When answering the question, “How is the sales market today?” people in the market could respond in a variety of ways. For brokers and sellers, the answer is a resounding “incredible,” “fantastic” or “the best ever.” However, for buyers, the answers are much different. Things I often hear them say include, “It’s horrible out there,” “I can’t buy anything” and “I am looking outside New York City now.” Clearly, local buyers are still buying properties here at home but their frustration is palpable.
I often write about the supply/demand dynamic within the investment sales market and the king within this dynamic is almost always supply. In 1992, the Resolution Trust Corporation was liquidating properties from failed banks at such a rapid rate that the supply of properties for sale exceeded demand, but other than this one outlier, demand has always exceeded supply.
Today, demand is coming to the market from every imaginable source. Local buyers, high-net-worth individuals, families and institutions are joined by buyers from across the country and foreign buyers (both individuals and institutions). All of these hungry investors are vigorously competing for properties that are for sale today. All of this demand has exerted tremendous upward pressure on property values. In a typical positive feedback loop, this upward movement of values would induce a new wave of sellers to enter the market. While this is normally what would happen (and has indeed been happening for the past two years or more), the new supply has not grown as expected. This low supply is adding to the frustration of buyers.
Why is the supply so low? There are several possibilities. First, the escalating prices may have already enticed many of the discretionary sellers who made a sale decision solely on a dollar basis. Second, with property values rising so steadily, effectuating 1031 exchanges, have been getting more and more difficult, and sellers may not want to pay the taxes associated with a sale. Third, with interest rates so low (i.e., rates of return on alternative investments), what do sellers do with the money? And, fourth, with values rising so rapidly, why sell today when your asset might be worth more tomorrow?
Or maybe it is just the natural cyclical nature of the marketplace. After all, more properties sold in New York City last year than ever before. In the past 31 years, we have not seen two consecutive record volume years in a row and 2015 might just be a reversion to the long-term trend line. Regardless of the reason, the supply of properties for sale is slowing and will likely be reflected in market statistics soon.
All of this is inducing buyers to implement new strategies. Many have hired acquisition directors who are taking a very different approach to sourcing product. Typically, these professionals would cultivate relationships with brokers and look to get fed properties by as many brokers as possible. While many buyers have been directly prospecting for decades, today, a greater and greater percentage of buyers are aggressively canvassing potential sellers directly by mail, email and phone calls. Often, offers are being made by these acquisitions people only using ball park metrics to see if they can shake something loose. Sometimes, potential sellers, being surprised by the level of the bids they are getting, are agreeing to sell the asset without going to the full market. This often leads to millions being left on the table.
In a recent example, a property owner with decades of experience in the local market received what was described to me as a “knockout” offer that “was too good to be true.” After weeks of practically begging the seller to let us take it to market, we were retained to bring it to the market and within a few days had an offer almost 20 percent higher than the knockout bid.
The bottom line here is that buyer frustration has them resorting to new methods of sourcing properties. It is also making them go after assets like a bunch of starving piranhas. Low supply is a present reality that is benefitting sellers and will continue to exert upward pressure on property values until something changes.
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.
