So the question becomes, why is volume meandering at this relatively low level? At the end of 2Q11, it appeared that the recovery had great traction and we were headed on a sharply increasing ascent back to 2005-07 levels. But the sales market’s trajectory has temporarily plateaued (I am hopeful that adverb is correct). Why is this happening?
The acute supply/demand imbalance addresses this dynamic. There is an extraordinarily low supply of available properties on the market today. This has been created mainly by discretionary sellers who routinely ask the question, “If I sell, what do I do with the money?” The rates of return on alternative investments are near historic lows and, while the equities market is performing well, uncertainty surrounding the economy has investors leery about equities. Bond yields are at or near all-time lows with the 10-year Treasury dipping below 2 percent once again in recent weeks. Bank CD rates were as high as 5.5 percent as recently as 2007. Today these same investments are yielding maybe 20 or 30 basis points of return.
Simultaneously, the demand side is excessive, with high-net-worth individuals and families establishing strong footholds since the institutional capital left the market in the 2007-09 period. This institutional capital has, however, regained traction and is a prominent player in the marketplace today, being joined by tremendous traditional foreign buyer demand and, increasingly, we are seeing first-time buyers in the New York City market who are domestic and foreign.
While volume is relatively slow but steady, we expect values to rise significantly this year. Just within the past six to eight weeks, we have seen significant cap rate compression as lending rates have dropped, exerting downward pressure on caps, which have fallen by 75 to 100 basis points just in the past two months. First-quarter results do not show this increase in value but, based upon the contracts signed recently, we expect to see sharp increases in value in 2Q12. So, from my client’s perspective (and all other property owners), the market is indeed great. But if you are someone who relies on transaction volume for your compensation, leave the cork in the Champaign for now.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and in his career has brokered the sale of more than 1,200 properties, having a market value in excess of $8 billion.