Long Island economic and investment outlook: Trends and new developments to watch
The bi-county economy continues to gain momentum through the third quarter of 2004 in most industry sectors as the economic recovery continues to sustain itself, but on a moderate level. Reportedly, in the first 6 months of 2004, the region added 14,800 jobs reflecting a modest gain of 1%.
Annualized unemployment rates for the bi-county region approximate 4%, which falls below both the state and national year-to-date averages of 6% and 5.5% respectively. However, the incremental increases in interest rates may have an affect on some markets, especially the housing market and consumer sectors.
Other concerns focus on the lack of affordable housing for entry-level workers, a deteriorating and inadequate transportation system, and one of the highest real estate tax basis in the country, all of which will play a significant role on Long Island’s future growth prospects.
Regardless of these concerns, according to the Sales and Marketing Management 2003 Survey, the bi-county region ranks 6th in Average Household EBI at $67,842 and 16th in the country in terms of population, which now exceeds 2.8 million. Moreover, Nassau and Suffolk rank #1 in Median Household Income EBI at $54,492 and 14th in buying power within the 20 largest markets surveyed by Sales and Marketing Management 2003 Survey of Buying Power. A total EBI in excess of $63.5 billion, combined with retail sales exceeding $45.7 billion, is one of the key attractions to retailers, banking, and service sector industries as they continue expansion and their desired presence on Long Island.
In terms of markets to watch,the residential sector continues to expand at all levels with annualized appreciation still approaching 10%, and a median home price level of $440,000 in Nassau and $350,000 in Suffolk. Multifamily construction is minimal due to the lack of available land, which is virtually non-existent as-of-right. Rental rates continue to escalate and occupancies remain high. Effective monthly rents for new multifamily construction are in excess of $2 per s/f. Both industrial and office vacancies are dropping below 10%, with a slight “up tick” in average rents. Low vacancy rates in retail space has led to a slightly higher rental growth of approximately 2% over last year’s figures, with most class A type space in unenclosed shopping centers exceeding $20 per s/f. This space-constrained market benefits from the bi-county high household income levels and sales per household. Most centers report vacancies of less than 5% with the “big box” users continuing to do well. Notable players in this market space are Target, Modells, Kohl’s and Wal-Mart with most of the vacated Kmart and Office Depot sites already accounted for or redeveloped.
In terms of the Long Island office market, the lack of available land has pushed growth easterly into Central Suffolk and has contributed to the continued conversion of older industrial uses to flex office space. This trend is noted in the primary industrial hub areas of Plainview, Woodbury, and Westbury in Nassau and along the 110 corridor and Hauppauge regions of Suffolk. Another factor is the high cost of entry in Nassau and Western Suffolk, with most commercially zoned land exceeding $1 million per acre followed by industrial land prices at $500,000 to $700,000 per acre.
As a result, the Central Suffolk region has experienced notable land development and significant land appreciation trends, especially within the Yaphank and Stony Brook corridors of Brookhaven Township. Some of the major developers in these retro fit projects include Rechler, T. Weiss Realty, TRITEC and The Shalam Group.
Average rental rates for class A office space approximates $23.50 per s/f, with an availability of less then 10%. Office pricing based upon recent sales activity has ranged between $125 to $170 per s/f. In terms of industrial activity, an overall vacancy rate of less than 6% has been noted, with average rents of $7 per s/f in Nassau and $5.50 per s/f in Suffolk, according to several industry sources. Industrial pricing runs the full gamut, depending on age, location, access, etc., from a low of $50 per s/f to more than $80 per s/f. The recent trend of retrofitting older industrial buildings to class B office and industrial flex space has fueled this market. This redevelopment is primarily concentrated in Eastern Nassau and Western Suffolk. The most recent significant industrial transaction was the Long Island based Reckson Associates sale of its 95-property portfolio to Rechler Equity Partners for approximately $315.25 million for 5.9 million s/f.
New developments involving a move towards smart planning of combined residential, office and retail complexes include Jerry Wolkoff’s plans for the former Pilgrim State site; Charles Wang’s proposed interest in a multi-use development of a former Nassau County site in Plainview; and the still pending plans for the development on the former King’s Park hospital grounds.
Other notable development plans include the ongoing plans for the Calverton Enterprise Park in the former 2,900 acre Grumman facility in Riverhead; the Caithness proposal for a 326 megawatt generator site on a 97-acre site in Yaphank; and Taubman Co. regional mall proposal for the 39-acre former Cerro site in Syosset, which is still in opposition, but destined for redevelopment. Wilbur Breslin’s Brookhaven Town Center along William Floyd Parkway has been scaled down, with the latest proposal calling for an 850,000 s/f Lifestyle Center. Construction is underway on a new 277,000 s/f class A office building at 68 South Service Rd. as part of the 681,000 s/f Reckson Executive Park.
Lastly, final development plans for the 160-acre site that Northrop-Grumman intends on offering for sale in the near future, is still linked to the Town of Oyster Bay approval in selecting a future land use for the site that will reportedly be pre-determined prior to its sale. A mix of uses is currently being contemplated, but no plans have been drawn.
One of the major deterrents of new development on Long Island besides the lack of available land is the lengthy and costly municipal approval process and local government demands for new construction. This trend has resulted in unconscionable delays, which in many instances span over several years. New State Building codes, along with higher parking ratio requirements, reduced FARs and increased land to building ratios have further exacerbated the development process and has contributed to the escalating end-unit pricing.
Overall cap rates on most property types have remained constant, even with the gradual rise in interest rates. Real estate still remains a strong favor, especially when compared to other more cyclical/volatile investment vehicles (i.e. stock market, commodities, etc.). Moreover, improving rents and occupancies should offset any moderate increase in the cost of capital. The end result is that interest rates are still at 40 year lows, demand for real estate in all sectors has not decreased, and with the absence of any prolonged trade or budget deficits, no noted downside risk has emerged from the marketplace.
Overall, the U. S. economy continues to rebound and to gain strength, which should continue to improve the overall employment picture. However, the slow pace of prolonged job growth and the absence of consistent economic growth is still a concern, because of the relationship of these two indices in the underlying strata of a healthy economy (i.e., job expansion and increased plant capacity). With inflation in check, a GDP of 4%, and a presidential election in November, federal chairman Greenspan should continue to increase interest rates at moderate levels through 2005. As such, an upward shift in interest rates (i.e., 100-150 basis points) should have no notable consequence through 2005. Overall, the local economy should benefit from these positive trends with no significant declines in the various real estate sectors foreseeable over the near term.
Richard DiGeronimo, MAI, SRPA, CRA is president and founder of R.D. Geronimo Ltd., Mineola, N.Y.