Commercial Real Estate is the only hard asset that has a cash flow. This dynamic attracts investors worldwide to invest in commercial real estate specifically in New York City and here’s why;
New York City has rent levels at an all time high. For example, a one bedroom unit in the Upper west Side in September 2012 rents for an average just over $2,700 USD per month compared to an average rent of about $1760 USD per month for a one bedroom apartment in Washington D.C. in September 2012.
Not surprisingly, vacancy rates in New York City remains below one percent due to the sheer population volume and lack of new residential developments. Another factor driving the investment sales market, through the perspective of an investor, is the historic low interest rates offered by banks. Some banks are offering under 3% interest rates for multifamily properties. These historic low interest rates help raise the value and price of commercial real estate.
Some factors driving the investment sales market, through the perspective of a seller, include high real estate and capital gains taxes. Real estate taxes and expenses to operate an income producing property account for about more than a third of the revenue generated by the income producing property. Some New York City properties pay 40% in taxes and operating expenses. The capital tax gains will increase to at least 18.8% from 15% beginning on January 1, 2013. If congress allows the Bush tax cuts to sunset, capital gains tax will go up to at least 23.8%. Due to the previous acts of congress, I believe that they will continue to keep capital gains taxes fairly low which will bring about a sense of stability and confidence to the New York City commercial real estate market.
For these reasons, the commercial real estate market will continue to flourish as the strong economic fundamentals will bring certainty back to the marketplace.