Investment Sales: What Just Happened, What Lies Ahead

In 2010, sales volume reached $14.5 billion, up 131 percent from the abysmal $6.3 billion achieved in 2009. To illustrate just how bad the performance was in 2009, the $6.3 billion in sales reflected a drop of about 90 percent from the $62.2 billion at the peak of the market in 2007. The $14.5 billion in sales recorded in 2010 was also less than half of the $32.6 billion recorded back in 2005. Therefore, while the 131 percent increase over 2009 levels seems encouraging, we are still well below the medium-term trend line.

Manhattan was the submarket that performed the best, showing a 187 percent increase over 2009 levels; Queens continued its slide, with a 6 percent drop compared to the prior year.

The 2010 numbers were helped immensely by an extraordinary fourth quarter, in which there was $5.6 billion in sales volume. This was the highest quarterly total in more than nine quarters, going back to 3Q08. The tremendous activity in the fourth quarter was reflective of two very strong factors: that banks and special servicers were aggressively trying to clean up balance sheets before the end of the year; and that many sellers, motivated to dispose of assets due to the anticipated increase in capital gains tax rates, had already closed on their sales or executed binding contracts prior to Congress agreeing to extend the then-current rates. These two forces created many long days and nights in December for market participants who are involved on the transactional side of the business. I can’t remember a time during my 27-year career when simultaneous contract/closings or contract periods of less than two weeks were more prevalent.

While the trend within the volume of sales is clearly upward, there has been significant quarterly volatility in the numbers. After the second quarter of 2010, we had seen several consecutive quarters of volume growth in Manhattan and northern Manhattan. Volume trends in Brooklyn and Queens had also become positive for the first time in this cycle, and it was anticipated that the Bronx would turn positive in 3Q10. With the exception of the Bronx, which did see an increase in sales volume, 3Q10 results were disappointing, as volume dropped in all submarkets. These third-quarter setbacks were followed by dramatic increases in the fourth quarter. Given the external stimulus of lender balance sheet considerations and, more importantly, tax considerations, we expect that this bloated activity in 4Q10 will have “stolen,” or accelerated, some of the expected activity from 1Q11.

This is something that we would expect to see and is common after externalities impact a marketplace. We saw similar dynamics with the cash-for-clunkers program and the tax credit for first-time home buyers. As soon as these programs ended, auto sales and home sales plunged. We expect to see similar declines in volume in the first quarter of this year.

Something that has been unexpected, and is very positive, is that, thus far in January, we have seen an incredible number of potential discretionary sellers inquiring as to the value of their properties as they consider potential sales. This was unexpected, and is very encouraging relative to our projected sales volume for 2011.

EVEN THOUGH THE dollar volume of sales increased 131 percent in 2010, we always look more closely at the volume based on the number of properties sold, as we believe this is a better indication of market activity. After all, a few very large transactions can skew the dollar volume significantly.

In 2010, 1,667 properties were sold in New York City, up just 16 percent from the 1,436 properties sold in 2009. At the peak of the market in 2007, 5,018 properties were sold. In fact, during the period from 2005 to 2007, an average of approximately 4,750 properties sold each year. Therefore, 2010 activity was only about a third of the medium-term trend line.

The 1,667 properties sold represented a turnover ratio of approximately 1.01 percent of the 165,000 properties in our statistical sample. This is up from a 0.87 percent turnover rate experienced in 2009, and is significantly less than the approximate 3 percent turnover experienced in 2005, 2006 and 2007. An interesting way to look at this turnover percentage is that a 1 percent turnover ratio means that the average property would only sell once every 100 years!

In terms of submarket performance, Manhattan’s increase in number of buildings sold was the strongest, at 47 percent; the number of sales in Queens, meanwhile, was down by 11 percent on a year-over-year basis. If we look at the turnover ratio in each submarket, we see that northern Manhattan was the most active, with a 1.82 percent turnover ratio, and Queens was the lowest, with just 0.70 percent of its stock trading in 2010.

To illustrate shifts in certain trends in the sales market, it is interesting to look at the difference in the performance of dollar volume of sales versus the number of properties sold. From the peak of the market in 2007 to 2009, the dollar volume dropped 90 percent; the number of properties sold fell by 74 percent.

This bias toward smaller property sales was a clear indication that larger financings were difficult to obtain and it was simply easier to sell smaller properties during that period. The commercial mortgage-backed securities market dried up, falling from $230 billion in 2007 to just a few billion in 2009. Additionally, large commercial and money-center banks ceased lending on commercial real estate during this period. This reduction in the availability of large-scale debt exerted downward pressure on average transaction levels.

The banks most actively lending during this time period were small regional and community banks. These banks typically had an individual loan threshold of about $30 million. The 60 percent loan-to-value ratio created a clear line of demarcation at the $50 million price level. Now we have seen an increase in the dollar volume of sales by 131 percent, but an increase in the number of properties sold at only 16 percent. The market is now clearly demonstrating a bias toward larger transactions, as the financing markets are recovering and investor confidence is encouraging them to deploy large chunks of equity into a single transaction.