LIC in 2017: What To Expect From The Long Island City Real Estate Market

Changing residential dynamics, the need for retail and rising interest rates expected to affect market this year
 

by Rey Mashayekhi

The Long Island City real estate market enters 2017 from a position of strength, with the neighborhood expected to continue to benefit from significant investments made in recent years. On the residential side, roughly 8,000 of the projected 22,000 apartments in the LIC pipeline are due to come online this year, per the Long Island City Partnership. In the commercial market, mixed-use development and warehouse-to-office conversions have helped drive the neighborhood’s growing retail and office sectors.

The Long Island City waterfront (credit: Streeteasy)

The Long Island City waterfront (credit: Streeteasy)

But there are still challenges to account for in 2017 -- ranging from potentially shifting fundamentals in the New York City residential market, to economic factors like rising interest rates and the state of the real estate financing market, to political issues like the ongoing uncertainty over the now-expired 421a tax abatement.

While most observers are optimistic on the neighborhood’s prospects – Long Island City remains one of the fastest-growing, most promising submarkets in the nation’s most dynamic real estate economy – there are questions over how the market responds to an influx of new rental units, how property values and transaction volumes fare, and whether retail offerings can keep pace with a rapidly growing number of residents and office tenants in the area.

Here are some of the key trends and current issues in LIC real estate to keep an eye on in 2017:

Residential market: Rental influx could mean more landlord concessions, shift to condos

One of the biggest questions hovering over New York City’s residential real estate market is how it deals with the influx of new, mostly high-priced rental inventory built over the course of the current commercial real estate cycle. Much like how the Manhattan luxury condo market experienced softening over the course of 2016 – the result of oversupply and a corresponding drop in demand from wealthy foreign investors – there are now concerns that a similar dynamic is at work in the luxury rental space.

With more than 11,000 new apartments built in Long Island City over the last decade and more than twice that number due to come online over the next few years – and an overwhelming majority of them rentals -- Long Island City would appear particularly vulnerable to this shift.

Eric Benaim

Eric Benaim

“I see the rental market taking kind of a dip [in 2017], only because of the large amount of supply coming online this year,” Eric Benaim, founder, president and CEO of Long Island City-based brokerage Modern Spaces, told Living LIC. “With all that supply, there will probably be a lot of incentives [for renters], so it’ll probably be a good time to rent an apartment.”

Indeed, many observers anticipate an increase in landlord concessions as a trend to watch across the city’s residential market – and one that Long Island City would not be immune to. Jonathan Miller, president and CEO of real estate appraisal and consulting firm Miller Samuel, said he’s seen an increase in “significant concessions being offered across the market,” with new buildings offering renter incentives “to get the [leasing] momentum going.”

“In New York City in general, there’s a lot of high-end rental [stock] coming online,” Miller told Living LIC, adding that this influx in luxury rental product exemplifies “a disconnect between what’s being built and where the demand is” within the residential market. “We clearly have not built too much housing [in New York City]; it’s just that we built too much at the high-end. Everybody had the same idea.”

More supply and competition in the rental market – and, hence, a softening in rents and an increase in landlord concessions – may be good news for renters, but it’s less than ideal for developers and the financial backers behind their projects. Apartment developers could consequently lean more toward a segment of the market that’s been underrepresented in Long Island City thus far: for-sale condominiums, which currently comprise only a fraction of the neighborhood’s residential pipeline.

“It’s probably going to start shifting; some developers who built rental projects may turn those into condos,” Benaim said, suggesting that some buildings – particularly those holding “100 units or less” – may look to convert to condos to take advantage of demand for that product in the area. “Prices [for condos in Long Island City] are still reasonable, while Manhattan and Brooklyn are a little overpriced.”

Miller echoed that sentiment, noting that in “the outer boroughs – Brooklyn and western Queens, in particular – you could argue that there’s a shortage of new condominiums, because the emphasis has been on rental.”

