Back to the Boom: Low Interest Rates Are Creating a New Real Estate Bubble
The New York City investment sales market over the past three or four weeks has been happily reminiscent of the market in 2007. This, folks, is the best market we have seen in five years.
Cap rates are compressing sharply, values are up, bidding wars at or above the asking price are commonplace as buyers are climbing all over each other to purchase the relatively few properties that are available for sale.
I’m bringing these dynamics to your attention today because I think building owners are seeing a wonderful moment in time for potential sellers to take advantage of these market dynamics. This may come across as one of the most self-serving correspondences I’ve ever sent, but if you follow the points below I think you may agree with my conclusions.
Presently in the investment sales market there is a very sharp supply-demand imbalance, with demand greatly exceeding supply. On the supply side, there are relatively few properties on the market for sale, as many potential sellers have indicated that they are not interested in letting go because of a lack of alternative investments into which to deploy the proceeds from the sale. Meanwhile, we haven’t seen as many sellers as we anticipated to take advantage of this year’s capital gains tax rates, which are likely to increase next year.
Interestingly, the mergers and acquisitions business for companies has been extraordinarily active, as company sellers appear to be more aware of this potential tax increase and are taking advantage of this year’s rate more aggressively than participants in the real estate market.
Along with this low supply of properties for sale, demand drivers appear to be at an all-time high. The institutional capital that inflated the asset bubble in the 2005-2007 period had been on the sidelines for a couple of years but has now reemerged, in some cases stronger than before, and is actively competing with the high-net-worth individuals and established New York families that have been extremely active since the downturn.