The New York City investment sales market last year was, indeed, a memorable one. While the final statistics won’t be available for another couple of weeks, there are some things that are very clear about the results.
Large transactions made a strong comeback as their numbers rose to levels that were several times larger than we saw in 2012. The dollar volume of sales will end up with a positive surprise, and the number of properties sold will be almost exactly what we projected it would be last January. As soon as those numbers are finalized, I will report them in this column.
A trend that was very obvious in 2013 was that the extraordinarily low interest rate environment caused cap rate compression to an extent that frustrated many of the investors in the marketplace. The desire to find yield led investors to seek transactions outside of their typical comfort zones. This resulted in buyers increasingly looking at properties in the outer boroughs (in fact, we believe a greater percentage of properties sold citywide took place outside Manhattan than in any other year in history), as yields were slightly better there. The chase for yield also drove many—typically, nondevelopers—into the land market, which drove up both the number of development sites sold and exerted tremendous upward pressure on land prices with values in all neighborhoods surpassing their previous record highs, some by surprising amounts.
The number of buyers in the marketplace also rose to seemingly record levels. We have never tracked how many buyers are looking at any particular time, but we did see our active investor list grow by 37 percent from January to December of last year. The overwhelming majority of new buyers were from outside the United States or have been active in real estate markets around the country but not in the New York metro area. For this reason, over the last several months, we have been telling sellers who retain us exclusively to market their properties that there is a better than 50 percent chance that the buyer of their property will be someone we—and they—have never heard of or don’t know very well. This is probably the most important reason why property should not be sold in an “off-market” fashion today and should be widely distributed to the broadest possible audience.
Another very tangible trend seen last year were the scores of investors complaining about the market being too hot and prices not making any sense. This caused them to sit on the sidelines and wait for the next recession. All of this chatter is eerily reminiscent of what investors were saying over and over again in 1998. At that point, we were five years into a recovery. I vividly remember being at a Community Housing Improvement Program event—CHIP is a great organization that advocates for multifamily property owners on a host of issues surrounding rent regulations—and more than half the attendees told me they had raised significant funds to invest in properties but that they were going to wait until the next downturn, because “insane” prices were seven times the rent (the same properties were selling for just three or four times the rent five or six years earlier).
In retrospect, the market was just poised to take off, and values actually continued to rise for another 10 years (the recession in the early ’90s resulted in a slowdown in the number of transactions but not a reduction in property value). Those who sat on the sidelines kicked themselves for not buying during this time when fortunes were made.
So where are we today? From what I have read and heard thus far, most pundits seem to believe 2014 will be “more of the same” compared with last year. I disagree. I believe this year will be a record year in many ways. I believe both the dollar volume of sales and the number of properties sold this year will set all-time records and surpass the $62 billion and 5,018 properties sold in 2007. I also believe that property values will continue to rise to even higher levels this year as the supply/demand imbalance continues to widen.
There are several reasons why this is a projection I’m very comfortable to make. I will review all of these reasons, which include history, trends, economics and politics, at the Massey Knakal press conference later this month and then will write about those reasons in detail in this column.
But one thing is certain: If you are a sales broker or someone who makes a living based on transaction volume, put off those vacations you have planned for this year, put your space helmets on, and hunker down. It will be a real estate sales market for the ages.