Jonathan Miller

Jonathan Miller

But Miller also noted that the L train’s pending maintenance shutdown in 2019, which is expected to considerably impact the Brooklyn rental market, could mean that Long Island City rental market will soon “benefit as an alternative location for renters” looking for adequate, if not robust, public transit offerings.

Commercial market: Retail market heating up as office conversions come online

Whether it’s the tens of thousands of new apartments, thousands of new hotel rooms or numerous new and converted office properties popping up across the neighborhood, Long Island City is poised for a serious influx of people in the coming years. And if they live or work in LIC, they’ll also need places to shop, eat, drink and play in LIC – and there are questions over whether the neighborhood can develop a retail infrastructure to match its expanding residential, hotel and office footprint.

Because of Long Island City’s roots as an industrial neighborhood, retail amenities like stores and restaurants are a relatively recent development in the area and continue to be underserved. Luckily, LIC will see much-needed supply in this sector of the market coming via mixed-use development, such as ground-floor retail space built at the base of new residential and office buildings. Long Island City will see an additional 395,000 square feet of retail space via mixed-use development by 2020, according to the LIC Partnership.

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“I think the retail [in Long Island City] is going to evolve over time, and there’s going to be more and more retail and more people choose to live there,” according to Jonathan Miller. “One of the problems with residential support services in emerging markets has always been that just because you build one tower and put retail in it, doesn’t mean it’s going to survive. But with Long Island City, there’s been so much [mixed-use] development that it’s become a big part of establishing the neighborhood.”

Benaim said he sees LIC’s retail market growing substantially this year, citing how there will be “several thousand new apartments in the market” this year and noting that businesses and retail tenants are “anticipating” this influx as an opportunity to serve new demand for services. Marcus & Millichap investment sales broker Jonathan Eshaghian, who specializes in the Queens market, echoed that claim – saying he’s heard of “major retailers” set to announce moves to Long Island City in the coming year.

“A lot of [retailers] are already coming, and we need more,” David Chase, founder of commercial brokerage ONE Commercial Realty Services, told Living LIC. “We see thousands of units coming online the next few years, so to create a live/work/play environment [in Long Island City] we need a diversity of retailers.”

On the office side of the commercial market, the neighborhood will see more of the many warehouse-to-office conversions planned in recent years start to come online, as well as the ongoing development of Tishman Speyer’s massive two-towered, 1.1 million-square-foot Class A office complex on Jackson Avenue. Many of these projects, including the Tishman Speyer development, include retail components of their own – further fleshing out the neighborhood’s potential as an emerging location not just to live, but to do business.

Rendering of Tishman Speyer's planned residential and commercial office developments on Jackson Avenue in Long Island City (credit: Tishman Speyer)

Rendering of Tishman Speyer's planned residential and commercial office developments on Jackson Avenue in Long Island City (credit: Tishman Speyer)

Capital markets and investment sales: Market faces uncertainty as values, sales volumes may dip

The real estate market nationally will likely face a rising interest rate environment in 2017, with the Federal Reserve having already raised its short-term benchmark rate in December and anticipating a further three increases this year. Longer-term interest rates are also climbing on the back of a rising 10-year Treasury rate, which has even more of an impact on real estate borrowing costs.

This could prove a notable headwind for investors in 2017 and compound what was by most accounts a cooler New York City investment sales market in 2016, as property values flattened and transaction volumes dipped following a robust 2015.

“The overall industry saw a decrease in investment sales volume citywide,” Marcus & Millichap’s Eshaghian said, adding that he "wouldn’t be surprised to see a dip in overall transactions [in 2017] compared to 2016.”

Long Island City’s relatively strong market fundamentals could potentially insulate it from the effects of this dynamic. “If the market is strong, if job creation stays strong and people need offices and apartments, rents will keep going up and that will hedge against [rising] interest rates,” Eshaghian noted. “I think there’s been a flattening, but there's still room for growth [in Long Island City].”

Real estate financing from traditional banks has also been harder to come by due heightened regulations and increased capital requirements, particularly on construction lending – prompting borrowers to look to less conventional outlets for capital, like private debt funds, boutique investment banks and even other developers.

