Manhattan Investment Sales Market’s First Quarter Surge

The investment sales market in the Manhattan submarket (defined as below 96th Street on the East Side and below 110th Street on the West Side) is off to a flying start.

In 1Q14, there was $9.6 billion of investment sales activity, which, if annualized, would lead to about $38.5 billion for the year. This figure represents what would be a 34 percent increase over the $28.7 billion of activity in 2013. While the broader citywide market is on pace to come close to the all-time record established in 2007, the Manhattan submarket is performing at about 27 percent below where it was in 2007. The $9.6 billion of sales activity in 1Q14 was, however, the highest first quarter total going back to 2007.

There were 229 properties sold in the Manhattan submarket in 1Q14. If annualized, this total represents an expected 914 property sales, which would be about 14 percent above the 807 properties sold in 2013. The 229 properties sold also represent the highest first quarter total going back to 2007.

In 1Q14, we observed some tangible shifts from the recent past. Notably, development site transactions in 2009 represented only 5 percent of the total number of properties sold. In 1Q14, development transactions represented 18 percent of total properties sold. Office building sales represented just 7 percent of properties sold in 2009; in 1Q14 this total reached 20 percent, again nearly triple 2009 levels.

If we look at Manhattan dollar volume on a quarterly basis, we see that 4Q13 and 1Q14 are the two best back-to-back quarters since early 2007.

The land market has been absolutely on fire in the Manhattan submarket. The price per buildable square foot has hit an all-time high average of $482.This figure may seem low based upon the headlines of residential land selling for $800 to over a $1,000 per buildable foot. But we must remember that this average takes into consideration land that is zoned as commercial and manufacturing, as well as residential. These sectors negatively affect the average. Based upon the strength of the development market, we expect to see several transactions eclipse the $1,000 per buildable square foot mark in 2014.

The retail property sector has also been a story so far in 1Q14. The average price per square foot of a retail assets sold in the Manhattan submarket in 1Q14 has hit $1,315. While this average is skewed somewhat by the $31,000-per-square-foot sale at 737 Madison Avenue (which was the highest price per square foot ever achieved in the city) the strength of the retail market continues to be unquestionable. It is also thought that the strength of the retail sector is driving land values, as the retail component of several sites has become so valuable that it is affecting the value of land on a price-per-square-foot basis.

In the Manhattan submarket, cap rates have continued to compress. At the low point of the market in 2010, cap rates in Manhattan hit an average of 6 percent. This has been steadily declining such that in 2013 the average cap rate in Manhattan was 4.4 percent. In 1Q14 the rate dropped to 4.1 percent. This is meaningful in that average lending rates have remained steady, so the cap rate compression that we have seen is 100 percent attributable to investor’s willingness to accept lower yields on their investments. In the conversation about cap rates, it is also important to note that upside potential and cap rate have an inverse relationship. There are some transactions we have done recently in which cap rates have been in the 2 to 3 percent range, but those were assets with tremendous upside potential.

As we move through 2Q14, it is apparent that the momentum we saw in 1Q14 is continuing, which should lead to a wild ride throughout the rest of the year.