Third Down: Investment Sales Have Dropped From The Second Quarter, But the Stats Are Rosier Than They Appear
By Jotham Sederstrom October 25, 2011 10:14 am
reprintsAlso worth inspecting is the “turnover ratio,” which is the number of properties sold out of the total stock of properties across the market. Considering the annualized potential of 2,064 sales this year, the citywide market place is running at a turnover rate of about 1.25 percent of the approximately 165,000 properties that are tracked.
This figure is up significantly from the 0.87 percent turnover achieved in 2009, which was a historical low. The marketplace with the lowest turnover was the Queens submarket, with a 0.82 percent turnover. The submarket with the highest turnover was Manhattan, with 2.3 percent. While the Manhattan submarket has been performing extremely well and is up significantly from the 1.17 percent turnover achieved in 2009, the 2.3 turnover is still well below the long-term average of 2.6 percent going back to 1984. There are 27,649 properties in the Manhattan submarket and the 630 projected sales for this year would result in a turnover ratio of approximately 2.28 percent.
Several questions have been asked about recent occurrences in the broader markets and their potential impact on commercial real estate capital markets. These include the S.&P. downgrade, economic turmoil in Europe and the debt-ceiling debate. An argument could be made that these events have negatively impacted the dollar volume of sales. But, again, further analysis is necessary.
Interestingly, the S.&P. downgrade has both hurt and helped the market. It has helped the market because, counterintuitively, the U.S. long-term debt downgrade caused a flight to quality, which increased demand for U.S. Treasuries, driving the yield down. This was a positive result for portfolio lenders—specifically, the community banks and small regional banks—who lend at spreads above Treasury rates. This has created a positive impact on the financing market from these portfolio lenders. However, the flight to quality, as a result of increased risk aversion, created stresses in the C.M.B.S. market. This, therefore, hurt the financing market for larger loans, which impacted dollar volume.
Moving forward, there are five factors worth watching to determine how the sales market will react: employment, supply, demand, inflation and interest rates. Clearly, employment is well below where we would like to see it given the tremendous impact that it has on real estate fundamentals.
As discussed in this column two weeks ago, supply-and-demand dynamics dictate that demand far exceeds supply and we do not anticipate that changing anytime soon. Supply has been scaled back slightly as the broader economy is creating uncertainty for many participants.
Inflation appears to be rising as the recent C.P.I. calculation has pegged it at about 3.8 percent, well above the Fed’s comfort zone. This increase in C.P.I., combined with our unemployment rate, yields a metric called the “Misery Index.” At 12.9 percent today, the dreary sounding metric is the highest it has been since 1982.
Interest rate increases also pose a deep threat to the marketplace. While Fed chair Ben Bernanke has indicated that rates will stay low through, at least, the middle of 2013, it would not be at all surprising to see rates rise before that. To the extent that interest rates stay too low for too long, it would create a concern for the marketplace, as low interest rates for an extended period create asset bubbles. This has some investors contemplating whether the market is currently overheated. Others fear that, with inflation right around the corner, hard assets, like commercial real estate, are favorable, and their aggressiveness is reflective of this perspective.
All things considered, the market is trending very positively and we expect these conditions to continue in the short-term.
knakal@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 1,175 properties, having a market value in excess of $7.8 billion.