“We have been a lender on the nontraditional side, where we’ve been a mezzanine lender on construction financing,” Brause Realtypresident David Brause, whose company is nearing completion on its brand new rental tower at 44-28 Purves Street, told Living LIC. “We have many friends in the business who are looking to obtain financing and they’re being forced to look for funds away from the typical banks.”

That dynamic, coupled with the rising interest rate environment, could recalibrate expectations in the commercial real estate market – both for Long Island City and New York City at large. How that carries out in the marketplace over the next year is up for debate, however; some believe that the changing conditions could discourage buyers and prompt owners to hold onto their assets longer, while others can see landlords attempting to get ahead of rising interest rates and sell sooner rather than later.

“People have gotten used to a really low lending environment, and therefore a really low cap rate environment makes sense,” Brause said. “If sellers are going to realign their expectations, typically there’s inertia; if they have been told their building was worth ‘X’ the last few years, and now they’re being told by buyers and brokers that their properties aren’t worth as much as they were six months ago, they may say, ‘Well, this is temporary and I won’t sell.’”

Chase, however, said he thinks rising interest rates “will trigger more activity in the marketplace.”

“If you’re a seller, you want to sell now and get ahead of a higher-cost lending environment,” Chase said. “Investors’ underwriting will change and they won’t be as aggressive with higher interest rates, so sellers will take advantage of the current low interest rates. If they planned on selling in the next two or three years, they’re going to push for that now.”

421a: The saga continues

The future of the 421a tax abatement, which expired for good last January after much haggling in Albany, continues to hang as an unknown over the city’s real estate market. The tax break incentivized the construction of affordable housing in New York City and was considered a critical tool by developers for making the economics behind rental housing work – without it, most in the real estate industry claim, rentals don’t provide enough immediate return to make up for land acquisition and construction costs.

In wake of the abatement’s expiry, new building permits dropped citywide in 2016, exemplifying how many residential developers have retreated from the market until the future of 421a – or a similar, replacement program – is resolved.

“It’s definitely taken a lot of players out of the bidding,” Eshaghian said of the 421a expiry’s effect on development site sales and property transactions. “There’s a lot of people that rely on it. If you’re a condo developer, maybe not so much, but it has taken some of the buyers out of play.”

Of course, Long Island City is arguably better positioned than most NYC neighborhoods to cope with the new 421a-less reality, thanks to the sheer volume of new units already planned for the neighborhood and due to come online this decade. Many LIC rental projects are also already grandfathered into 421a, and simply need to be completed by 2019 to take advantage of the previous law.

“We definitely need 421a back – not necessarily Long Island City, but in New York City at large it’s a necessity,” Chase said, citing the drop in new building permits seen last year. “Long Island City, I think, has already proven that it’s the next big thing.”

In November, it emerged that the Real Estate Board of New York and the city’s top construction trades union had finally reached a compromise on workers’ wages at projects that would receive the tax break. Gov. Andrew Cuomo has demanded such an agreement as a requirement for any new 421a program. The deal, which still needs the approval of legislators in Albany, may finally resolve the matter and consequently kickstart new rental projects across the city in the coming years.

The Long Island City Clock Tower in Queens Plaza (credit: Michael Hall)

The Long Island City Clock Tower in Queens Plaza (credit: Michael Hall)

Long Island City would also benefit from the return of 421a; the Durst Organization’s December purchase of the massive Clock Tower development site at 29-37 41st Avenue, which it acquired for roughly $175 million, was widely considered a show of confidence in the future of 421a -- particularly since Durst is planning to construct a large rental tower on the site.

But regardless of 421a’s future and the myriad other questions facing the city’s real estate market in 2017, LIC is widely expected to continue its remarkable growth and evolution into one of the city’s most exciting outer borough locales.

“I’m very optimistic about the future of Long Island City,” Miller said. “I don’t think you’re going to recognize Long Island City a decade from now. It’s quite an amazing urban development story.”