Bright Lights, Big City: Manhattan, Again, Destined to Lead City Out of Market Downturn

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While the number of properties that have sold in Manhattan has doubled since the submarket’s low point, if our present pace continues, we will still be about 37 percent below the 999 properties that sold in 2007 at the market peak.
Another indicator worth examining is the turnover ratio, which is the total number of properties sold out of the total stock of properties in the marketplace. In the Manhattan submarket there are 27,649 properties and, with an expectation of 631 properties trading this year, year-end activity should produce a turnover ratio of 2.28 percent.

With the exception of 2009, the lowest turnover ratio we had ever seen occurred in 1992, and again in 2003, at 1.6 percent. Both years marked the end of recessionary periods and were also years in which cyclical unemployment hit a peak. In 2009, market conditions were so bad that the turnover ratio hit 1.17 percent, an all-time low, even below the 1975-’76 totals, when New York City was on the brink of bankruptcy.

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The market has made significant strides in terms of a recovery. However, even if the year finishes at a projected 2.28 percent turnover, the market will still not reach the 2.6 percent long-term average that the market has experienced.
With regard to the average transaction size thus far in 2011, the average property sold in the Manhattan submarket has clocked in at $35.44 million. This is up significantly from the 2009 average of $12 million, but well below the $52 million average tallied in 2007.

Perhaps the most interesting aspect of the Manhattan submarket—and what differentiates it from the outer boroughs and northern Manhattan—is its tremendous appeal to foreign investors. While there is some demand outside Manhattan from foreign buyers, this demand is very limited. In Manhattan, foreign capital has flooded the market in significant amounts from high-net-worth individuals, small companies and large institutional investors across the globe. The relative political stability and relative economic stability the U.S. provides is a welcome change to present conditions in many foreign countries.

This foreign demand, coupled with extraordinarily high domestic demand for New York City assets, has exerted upward pressure on property values. The extraordinarily low interest-rate environment has also added to the upward trajectory of property values.

We believe that, years from now, looking back at market average prices per square foot, it will be clear that 2010 was the bottom of the market in the Manhattan submarket, and 2011 was the bottom for northern Manhattan and the outer boroughs. In 2011, average prices in Manhattan have increased nearly 6 percent from 2010 levels.

Each property segment has reacted differently based on differences in underlying fundamentals within each of those property types. Elevator apartment buildings have been the best performers thus far, mainly due to the fact that condo conversion underwriting has returned to the marketplace, exerting significant upward pressure on property values. Office buildings and retail properties have also seen double-digit increases in average price per square foot and hotel properties have also been doing extraordinarily well.

We will get into much more detail with regard to value trends in our year-end synopsis in January.
Meanwhile, we will complete our 3Q11 analysis next week as we dig into the performance of northern Manhattan and the outer boroughs.

Rknakal@massyknakal.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 totaling more than $7.8 billion in value.