NEW YORK: An Introduction to Real Estate: Mainly Dirt

Tariffs and Turbulence: The Economic Outlook for New York’s Real Estate Market

Spring of 2025 has seen the opening salvos of a trade war started by the new administration in Washington DC. World equity and credit markets have convulsed and academics who research uncertainty in the business community say their uncertainty index has surpassed levels seen during the Covid pandemic. Interest rates have spiked, and currency exchange rates have made the US dollar less valuable. Whether the announced tariffs turn out to be a bluff by the current administration or the start of a drawn-out global trade war remains to be seen.

The opening salvos of a trade war?

Due to its diverse business environment, New York should be in a decent position to weather any global trade war, but various segments of the New York real estate market may see periods of adjustments. For example, while it is too early to have any hard data, the hotel industry is bracing for a downturn in global tourism and business visits, the office building segment is concerned about a slowdown in office leasing, and residential developers are concerned about rising costs for imported construction materials. These concerns, of course, are on top of warnings from economists regarding general inflation and slower economic growth. Perhaps the administration’s view that the trade war will be positive for the US economy over the long term will be correct, but the New York real estate market will be affected in any event.

Economic resilience

For the 15 months prior to the opening of the trade war, New York’s economy was proving remarkably resilient. Job creation was continuing and, like much of the United States, inflation had tempered. During this period, New York’s real estate market had been segmented by asset classes. The residential rental segment of the market has been hit by draconian statutory changes over the last five to seven years and rising interest rates. Values of existing rental buildings have been dramatically reduced over that period causing distress at both the owner and mortgagee level. Some would argue that investment at this time in the New York residential rental market would be buying at the bottom with significant upside. Others argue that there is no sign of any relief from policy makers.

Residential rental properties

New construction of residential rental properties has been buffeted by uncertainty given interest rates and the potential global trade war, but recent City of Yes zoning amendments have given some hope to builders that there will be more opportunities to build new rental properties, often with a significant affordable housing component. Providing affordable housing to the millions who wish to live in New York remains a top political goal.

Residential resale market

The residential resale market has held surprisingly steady in the face of rising interest rates, at least at the luxury levels. Locked in legacy interest rates and a taxation level on gains that has not been raised in 30 years contribute to sellers refusing to sell thereby reducing inventory which forces buyers to jump when well-priced units become available.

The New York office market continues to struggle from the effects of the Covid pandemic. The struggle is particularly acute in B and C level buildings. Reduced demand for in person offices combined with the spike in interest rates over the last several years has caused a loss of equity and, in many cases, write downs of mortgages. There are numerous examples of mortgages being purchased for a fraction of the outstanding principal amount.

Office market

We continue to see, however, the office market addressing the value slump. From mortgagees accepting the reality of the current valuations to borrowers realising there may not be an easy fix, consensual short sales and other workouts are progressing. We are continually dealing with tax ramifications of these transactions for borrowers who had refinanced money out of their properties years ago. Some industry watchers are suggesting that this is an opportune time to purchase B and C level office properties, equating it with the savings and loan crisis of the late 1980s. Others remain concerned about the capital needed to reposition the buildings, convert them to residential use or demolish them as part of some larger assemblage. This concern is amplified by the current interest rate environment, and the potential long-term trade war.

Hotel and retail segments

While the residential rental and office markets have struggled, the hotel and retail segments have improved significantly over the last couple of years. Retail leasing, which had suffered a significant downturn well before the pandemic due to the increase in online shopping, had trended up given reduced rents and the move to experiential retail.

Hotel rates and occupancies had recovered significantly albeit from the significant lows caused by the pandemic, but hotels remain in the crosshairs of the effects of any extended disruption of international tourism and business conventions.

One area of concern is bio-medical facilities in New York. Indications that the current federal administration is cutting funding of medical research has caused institutions to rethink expansion of laboratory space. Whether the bio-medical buildings will survive in their current form may depend on whether that research moves to overseas to jurisdictions eager to attract top US researchers. Will Germany or Japan or even China benefit from the cutbacks?

Commercial property headwinds

Other segments of New York’s commercial property industry also face headwinds. Political opposition is mounting to “last mile” distribution centers. Film and TV production facilities have been hit hard as producers move productions overseas to avoid the higher labor costs arising out of contracts won by actors and writers.

New York's dynamic business environment

New York’s real estate market will continue to be buffeted by US and global macro conditions and investing in New York should be sure to diligence the particular segment and sub-market for deals they are pursuing. New York’s dynamic business environment should, however, insulate it from the worst of any global downturn caused by current federal policies.