Frustrated Buyers Can Smile: While Prices are Stratospheric, More Opportunities To Come
Robert Knakal June 25, 2013, 6 a.m.
When it comes to the investment sales market in New York City, supply and demand play a vital role. Presently, we are witnessing a tangible increase in supply, which will have a noticeable impact on this year’s statistics.
Those of us who are fortunate enough to be brokers selling properties in New York City are almost always operating in a market where demand greatly exceeds supply. In fact, during the last 30 years, I have only observed one time when supply exceeded demand. That was in 1992, caused by the savings and loan crisis. At the time, the Resolution Trust Corporation was dumping hundreds of properties that failed banks had taken back in foreclosure. Its mission was to sell the assets as quickly as it could. Remarkably, buyers were few and far between, as equity was scarce and those who had capital were reluctant to invest it. This resulted in those buyers who were willing to jump in getting huge discounts from what those same assets sold for during the prior peak.
During all other periods in the last three decades, demand has greatly exceeded supply. Therefore, supply has a much more profound impact on the market than demand does.
Supply is created by two distinct groups of sellers. The first are those who don’t have much of a choice. They either have to sell or are compelled to sell for some reason. These reasons typically consist of death, divorce, taxes or partnership disputes. This group sometimes includes institutional sellers who are approaching the end of a fund’s life, when a sale is required. It also includes users who have occupied the properties they have purchased and have either outgrown the space or no longer need it.
The other category is discretionary sellers, who decide for a variety of reasons that now is the time to sell. These include investors who are “retiring” and want less active management to deal with, owners who want to realign portfolios by focusing on another type of asset or a different geography, and some folks who simply feel they have done as much as they wanted to do with an asset and want to take advantage of market conditions. This last often involves simply taking good old-fashioned profits.
Given how impactful interest rates have been on the sales market, it is not surprising that supply is rising. An extraordinarily low interest rate environment has exerted tremendous upward pressure on values. Currently, values on a price-per-square-foot basis exceed (greatly in some cases) levels seen at the peak of the last cycle in 2007.
For the past couple of weeks, Fed Chairman Bernanke has been dropping the word “tapering” in many of his comments, indicating that a slowing of the Fed’s seemingly endless quantitative easing program is on the horizon. This has forced sellers to consider the direction of the market. We have already seen an impact on the equities markets.
Over the long term, interest rates and capitalization rates have been highly correlated. A slowdown and eventual end to QE means that interest rates on bonds and Treasuries will rise. As these rates rise, borrowing rates will rise, and as they rise, cap rates will move accordingly. As cap rates rise, they exert downward pressure on values.
For these reasons, many sellers are looking to take advantage of current market conditions by putting their properties on the market. During the past two months, the number of valuations we have done for owners who are considering a potential sale has skyrocketed, as has the number of our exclusive listings.
The first half of 2013 is rapidly drawing to a close. We won’t have those statistics until around the third week in July, but we expect that second-quarter numbers won’t be vastly different from the first quarter’s. Based upon first-quarter figures, the dollar volume of sales was running at 36 percent less than last year, and the number of building sold was about 45 percent lower. With second-quarter activity not changing these percentages much, one might think we are in danger of having been way off in our January 1 projections of 20 to 25 percent fewer buildings sold this year and about the same dollar volume as last year. The increased supply coming onto the market, however, has us feeling very comfortable with our prognosis of about six months ago. Expect second-half activity to take off.