Vacillations Mean a Market Still in Transition—What to Look for
Dan Duray Nov. 4, 2010, 10:55 a.m.
In the first three quarters of 2010 (1-3Q10), the Manhattan investment sales marketplace showed that it is not immune from the sluggishness that is pervasive throughout our economy.
Looking at our two main indicators, volume and value, it had been obvious that the former was moving in a consistent, positive direction and the latter was simply meandering along. Since property values came off their 2007 peaks, and settled to an apparent bottom in 2009, value has simply been bouncing along the bottom with minor fluctuations depending upon property type and specific location. This is not surprising given the uncertainties in our economy, the lack of robust gross domestic product growth and the corresponding lack of job creation. Without a steadily growing economy in which jobs can be created, the fundamentals of real estate will find tangible improvement challenging. This clearly impacts property values.
As values have been vacillating during the past 18 months, we’ve been coming off our low point in terms of volume steadily since the second quarter of 2009 (2Q09). For six consecutive quarters, we saw momentum with consistently growing annualized sales volume in the Manhattan submarket. In the third quarter of 2010 (3Q10), this trend, unfortunately, reversed. Although the trend over the past 24 months has clearly demonstrated an increase in transaction volume, 3Q10 results were a clear disappointment for the market.
LET’S TAKE A look at third-quarter results.
In 3Q10, there were $2.15 billion of investment-sale transactions in the Manhattan marketplace. (We define the Manhattan submarket as south of 96th Street on the East Side and south of 110th Street on the West Side.) This activity level dropped 26 percent from the $2.9 billion in investment-sale transactions recorded in 2Q10. It is also lower than the $2.2 billion in sale transactions in 1Q10.
On the positive side, with the exception of the first two quarters of 2010, our $2.15 billion in investment-sale transactions in 3Q10 was the highest quarterly total going back to 3Q08. For some perspective, in 2007, average quarterly transaction volume was in excess of $13 billion.
In 1-3Q10, the total dollar volume of sales came to $7.27 billion. This represents a 130 percent increase over the $3.16 billion of transaction volume in the same period in 2009. This level remained 82 percent below the lofty levels achieved in 1-3Q07, in which there were approximately $40 billion in volume. As is usually the case, Manhattan disproportionately represented the majority of dollar volume in New York City sales.
While the 27,649 properties in the Manhattan submarket represent only 16.8 percent of total properties in our citywide statistical sample, the $7.27 billion in sale transactions represented 79.8 percent of the first three-quarter total of $9.1 billion of volume citywide.
Due to the fact that dollar volume sales can be skewed by the few very large transactions, we always look more intensely at the number of properties sold. In 3Q10, there were 112 investment properties sold in Manhattan. This figure represented an 18 percent reduction from the 136 properties sold in the prior quarter. This drop in volume was unexpected and disappointing given the actual and psychological momentum felt by market participants. For 1-3Q10, however, the 354 properties sold represent a 69 percent increase over the 210 properties sold in the same period last year.
Another metric that we monitor is the total number of buildings sold out of the total stock to derive a turnover ratio. On an annualized basis, the 354 properties sold represent 1.71 percent of the total stock of 27,649 properties. This figure compares very favorably to the 1.17 percent turnover ratio in 2009 but is less than half of the 3.61 percent ratio observed in 2007. Going back to 1984, the average turnover ratio in Manhattan has been 2.6 percent. Prior to 2009, the lowest turnover we had ever seen was 1.6 percent, observed in 1992 and again in 2003. These were both years at the end of recessionary periods and also both years in which we saw peaks in cyclical unemployment.
We had always assumed that the 1.6 percent turnover rate was a baseline below which activity would never fall. This assumption was based on the fact that the only people selling in 1992 and 2003 were those who had no choice: They were selling due to death, divorce, taxes, insolvency, partnership disputes and the like. This theory was blown away by the 1.17 percent turnover ratio experienced in 2009. Because 2009 turnover was so low, it is not surprising to see significant increases in 2010 on a percentage basis.
IN TERMS OF dollar volume of sales, there are five product types on which 2010 activity, on an annualized basis, is running at triple-digit percentage increases over 2009 levels.
In the retail property sector, we’ve already seen nearly $400 million of sale transactions, versus $261 million of activity last year, a 103 percent increase.
In the office building sector, there have been nearly $3.5 billion in transaction volume, versus just under $2 billion in 2010, a 135 percent increase.
In terms of land sales for development, 2010 has produced $527 million in sale transactions, versus $227 million of volume last year. This represents a 210 percent increase.
Elevator apartment buildings also have been selling at a rapid pace, with approximately $826 million in closed transactions in 2010, versus just $239 million of transaction volume in 2009, a 246 percent increase.
The largest, and most noticeable, increase in dollar volume has occurred in the hotel sector. In 1-3Q10, there were $759 million invested in hotels, versus just $220 million of activity in all of 2009, a whopping 360 percent increase.
The one product type in which we have seen a reduction in the dollar volume of transactions is in the walk-up apartment building sector, where just $169 million of activity has occurred this year, versus $270 million of activity in 2009, a 17 percent reduction.
In terms of number of properties sold, in 1-3Q10, the number of properties sold in every single product type has already exceeded the annual totals seen 2009, with the exception of one. This increase in activity affects one- to four-family residences, elevator apartment buildings, walk-up apartment buildings, mixed-use properties, retail buildings, office buildings, office condominiums, development land and hotels.
Specialty-use properties, which are those purchased by nonprofit organizations, schools, religious organizations, foundations or foreign governments, were the only category in which 1-3Q10 totals did not exceed the 2009 annual level. Here, there have been seven 2010 sales, versus nine in 2009.
EARLIER, WE DISCUSSED pricing volatility. This is demonstrated by the fact that the value of elevator properties, walk-up buildings and mixed-use properties showed appreciation thus far in 2010 versus 2009, of 3 percent, 10 percent and 28 percent, respectively.
Conversely, one- to four-family townhouses have lost 1 percent of value; development land is down 7 percent, from $363 per buildable square foot to $339 per buildable square foot; and, in the hotel sector, value is down 22 percent from 2009 levels. It should be noted, however, that in the hotel sector, the 2009 average price per square foot of $997 is statistically insignificant because there were only two hotels sold in the Manhattan submarket last year. Additionally, office condominiums and specialty-use buildings have seen their values completely flat from 2009 to 2010.
It is clear that activity in Manhattan is much stronger than we are seeing in the outer boroughs. Manhattan always leads the city out of its downturns, and we expect nothing different this time around. The fact that in the Manhattan market we’re seeing volume and prices vacillate the way they have is indicative of a market that is still desperately searching to find its footing. While the trends may be generally moving in the right direction, some volatile market data is engendering caution on behalf of some market participants.
The majority of market participants believes that both volume and value will increase from their present levels, and I concur with this position. However, the timing of these increases is anyone’s guess, and will likely move in tandem with G.D.P. growth and job creation.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.