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- “How’s the market?”

Eric Ladden | August 18, 2016

Almost every time I speak to someone regarding business, I’m asked “How’s the market?” It’s a far more complicated question than it appears. In this blog post I’ll explore this particular question from the perspective of the NYC market.

When the cost of money, or interest rates, is at or near zero, as is the case now, the consequences for the misallocation of capital are muted. In this environment, capital will continue to be misallocated in a desperate search for yield. From a tenant’s perspective, the effects are existentially serious. Five to ten years ago, garment companies permeated the fashion district around Broadway and Seventh Avenue in the 30’s. Rents ran from the mid-twenties to low thirties per square foot. Today, rents have doubled. The area is now teeming with tech companies. What happened?

What happened is the search for yield, the desperate search. Insurance companies, wealthy individuals, pension funds, etc., are funding venture capital and private equity firms. These dollars are invested in TAMI (technology, advertising, media, and information) companies. As with everything else in economics, if you subsidize something it will cost more [true?]. The young companies whose founders claim to have the best product, culture, and team are now well funded. Landlords aren’t ignorant of this fact and adjust their rents accordingly. So now the TAMI companies are paying $50 to $65 in midtown south and the garment companies are leaving for the other boroughs.

So how’s the market? If you’re a landlord, it’s phenomenal. If you’re a tenant, you’re allocating much more capital to overhead and fixed costs than you likely planned and correspondingly have less to attract the quality or quantity of people desired. That’s generally not how the business plan was initially created. So, if you ask: “How’s the market?” My simple answer to this vexing question would be: "Dangerous." Proper preparation can be the difference between the survival of your company or extinction. It won’t matter how great your product or service is if during volatile times you don’t have the flexibility within your lease to adapt, improvise, and adjust. In these times, an inflexible or poorly negotiated lease can be a killer.

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