The second quarter of 2014 picked up right where the first quarter ended for New York City’s investment sales market. The pace of sales, with regard to the number of properties sold, remains on pace to eclipse 2012’s record of 5,018 properties sold. The dollar volume of sales is not quite on record pace. But because the volume is normally greater in the second half of the year, we could see shattered records there as well.
In 2Q14, there was $13.67 billion of investment sale transactions citywide, just a shade under the $13.74 billion in 1Q14. The total of $27.4 billion for 1H14 puts the market on pace for $54.8 billion annually. The all-time record for dollar volume was 2007’s $62.2 billion. A large part of the reason behind 2007’s boom was an extraordinarily robust CMBS market that hit $230 billion. The abundance of CMBS money fueled larger property sales, leading to the massive dollar volume occurring in that year. During the Great Recession, as many loans were going into default and many pundits were predicting a tsunami of loan sales and foreclosures, many predicted another wave of distress in 2016 and 2017 as these aggressively underwritten 10-year 2006 and 2007 vintage loans matured. Given the rise in values we have seen the distress predicted in 2016 and 2017 will not occur unless the market slips into another downturn.
With the dollar volume observed through 1H14 coupled with the larger assets on the market and presently under contract waiting to close, we fully expect the natural second half pick-up to lead to a new record in terms of dollar volume. Interestingly, if the same basket of properties that sold in 2007 were to be sold today, the total dollar volume would be in excess of $80 billion. The reason we won’t quite reach that level is that lenders are more disciplined today than they were in 2007 and the CMBS market, while performing well, is nowhere near as accessible as it was back in its heyday.
There were 1,285 properties sold in 2Q14, the best second quarter total going back to 2007, when 1,385 properties sold, the highest quarterly total on record. In 1Q14, the 1,358 properties sold established the second highest quarterly total on record. The 1,285 properties sold in the second quarter represented the fourth highest quarterly total on record. These two great quarters, back-to-back, represent 2,643 sales in 1H14, which is on pace for 5,286, which would be an all-time record annually.
It is noteworthy to mention that the prior four quarters have established a new record, with four consecutive quarters—3Q13 through 2Q14—seeing 5,130 properties trading hands. This total eclipses the prior record established in the four quarter period ending 3Q07 in which 5,102 or more properties were sold.
In addition to this tremendous volume of sales, property values have continued to soar. Thus far in 2014, the average price paid per square foot has increased to $421 from $388 last year. This is the first time the citywide average has ever exceeded $400 per square foot. The increase represents an 8 percent appreciation over 2013. The largest submarket gains came in Upper Manhattan, where price paid per foot zoomed from $255 to $304, a 19 percent increase; and Manhattan, where the 2013 average of $1,051 rose to a new record of $1,171 per square foot, an 11 percent rise. Meanwhile, Brooklyn, Queens and the Bronx’s figures grew to $309, $289 and $161, respectively, resulting in percentage increases of 14, 3 and 1 percent.
Capitalization rates also continued to compress. The average cap rate citywide dropped to a cyclical low of 5.4 percent. The cyclical peak was 7.0 percent in 3Q10. The lowest average cap rate was seen in Manhattan, which has an average cap rate of 4.1 percent. The highest cap rate average was seen in the Bronx, where 7.0 percent was the average. Average cap rates in Northern Manhattan, Brooklyn and Queens have been 5.0, 5.8 and 5.6 percent, respectively, so far this year.
All metrics in the sales market are pointing towards a terrific second half of the year. Let’s hope these trends continue. There is nothing presently on the horizon to indicate they won’t.