Manhattan in 2013: Values Surge as Volumes Struggle

Last week, I reported on the state of New York’s investment property sales market on a citywide basis. The numbers showed that, while volume was good, it could not quite get back to the totals seen in 2012. The dollar volume totaled $37.6 billion, down 9 percent from 2012’s $41.2 billion, and the number of properties sold dropped 8 percent, from 4,077 in 2012 to 3,767 last year. This result was not unexpected, as the strong pace of sales in 2012 was materially affected by capital gains tax policy that accelerated some activity that would have normally occurred in 2013. The good news was that last year, on average, property values in the city increased by 13.4 percent on a price-per-square-foot basis.

The Manhattan submarket—defined in our statistics as the market below 96th Street on the East Side and below 110th Street on the West Side—in 2013 fared worse in comparison to the prior year in terms of dollar volume and, particularly, in terms of the number of properties sold, which dropped significantly.
Manhattan saw $28.4 billion in sales activity last year. This figure was down about 10 percent from the $31.5 billion in 2012. The number of properties sold dropped a whopping 34 percent, from 1,200 in 2012, to 789.

The difference between these declines tells us a few things about the Manhattan submarket.

First, the larger drop in number of properties demonstrates that, in 2013, larger properties were being sold. This is evidenced by the four sale transactions that occurred in excess of $1 billion last year. These were the first such sales since 2010. Last January, we forecast that larger transactions would make a comeback. And while the mega deal did return, larger sales in general increased only moderately. In 2012, transactions more than $100 million (generally considered “larger transactions”) accounted for about $21 billion, while this same category produced just $22 billion last year. However, the average price of a property sold increased from $26.25 million in 2012 to $36 million last year—a 37 percent increase!

Second, the stats tell us that owners of Manhattan properties appear to be more highly affected by tax policy than owners in other submarkets of the city. While it is undeniable that this correlation exists (three of the years in which the most properties were sold happened to be years in which tax policy came into play—1986, 1998 and 2012), it is hard to explain exactly why. Tax rates are no different in the outer boroughs than they are in Manhattan. It could be that Manhattan is more a traders’ market, while the other boroughs attract investors with a longer-term perspective on their investments. While both turnover rates are low, the historical Manhattan rate has been 2.6 percent, while the rate in the other submarkets has been below 2.0 percent.

Third, the stats tell us that owners are becoming more highly sensitive to tax policy. This could be because of all the talk about tax reform in Washington or because of the extraordinary income tax burdens New Yorkers currently face or because the industry has been bracing for large real estate tax increases as an easy political solution to the rapidly escalating labor and pension obligations facing the city. Perhaps this sensitivity stems from the tremendous media coverage taxes have received recently. No matter the reason, last year in Manhattan, 1,200 properties were sold, more than any other year on record. This total eclipsed 1998’s previous record of 1,078.

Fourth, in the Manhattan submarket, values are increasing at a very rapid rate so that even with fewer properties sold, the dollar volume of sales does not drop as much as the reduction in the number of properties sold would dictate. In 2013, value per square foot in Manhattan jumped by 15.7 percent to a new all-time high, breaking through the $1,000 threshold for the first time ever at $1,040 (the Manhattan submarket has also shown a 60 percent increase in value since 2010’s $651 average). We expect double-digit value increases in this submarket in 2014, as well.

Lastly, no article about the Manhattan sales market would be complete with briefly addressing the boom in the land market last year. The average price per buildable square foot increased to $445, up 22 percent year over year. While this is an impressive number, sites at the high end have averaged $846 per buildable square foot, blowing away the 2007 average of $392 for this segment.

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