real estate, any professional operating in the suburbs of New York City will have their own story to tell, and it is sure to feature a market that is shifting rapidly and bringing about new challenges and new opportunities. Marks Paneth’s Real Estate Group has been at the forefront of many of these conversations, including at seminar focused on Westchester real estate which was hosted by Fordham Real Estate Institute and The Business Council of Westchester, and most recently on January 13 at a Marks Paneth live virtual event dedicated to the future of Long Island real estate. The virtual panel brought together leading names in Long Island real estate: Michael Stoler from the Stoler Report, Andrew Kubrick, partner in Marks Paneth’s Real Estate Group and Partner-in-Charge of the firm’s Long Island office, Kalmon Dolgin, Co-President of Kalmon Dolgin Affiliates Inc., Gary Meltzer, Partner of Meltzer, Lippe, Goldstein & Breitstone, LLP and Gus Nuzzolese, Executive Managing Director at Colliers International. The accomplished panelists had no shortage of discussion related to Long Island’s dynamic real estate landscape, sharing their insight on everything from the future of office space, to which property types are experiencing highs and lows, the current lending environment for investors, and even how the new administration could impact investment strategies. Below are highlights from the discussion, which can be viewed in full here.
Office Space is Not a Thing of the Past
As Gus Nuzzolese put it during the discussion, “We are living in complex times, but businesses have adapted.” Adaptation has had an impact on office space, but all panelists agreed that it will not become a thing of the past. It’s true that remote working was successful when the pandemic gave businesses no choice but to shut down and work from home, but the loss of the synergy that comes from working together in person will likely play a big role in our return to the traditional office when the time is right. While many office tenants have worked out rent deferrals, the panelists do not believe these tenants will cancel their leases when the terms come due. There may be some lease modifications based on needing decreased space due to smaller conference and meeting rooms, but the office is still very much a part of doing business. Furthermore, trends such as “hoteling” or hybrid office space sharing will help keep the office space market alive.
Highs and Lows by Property Class
Anyone familiar with Long Island knows that it houses an impressively diverse breadth of real estate property classes—residential, retail, and industrial to name a few. With New York City residents moving away for space and safety reasons, residential markets are booming. Retail, however, has been met with significant challenges. The panelists noted a tremendous demand for the refitting of existing retail stores to suit new needs. Mixed-use properties and transit-oriented developments where residents can walk to stores, restaurants and transit have been successful in municipalities such as Patchogue and Mineola. Panelists mentioned that Long Island’s real estate taxes are hurting the market and they hope that more municipalities will adopt these mixed used properties to obtain more funds. The repurposing of retail space to create additional residential property on Long Island is a trend to follow for 2021 and beyond.
All of the speakers agreed that the industrial market, such as large box facilities that support e-commerce business, has been sizzling. Space is limited and search for inventory is difficult, so repurposing big box retail space to industrial is another upward trend. The industrial market has caused a ripple effect on distribution, products, inventory and affects all types of business on Long Island.
One type of property many are wondering about is hotels, and whether they can or should be repositioned to residential or student housing. Even though this appears to be taking place in larger cities, it is not a clear trend on Long Island. The panelists noted that there does not seem to be an oversupply of hotel space on the Island and were hopeful that hotel occupancy will return to its pre-pandemic demand.
A Stricter Lending Environment
The pandemic has affected mortgage lending, which has become challenging for keen investors. The panelists remarked that lenders have been more cautious, and they seem to be lending to borrowers who they have had past lending relationships with. Due to uncertainties and appraisal difficulties, lenders are also lowering their loan to value ratio and including stricter covenants on their mortgage agreements. As Kalmon Dolgin wisely pointed out, real estate ownership is a long-term commitment. Successful real estate owners need to be under leveraged and committed to a long-term plan, as values have historically increased through time. As loans become due and problematic refinancing continues, the panelists considered whether some owners may need to sell their properties, which would cause an uptick in sale transactions on the Island.
1031 Exchange Strategies
A 1031 exchange is a tax strategy where a real estate owner can defer gain from a sale of a property into a new purchased property. Andrew Kubrick noted that large real estate clients use this strategy often,
but real estate owners are feeling more cautious now since President Joe Biden has hinted that his administration may eliminate the 1031 exchange. He and fellow panelists felt that 1031 exchanges spur activity in the market and can increase revenues for municipalities from transfer and mortgage recording taxes. If the strategy is not eliminated, there could be an increase in 1031 exchange transactions to come.
An Optimistic Executive Outlook on the Future
The virtual event concluded with each of the distinguished panelists sharing their unique perspective on what 2021 will bring for the real estate market in Long Island. All were optimistic and eager to see what opportunities lie ahead. Kalmon Dolgin told the audience that we are living in a once in a decade time, and Gary Meltzer predicted that with real estate owners hungry for transactions, market sales will continue to rise. According to Andrew Kubrick, Long Island real estate is a hidden gem and there are great opportunities ahead. Gus Nuzzolese agreed, acknowledging the tremendous creativity on the Island. Real estate owners need to have staying power and be conservative, but these are exciting times—and if there was one theme from the morning’s discussion, it’s that more opportunities are coming in the days ahead.