The Manhattan investment sales market typically serves as a lead indicator for the sales market citywide, and in the first quarter of 2013, it was once again.
The Manhattan submarket (defined as south of 96th Street on the East Side and south of 110th Street on the West Side) led the way in the first quarter of 2013 with $5.5 billion in investment sales transactions. This represented 85 percent of the $6.5 billion citywide total.
As expected, the $5.5 billion was significantly lower than fourth-quarter 2012 totals, as the end-of-year rush to take advantage of lower capital gains rates created an epic quarter in which sales volume hit $14.6 billion, the second-highest quarterly total in history (The first quarter of 2007 was the peak, with $17.2 billion). The good news is that the $5.5 billion was much better than we anticipated.
In 2012, there was a total of $31.3 billion of investment sales activity in the Manhattan submarket. Annualizing the first quarter of 2013’s $5.5 billion, we are on pace for about $22 billion this year. However, we feel that the 2013 total will rival, if not exceed, the $31 billion seen in 2012 as activity picks up throughout the year.
As expected, 2012 was a very active year, due to the impact an anticipated increase in taxes had on seller behavior. An externality like the capital gains tax increase has two tangible effects. First, it serves to catalyze some transactions that might not have occurred otherwise, as sellers realize that a window of opportunity may be closing. Second, it pulls activity from future periods forward, as sellers who were anticipating selling in early 2013 accelerated their process to close before the end of last year, achieving higher after-tax proceeds than they would have had they sold this year.
Tax policy transparently impacts market participant behavior. Last year we saw a record number of properties sold in Manhattan as the turnover of the total stock of properties reached 4.3 percent, an all-time record. The previous high was achieved in 1998 when, under the Clinton administration, capital gains taxes were reduced from 28 percent to 20 percent. Another spike in sales occurred in 1986, prior to tax policies of the Tax Reform Act of 1986 kicking in at the beginning of 1987.
In the first quarter of 2013, there were 130 properties sold in the Manhattan submarket. This was down significantly from the 484 properties sold in the fourth quarter of 2012. Again, this was not surprising, as the fourth-quarter 2012 total set an all-time record for Manhattan, as did 2012’s yearly total of 1,194, eclipsing the 999 properties sold in 2007.
Coming off this record year, we expected the number of properties sold to be down, and while it was, the 130 sales were more than we anticipated. We believe this is another positive sign for the balance of 2013.
While we expect the number of properties sold in the Manhattan submarket to drop by 20 to 25 percent this year from last year’s total, we fully expect the dollar volume to be about where it was last year if not higher, given what we expect will be a resurgence in large office building sales, which impact dollar volume greatly.
Perhaps one of the most surprising trends in the Manhattan submarket in the first quarter of 2013 has been the incredible run-up in land values over a relatively short period of time. According to the transactions we have been working on, we believe that land values have appreciated by as much as 30 percent in the past three months alone.
We are seeing tremendous demand from local developers, as well as from developers from around the country who do not own anything in New York yet but are looking to get into the market. Joining them are foreign developers who are looking to do their first projects in New York City. We expect that land values will continue to rise throughout the year and may end the year as much as 50 percent higher than the averages we saw in 2012.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services; in his career he has brokered the sale of more than 1,300 properties, with a market value in excess of $9 billion.