As anticipated, after a slow start in 2013, investment sales activity in New York City continued to strengthen over the course of the year. As the economy and property fundamentals improved, a second-half investment rally pushed 2013’s dollar volume close to last year’s result. Additionally, we saw double-digit increases in values across the board last year. We expect these dynamics to carry over to this year, producing record results.
In 2013, the dollar volume of investment sales in the city totaled $37.6 billion, 9 percent lower than the $41.2 billion observed in 2012. The number of properties sold dropped 8 percent, from 2012’s 4,077, to 3,767 properties trading hands. These totals may lead casual observers to conclude that it was an off year in the sales market. Nothing could be further from the truth.
The reduction in sales volume was completely anticipated due to the artificially high sales volume in 2012. This artificially high volume was caused by the threat of increased capital gains taxes, which motivated sellers to accelerate their sell decisions to get transactions closed in 2012, which, under ordinary circumstances, would have come to market and closed in 2013. Externalities, especially tax policy changes, tend to “steal” activity from future periods and bring it into the present year to take advantage of the lower tax rates.
To illustrate the impact tax policy has on the market, consider that since1984 three of the top four years in terms of number of properties sold have been years in which tax policy affected seller behavior. It is important to note that seller behavior is the key to sales volume in New York as the supply of available properties for sale almost always greatly exceeds demand. The one notable exception to this relationship was 1992, when the Resolution Trust Corporation was selling distressed bank assets by the truck load. These three top volume years include 1986 (based upon the Tax Reform Act of 1986), 1998 (when the capital gains rate was reduced from 28 percent to 20 percent) and 2012 as the capital gains rate was expected to rise at the start of 2013.
So in 2012, investment sales rose significantly. Going into 2013, we projected a 20 percent decrease in the number of properties sold. So the 8 percent decrease was actually a pleasant surprise (we had also projected $41 billion in sales for the year, which was a counterintuitive forecast. But we felt there would be an increase in very large sales, which did occur but not to the extent we’d expected).
To put 2013 results into further perspective, look at 2011 totals. That was a year in which sales market participants were very pleased with the level of activity. If we compare 2013 results to 2011, we see a 35 percent increase in the dollar volume of sales and a whopping 69 percent increase in the number of properties sold.
Looking at a bar graph of the past several years, taking some of the activity from 2012 and putting it into 2013 (which would have happened but for the tax externality), we see a steady upward trend that we expect to continue into this year. For a host of reasons, including this trend, we expect records to be attained in both dollar volume and number of properties sold (eclipsing 2007’s $62.2 billion and 5,018 properties sold).
Supply and demand dynamics coupled with extraordinarily low interest rates exerted tremendous upward pressure on property values last year. All-time value records on a price-per-square-foot basis were achieved in every submarket. The average appreciation rate in all submarkets was 13.5 percent. Notably, the increase in the Manhattan submarket was the highest at 15.9 percent, increasing the market average to more than $1,000 per square foot for the first time ever ($1,040).
The high prices in Manhattan forced investors to increasingly look to the other submarkets. The number of properties sold in the Manhattan submarket, as a percentage of all properties sold, dropped back to a more normal 21 percent after three years in which the percentage hovered around an unusually high 30 percent. High prices citywide also motivated investors to seek yield in the development market. The share of dollar volume invested in land approached 14 percent last year after several years at its normal 7 percent to 8 percent level.
In retrospect, the 2013 investment sales market was very solid and has teed up 2014 to be an epic year. While we are only three weeks into the new year, thus far, it is living up to expectations.
Robert Knakal is the chairman and co-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 $10 billion.