Marty Burger, CEO of Silverstein Properties, talks about the prospects for New York City real estate
New York City still is the strongest real estate market in the United States and fundamentals in residential, retail, and office sectors continue to improve
Infrastructure investment continues to be a challenge
Providing affordable housing is an important part of development in today's New York City
New York City still is the strongest real estate market in the United States in nearly every sector, said Marty Burger, CEO of Silverstein Properties, in a recent interview. Residential sales are up year-over-year with absorption of new residential space continuing to rise; New York is still under-retailed and new retail space is being leased quickly; and vacancies are falling and rents are rising in the office sector, with growth especially in the technology, advertising, media and information (TAMI) industries. However, New York City continues to face a challenge in keeping up with needed infrastructure investment since the city's population is large and still growing and the existing infrastructure is used intensively. Rising residential rents have made it less affordable for people who work in the city to be able to live in the city. Developers such as Silverstein Properties are building more affordable housing as part of their new developments, encouraged in part through New York City Mayor de Blasio's office.
Zell/Lurie: Silverstein Properties has a long history of owning commercial real estate in New York, so let me start by asking you a few questions about the city. What do you see going on in commercial real estate in Lower Manhattan in New York City now and in the future? For example, where will demand growth come from? Can current price growth be sustained or even current price levels be sustained? And does New York's future trajectory look like its past or do you see different drivers going forward in the future?
Marty Burger: New York City is, in my opinion, the strongest market in the United States for many reasons. But if you look at all the different sectors, at all the different price points, New York just comes up number one in almost all of them. So if you talk about the office market, if you talk about the retail market, if you talk about the hotel market, and then, the residential market, it's just—except for some shining stars here and there like San Francisco—New York is coming out on top for the U.S. cities. And it's great to be a part of it. We're experiencing very high growth in the hotel room production area. And we have a great influx of people into New York City. New York City has become the safe harbor for a lot of the world's capital, so we have a ton of money coming into the city. And then, we've got great tourist attractions in New York City that continue to thrive. We just opened the One World Trade Center Observatory, down at the World Trade Center, the 9/11 Memorial Museum, the new Whitney Museum, and these things will continue to grow and grow and grow. So we're seeing a lot of hotel usage.
On the residential front, year over year, sales are still up. There are so many more projects being built that it seems like there's less absorption, but there's actually even more absorption, it's just less on a per-project basis. And prices continue to rise—not as much as they were, but they're still going up. So if you build the right project and the right sub-market, you're going to do very well in New York, as long as you bought the land the right way and your construction costs don't go too out of whack. So from the residential perspective, the condo market's strong, the residential rental market has always been rock solid in New York City, and cap rates are approaching 3 percent, which is just crazy. But it's tough to build multi-family today in New York City because land prices have gone up so much. So anything that is there is getting built up quickly.
And then, retail—you know, New York has always been under-retailed. We're adding about a million square feet of retail in the World Trade Center/Brookfield Place area and it's still not enough. It's incredibly well received. I think it was announced today, Westfield, who owns the retail at our World Trade Center buildings, is 100 percent leased and hasn't even started to fit out yet. The South Street Seaport is being rebuilt, that's another half a million square feet. Brookfield Place is open--most of it's retail and restaurants, it's thriving. Hudson Yards is building a new one– to two-million square-foot retail project, it's going to be anchored with Neiman Marcus, so that's going to be fantastic. And the city is just thriving. So we're very bullish on New York. Everyone always says, "What inning are we in?" I'm not going to give you an inning, but New York is still moving forward in a very positive fashion.
The office market, which I spend a lot of time in, is very interesting. I'll talk more about that later. But we have seen vacancies decrease. We've seen an increase in rental rates across the board, all through the city. There's been a huge push into the TAMI industry, the technology, advertising, media and information industries. Those companies have taken over Midtown South, but now, those companies are growing up and pushing throughout the whole city, so it's really helping what's happening in New York City.
Zell/Lurie: Marty, what do you see as the biggest challenges facing New York City from the perspective of a real estate investor?
Marty Burger: I think it's our infrastructure. You know, we have almost nine million people in New York City and that number is growing. We've got three airports that continue to be worked on. We have a roadway system that is always being eaten up. We have a transit system, the trains, the subways, which we try to improve, but we can't expand fast enough. So we're just opening the Second Avenue Subway Line, hopefully, by 2020—I think it's the first line that will open in a long time. We did extend the Seven Line to one stop—it was supposed to be two stops, but we couldn't afford the second subway station, because to build a subway station is a billion dollars, for some reason. And we need to continue to enhance what we have and expand it, whether it's building more tunnels or bridges from New Jersey into New York and vice versa, or fixing the FDR or all the bridges and tunnels on the East Side. We are constantly under siege on our infrastructure because it's used so readily every day. We are hopefully opening—the Port Authority will be opening—the new transportation hub down at the World Trade Center, which will be a phenomenal facility. Santiago Calatrava designed the building—four billion-plus dollars. But it will be the only place in Manhattan that within one block, you can reach 11 subway lines and the PATH trains coming in from New Jersey. It will handle over 250,000 passengers a day and it's just a phenomenal facility.
Zell/Lurie: We have seen a tremendous increase in residential real estate prices in New York City. How important, if at all, is residential affordability? And is the de Blasio administration's push to increase the supply of affordable housing—is that the right call?
Marty Burger: Well, you have to give the mayor credit. He wants 200,000 units of affordable housing. It was a lofty goal. I don't know if he'll reach it. It's going to be very difficult. And some of the tools that we had in the past that would help get there have been taken away from him.
And so, look, it's something we always have to think about because the people who come to work in our offices need a place to live and we don't want them living six hours away or two hours away. We want them to be able to get on a train and go two stops and get to where they're going. The biggest luxury in New York is being able to walk to your office and it's getting less and less affordable to do that. We were looking in Brooklyn and the pricing in Brooklyn is exceeding what it was in New York, in Manhattan, only two or three years ago. So it's crazy how prices have come up. So it is a very good thing to be delivering affordable housing whenever possible. The mayor's new edict through Carl Weisbrod by the City Planning Director is, if you need the city for anything, they will be cooperative, but you have to be cooperative back and help produce affordable housing, which we are a big advocate of. We built a ton of affordable housing in New York City. Our Silver Towers Project and our River Place Project on 42nd Street between 11th and 12th had a total of I think close to 400 residential units that are for low-income housing people and families. And it's a necessary part of building in the city.
Zell/Lurie: Thank you very much for speaking with us today.
Marty Burger: My pleasure. Thanks.