Investment Sales: Never Mind the Adjectives, Look at the Numbers
When people talk about the building sales market in Manhattan today, and how slow things are, they often speak in adjectives. Here is a sample of some used in the past four months in various news articles: slow, anemic, horrible, inert, quiet, sluggish, creeping, apathetic, inactive, stagnant and lethargic. Rather than ask you to suffer through interpreting the degree to which these words apply, let’s look at some numbers. I have always preferred numbers to adjectives.
Massey Knakal recently completed our analysis of the investment sales market in Manhattan through the first three quarters of 2009. The results were, unfortunately, in line with our expectations; however, we believe we may have already bottomed out in terms of a low point in the volume of sales.
Through the first three quarters of 2009, the aggregate sales consideration in Manhattan (south of 96th Street on the East Side and south of 110th Street on the West Side) was $3.2 billion. This figure is down 82 percent from the $18 billion in sales in the first three quarters of 2008, and down 92 percent from the $40 billion peak in sales in the first three quarters in 2007.
There were 209 Manhattan sales through the first three quarters, down 60 percent from the 528 sales during the same period in 2008, and down 75 percent from the peak over the first three quarters of 2007, when there were 829 sales. Interestingly, the reduction from the peak in the number of buildings sold (75 percent) was less than the reduction in aggregate consideration (92 percent), showing the bias toward smaller transactions recently. This is a function of financing markets in which financing for smaller, income-producing properties is much more readily available than for larger transactions. Our community and regional banks have been actively providing financing throughout the credit crisis, and their active participation continues today. These lenders prefer to make individual loans of $30 million or less, creating a majority of transactions in the small-to-midsize range.
In fact, 92 percent of all transactions in 2009 thus far have been below $25 million, and the average transaction size has been a mere $15.3 million.
Another reason for the bias toward smaller transactions is the significant amount of equity required to acquire property today. Loan-to-value ratios have been reduced from 75 to 85 percent to 50 to 60 percent. The impact of this on a $50 million sale is that an investor needs $25 million to $30 million of equity today as opposed to the $7.5 million to $12.5 million required pre–credit crisis. This difference is significant and cannot be overlooked as a tangible factor affecting the fundamentals of our building sales market.