As we enter 2015 with the wind at our backs in the investment sales market, it seems like a good time to consider the supply/demand dynamics currently driving the industry.
The most important metric for the market is supply. In the 31 years I’ve been a broker in New York City, supply exceeded demand only once, in 1992. That year, the Resolution Trust Corporation dumped hundreds of distressed properties from failed banks. Back then, the few investors who had money were hard-pressed to spend it on commercial real estate. Values at the time were about 70 percent lower than they were at the top of the market in 1988. By comparison, the 38 percent drop in values from 2007 to 2010 was little more than a speed bump.
One of the reasons that supply generally remains low here is because of how long owners hold on to properties. In the past three decades, the average turnover ratio of properties sold out of the total stock of properties has been just 2.6 percent. This means that, on average, when an investor purchases a property here, they own it for 40 years before selling.
And yet, supply has been picking up lately. Why? Because of the positive feedback loop the market is experiencing. The tremendous demand that exists in New York City is pushing up values. As values rise, owners find these values compelling and decide to sell. As these folks put their properties on the market, the massive demand for these assets pushes values even higher. And as a consequence, a new group of potential sellers decides it is time to enter the market.
The demand in New York City today is unprecedented. During the bubble of 2005-2007, institutional capital crowded out other investors. As the market slid downward over the next two years, high-net-worth individuals and families became the go-to buyers. By 2010, the institutions got back in the game with opportunity funds. They were joined by a host of foreign buyers who have been pouring into the market in numbers not seen since the 1980s. While the institutions and foreigners have been very active, the high-net-worth individuals and families have been holding their own and competing successfully with other potential buyers.
A new class of “foreign buyer” is the first-time buyer from other parts of the United States. Many of these folks are real estate investors who have seen how well New York pros have done and want a piece of the action. It has been remarkable how impactful these investors have been on our local market.
Moreover, the majority of the truly foreign investors we have seen are non-real estate professionals who have made riches in other businesses and have decided to preserve that capital by purchasing investment properties in the U.S., specifically New York. In the last three and a half years, Massey Knakal sold investment properties to investors from 51 countries. Now, as part of Cushman & Wakefield, we anticipate taking advantage of 260 worldwide offices to boost that number.
These foreign investors care much more about capital preservation than yield. And who can blame them? Yields on many government bonds in the Eurozone are offering negative returns. This is reminiscent of the 1800s, when Americans would pay banks a monthly fee to keep their gold in bank vaults. Under these circumstances, even miniscule returns on New York City investment properties look good.
Robert Knakal is the chairman of New York Investment Sales for Cushman & Wakefield and has brokered the sale of approximately 1,700 properties in his career having a market value in excess of $12.5 billion.