Volume Down, Values Up, Risk In Vogue for 3Q13 Investment Sales


The recovery in New York City’s property sales market accelerated in the third quarter of 2013, but its dynamics have changed. As pricing for existing Manhattan properties has exploded, investors are stepping up the risk ladder, increasingly chasing yield in development and value-added properties as well as properties outside of Manhattan.

In Q3, there was approximately $8 billion of investment sales transactions. Annualizing the first three quarters of the year, we are on pace for about $30.2 billion in sales volume for the year, which would be a 26 percent decrease from the $41 billion that occurred last year. However, comparisons to last year can be misleading and must be put into perspective. Record sales volume, precipitated by the fear of increased capital gains taxes, led to a spectacular year in 2012 from a dollar-volume, as well as a number of properties sold, perspective. Thinking back to 2011, it was a year in which all participants in the New York real estate sales market were feeling great about how the market was performing. Relative to 2011, this year’s activity, year-to-date, is ahead of the 2011 pace by about 8 percent.

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With respect to the number of properties sold (which is always more indicative of the actual activity level in the market), there were 996 properties sold in Q3, putting 2013 on pace for about 3,251 property sales. If achieved, this total would be about 20 percent below the 4,066 properties sold last year but, importantly, would be about 46 percent above 2011’s totals. In fact, other than the all-time quarterly record achieved in 2012’s Q4 of 1,677 properties sold, the 996 sales is the highest quarterly total going back to 2007. No wonder sales brokers have been happy of late.

Interestingly, the average price of a property sold so far this year has dropped to $9.3 million, and, in the third quarter alone, the average was just $8.1 million. These figures are down 8 percent from 2012 and 26 percent from 2011, respectively. This appears counterintuitive as values are rising rapidly. Keep reading.

With respect to the average price per square foot of properties sold, the average thus far in 2013 has been $455 per square foot, 3 percent lower than the $469 per square foot achieved last year. This also seems counterintuitive based upon the tremendous upward pressure that has been exerted on property values in the city.

However, the average transaction price and values per square foot citywide is easily explained by the fact that, as prices continue to soar in Manhattan, investors are increasingly looking to the outer boroughs for yield and opportunity. Given the properties in the outer boroughs sell for generally lower prices and less per square foot than properties in Manhattan, and an increasing percentage of transactions are occurring in the outer boroughs, it is not surprising to see these citywide averages dropping. Importantly, this does not mean that values are decreasing in the city, an assumption that could easily be made by the casual observer.

The submarket that has clearly performed the best has been northern Manhattan (north of 96th Street on the East Side and north of 110th Street on the West Side), having achieved approximately $1.3 billion in sales during the first three quarters of the year, already surpassing 2012’s total of approximately $1.1 billion.

With respect to dollar volume, approximately 39 percent has been generated by the office building sector, which is typical for the dollar-volume breakdown in this city almost every quarter.

The most notable statistic with respect to the breakdown of sales volume is that development sites, thus far in 2013, represent about 17.2 percent of all dollar volume, more than double the average seen in the period from 2009-2012. In fact, in the third quarter alone, dollar volume in the development sector was responsible for 22 percent of the total dollar volume, a record high surpassing the 2006 record. This emphasis on the development market is indicative of increasing confidence in the future of New York City’s property performance by the development community, as well as a lack of yield on existing properties.

There has also been resurgence in the mega deal (which we predicted in January of this year) with three transactions more than $1 million closing in the first three quarters and another four or five expected before year end. A notable lack of activity has been observed in the $100 million to $500 million space, which is on pace to be about one-half of the total seen in 2011. Only 1.7 percent of all transactions occurred between $100 million and $500 million, which is back to the level seen in 2010 for this sector.

With values in Manhattan rising, investors are searching for returns in riskier development assets or properties in the outer boroughs. The slowdown in transaction volumes is hurting transaction intermediaries, but rising values are benefiting owners greatly. We expect the same conditions to continue for the balance of 2013.