The stock market is a leading economic indicator. It affects the psychology of companies. When the market is up, there is a tendency toward growth and expansive thinking, but when it’s down, people are less likely to spend money on real estate and investments.
In New York City, approximately 25% of the economy is tied directly or indirectly to the stock market. Looking at the last 20 years, we can compare the Dow Jones index levels with those of asking rents in New York and see a pattern.
The period of time between peak-to-peak and trough-to-trough has been between 6 to 7 1/2 years for both stocks and real estate asking rents. After each peak, the level in stocks would go down for 18 to 30 months before rising again. The asking price of office rents followed suit, with a slight elongation in reaching their low point. Rent prices fluctuations tend to be smoother than stock market fluctuations because of the more long-term nature of leases, but the correlation is clear. With real estate rents, the price goes up much quicker and goes down more slowly than stocks, but the length of each cycle is similar.
Effective Rent - For today’s purposes, we have looked only at asking rent, but we should keep in mind that there is a difference between asking rent and effective rent. In a tight market, we don’t see as many tenant incentives like free rent, construction, etc. Such incentives can be worth up to 10-20% of the overall cost. Taking that into consideration, the fluctuations of effective rent would actually make the graph “spikier” than those of asking rent.
Location - Another consideration is that the areas outside New York, such as the suburbs in New Jersey, are less closely tied to the stock market. In the early 1990s, for example, I was the leasing agent for about 1.5 million square feet of space in the suburbs of New York. The rents for those buildings have hardly changed in 20 years. So, while still somewhat affected by the stock market, the effect on rent prices outside of New York is not as dramatic as it is within the city.
The stock market has a general upward bias—we can safely predict that stock prices will rise over a 15 to 20-year period, for example—but it is more difficult to predict as the length of time decreases. For example, any given second a stock may go up or down but over long periods a basket of stocks will generally go up.
That said, it is still a fairly reliable signpost that we at Mohr Partners do take into consideration. While not determinative, it is informative and valuable, and, for the right situation, can provide insight into market trends that can add tremendous value to our clients.
Let us help you navigate through a volatile real estate market.
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016