Recently, there was an article in Bloomberg News entitled Negative Rates Hit Global Shipping Market.
The article details remarks from Nils Smedegaard Andersen, CEO of shipping giant A.P. Moeller-Maersk (“Maersk”). Andersen makes a good case for the assertion that “cheap money” is hampering consolidation in his industry. Low-interest rates have been enabling banks to keep marginal shipping companies in business, according to Andersen, and the result is lower shipping rates and excess supply. One of Maersk’s competitors, Hanjin Shipping Co. of South Korea, has recently been forced into debt restructuring in order to cope with lower revenue.
Shipping as a Microcosm of Real Estate
As in the case of the shipping industry, real estate development in New York contains marginal producers that owe their existence primarily to artificially low-interest rates. One trend that comes to mind is the proliferation of new hotels that are opening their doors in Manhattan and the boroughs. Micro-decisions like building a hotel in a specific location (prompted by a high prevailing rate for room rentals), made by numerous hotels, result in a large increase in supply. On a macro-level, the increase in supply will cause lower room rates overall, which will impact the marginal suppliers who will end up like Hanjin Shipping—restructuring their debt. Unfortunately, all signs point to this boom ending poorly when rates normalize. To use a metaphor, that's when the water comes away from shore and everyone will be able to see who is wearing a bathing suit and who is not.
A company that I am currently representing has found itself searching for a new space during this period of high water and low-interest rates. The location they are considering is on a block where I negotiated a lease 6 years ago. As of today, the going rent has more than doubled from $25 a square foot to well over $50 a square foot in that time—a rate that is significantly steeper than the rate of inflation. Demand increased dramatically over that period and as a result supply is now beginning to increase. While commercial office real estate has a similar cyclical nature to hotels, hotels are in a later phase of the real estate cycle. I explained to my client that I don't believe these rents are sustainable and that he should carefully weigh his options when making the decision to sign a lease. The high rates today can be mitigated by taking shorter term leases or leasing a minimum amount of space. When more supply hits the market, which low-interest rates and demand will spur, the tenant can then expand their space and extend the lease when rents come down.
As a tenant representative broker, it is my job to understand both the micro and the macro—and to make recommendations to my clients. To learn more about the difference a tenant representative broker can make, contact me.
George E. Grace
G.E. Grace & Company, Inc.
232 Madison Avenue
New York, NY 10016