Six Reasons Property Values Will Continue to Rise
One of the commonly asked questions I get today is: “How is the commercial sales market performing?” People are having a tough time understanding how market conditions can be so good that values just continue to spiral upward. Properties that were just sold two or three years ago are now selling for 50 percent, 100 percent, 200 percent and even 300 percent more than they recently sold. While this may be an unsustainable trajectory, it is easy to understand why this is happening. There are six reasons:
1. The simple answer is that there is just so much demand for properties in New York City that the supply/demand dynamic is so incredibly skewed toward the demand side. Supply has always been the more important of the two over the past 30 years. As supply goes, so goes the volume of sales. Supply has been relatively modest but increases based on escalating property values, which potential sellers are finding compelling. This additional new supply is being absorbed by the overwhelmingly demand.
2. Certainly, low interest rates play a key role as well. Over the long term, interest rates and capitalization rates are highly correlated and with interest rates at, or near, record lows, pressure to compress capitalization rates has been significant. Notwithstanding this fact, cap rates are still above lending rates in most cases which means that, unbelievably, there is still room for additional cap rate compression. In the past, two distinct periods of time (the mid-1980s and mid-2000s) experienced negative leverage (cap rates lower than lending rates) but that is not the case presently, which is why the possibility of additional compression is possible.
3. Commercial real estate investments have become a more generally accepted class of investment for non-real estate investors. This has encouraged a new wave of investors seeking investments in real estate that previously would not consider them.
4. There are first time buyers from around the U.S. that have been active in real estate in other parts of the country and have witnessed how well New York City properties have performed and they want their piece of the Big Apple.
5. Worldwide economic turmoil and uncertainty has caused a rush to quality assets. On a relative basis, the economic and politically stability afforded in the U.S. is attractive to foreign investors. These foreign investors have been looking for real estate investments in New York in greater numbers than I can ever remember. It appears that the wealthy, from around the globe, are viewing real estate assets here the way they viewed Swiss Bank accounts for the past several decades. The lack of opaqueness in the Swiss banking system has encouraged many of these investors to seek more transparent investments and New York City real estate provides them comfort in that when they want their equity returned, they will be able to get it. It appears that yield is less important than preservation of capital for this massive wave of foreign investors.
6. Market conditions have also created an unusual dynamic that I have not seen in the three decades I have been brokering here. When speaking to a potential seller today, I tell them that the chances are better than 50/50 that the buyer will be someone that is not known to them or to me and that if I made up a list of the top 200 prospects for a particular property, it is highly likely that the buyer is not going to be on that list. There are two reasons for this: (a) the wave of new first-time buyers coming into the market from around the country and around the world, and, (b) many longtime city investors are now stepping out of their comfort zone with respect to product type. What I mean by this is that investors, who have typically purchased one type of property, are investing in other product sectors. Low yields across the board are creating a “grass is always greener” perspective within the pool of buyers, leading to some surprising sale results.
What all of this means for the marketplace is that, provided interest rates stay in a relatively narrow band and economic and political uncertainty remains prevalent around the world, we should continue to see tremendous influx of new capital into our market, which will continue to exert upward pressure on property values. These higher values should continue to push supply onto the market, which will continue to get absorbed. Let the good times roll!
Bob Knakal is the chairman of Massey Knakal Realty Services and has brokered the sale of nearly 1,600 properties having a market value of approximately $11.5 billion.