The investment sales market is about as good as it could be. Values are soaring and the volume of sales is approaching 2007 peak levels, both in dollar volume and the number of properties sold.
The dollar volume of sales in the first quarter 2014 hit $13.3 billion. This figure represents the best first quarter of activity since the $20 billion achieved in the first quarter of 2007. The first quarters of the year have generally been the weakest performing quarters as market participants rush to get transactions closed before year end. If we annualize the $13.3 billion of activity, we are on pace for $53.1 billion in sales for the year.
This total represents an increase of 39 percent from the $38.3 billion last year. It also is approaching the all-time record achieved in 2007 of $62.2 billion. We believe, based upon anticipated increases in volume as we move throughout the year, that total sales volume will eclipse the 2007 record.
With regard to the number of properties sold, first quarter 2014 represented a record pace, with 1,255 properties trading hands. If annualized, 2014 is on pace for 5,020 properties sold, which would establish a new record and narrowly eclipse the 2007 total of 5,018. This total also represents the highest quarterly total going back to the second quarter of 2007.
If we look at quarterly totals in terms of number of buildings sold, we see that the last three quarters had the highest concentration of sales for three quarters going back to the first three quarters of 2007. The similarities between our present market place and 2007 are remarkable.
With regard to value, we have seen increases across all submarkets. For New York City as a whole, the average price paid per square foot rose to $444 in first quarter 2014, a 14 percent jump from the $389 average last year. The rise in value in Manhattan has been especially astonishing. In the first quarter, the average price per foot was $1,315, a 25 percent increase over 2013’s $1,051 average.
A trend that also became very evident in the first quarter was that the percentage of transactions occurring in the outer boroughs is growing back to previous peak levels. In 2005-2007, 80 to 83 percent of transactions occurred in the outer boroughs. During the Great Recession, this total dropped to between 68 and 71 percent as a flight to quality and safety increasingly forced investors into the Manhattan submarket. For the last couple of years, the percentage of transactions occurring in the outer boroughs has jumped significantly. If we look at the number of properties in Manhattan versus our citywide statistical sample, we see that about 17 percent of the 165,000 properties are in Manhattan, meaning that this disproportional distribution of sales is impactful.
On a citywide basis, we have seen NYC capitalization rates compressed to post-recession lows. In third quarter 2010, cap rates hit a Great Recession high of 7 percent. In first quarter 2014, the citywide average was 5.6 percent. The highest average cap rate was observed in the Bronx, at 7.2 percent and the lowest average cap rate was in Manhattan, at 4.1 percent. Please be reminded that these cap rates can vary greatly depending upon location, quality of property and, most importantly, the upside potential of each asset.
With the first quarter of the year on record pace, the question becomes, Why is this happening? The dramatic increase in value has been compelling enough to force sellers to put properties on the market and the massive demand that exists in the market is easily absorbing this additional supply. Sellers are taking advantage of market conditions, where their properties are worth significantly more than they were two or three years ago. Enhanced underlying fundamentals, low interest rates, and overwhelming demand from purchasers are each exerting upward pressure on values, and sellers are deciding to take advantage of these elevated levels.