concrete thoughts

Investment Sales: What Just Happened, What Lies Ahead

MARKET-WIDE, THE average price for a property sold in 2010 was $7.2 million. This was up from a 2009 average of just $4.4 million. In 2007, the average New York City property sold for $12.4 million. Last year’s $7.2 million average is approximately what it was in 2005, when the average property sold for $7.3 million. The resurgence of the CMBS market, and the financing markets in general, has helped this average transaction level increase along with the increase in investor confidence mentioned above.

We see this bias toward larger transactions particularly in Manhattan, where in 2009 there were just nine properties sold with a price in excess of $100 million. In 2010, this number climbed to 32.

While the $14.5 billion in investments transactions in 2010 was very encouraging, it was not indicative of the actual level of activity, which was understated due to the tremendous action in the note-sale market. We estimate that there was approximately $6 billion to $7 billion of note-sale transactions last year. As note sales are not publicly reported anywhere, this number is merely an estimate based on extrapolations of Massey Knakal’s activities selling and analyzing potential note sales for lenders, on understanding the sheer volume of distressed assets in the marketplace and on speaking to banks and special servicers about the relative level of distressed left on their balance sheets.

If there were indeed $6 billion to 7 billion in note sales, this would mean that sales activity actually tripled from 2009 to 2010, and would further substantiate the very positive psychology that exists among participants in the market today.

 

WE ALWAYS TALK about the “two Vs” as the most important metrics when analyzing the investment sales market. We already looked at the positive trends in sales volume, and now we must look at the other V: value.

Perhaps the most surprising statistic coming out of our 2010 study was the fact that prices, on a price-per-square-foot basis, dropped by 8.4 percent in 2010 versus 2009. This data defies the generally held belief that prices were increasing in 2010. It is important, however, to draw a distinction between price trends within the “core” asset market and trends within the balance of the property sample. It is clear that core assets have seen overwhelming demand, and prices for these institutional quality assets did indeed rise in 2010. Unfortunately, these core assets (which make up a disproportionately high percentage of total dollar volume of sales) represent less than 5 percent of the total number of buildings sold. If we aggregate all product types, in all submarkets, we come up with our average drop of 8.4 percent.

In terms of submarket performance, surprisingly, the Bronx saw an increase in average value per square foot, with a 3 percent increase over 2009 levels. Queens was the most negatively impacted, as prices dropped by 13 percent year-over-year.

This 2010 average value reduction on a price-per-square-foot basis indicates that, on average, properties are trading for approximately 36 percent below where they were trading at the peak of the market. This additional reduction in value will leave distressed assets even more stressed as negative equity positions grow. Furthermore, the extend-and-pretend strategies implemented on a short-term basis will not have provided the anticipated relief, as this tactic is only beneficial in an appreciating market. Fortunately, the pace of the decline in value has slowed significantly, and we expect to see price appreciation sometime before the end of 2011.

If we look at the market from a macro perspective, it is clear that the low point in the volume of sales was the second quarter of 2009. We believe that the bottom in terms of value will occur sometime in 2011. Based upon the relative level of value and volume, we are optimistic that there is room for significant improvement in both these metrics over the short, medium and long terms. Based upon that perspective, we anticipate that the dollar volume of sales will rise into the $22 billion to $25 billion range this year, representing a 55 percent increase over 2010 levels. We also anticipate that the turnover ratio in this year’s market will be in the 1.2 to 1.3 percent range, representing about a 25 percent increase in the number of buildings sold. We also expect to see price appreciation of 5 to 8 percent citywide as core assets continue to climb and, more importantly, secondary and tertiary markets begin to firm up.

Clearly, there are many reasons for optimism as we progress into 2011. There are, however, many factors that we must monitor that could dampen that optimism. We will take a look at each of these factors next week.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,125 properties, having a market value in excess of $7 billion.