Investment Sales Still Rolling…
To describe the investment sales market at the end of the first quarter of 2015 (1Q15), I used a musical analogy—the 1967 Sonny and Cher song, “The Beat Goes On.” At the end of the first half of the year (1H15), this time it is The Cars’ 1978 classic, “Good Times Roll.” And in New York City’s investment sales market, the good times are certainly rolling.
At the beginning of the year, our forecast for 2015 included a record achieved in dollar volume and a reduction in the number of properties sold. Thus far, the market has been performing almost exactly as expected. In 1H15, there was a two-quarter record of $37.8 billion of investment sales transactions closed in the city. On an annualized basis, we are on pace for $75.6 billion, 30 percent higher than last year and 21 percent higher than the previous record of $62.2 billion achieved in 2007. This is great news for New York City as transfer tax revenue will be much higher than anticipated. On top of this, there were 2,586 properties sold, which puts the market on pace for 5,172, a 7 percent drop from the 5,533 properties sold last year.
Our forecast for 2015 was to see dollar volume at $60 to $65 billion and the number of properties sold to be down by 10 to 15 percent. Dollar volume is higher than expected and the number of properties sold is slightly higher than expected, but the direction of each of these metrics is moving as anticipated.
This increase in dollar volume coupled with a decrease in the number of properties sold has placed the average price of a property sold well into record territory. Last year, the average was $10.7 million per property trading hands. In 2007 (and in 2012) the average was about $12.5 million. In 1H15, the average was a whopping $14.6 million, a 36 percent increase over last year and an all-time record by about 17 percent. This metric is good news for brokers as transaction sizes, and consequently commission dollars, are on the rise.
Property values also continue to rise. In 2014, the average price paid per square foot was $460 and thus far in 2015 that average has increased 9.2 percent to $502. This is the first time ever this average has been more than $500. In the Manhattan submarket (defined as south of 96th Street on the East Side and south of 110th Street on the West Side), values have actually dipped a bit. In 2014, the average was $1,408 per square foot. This year, the average has been $1,355 per square foot, 4 percent lower than last year. To the casual observer, this might make you believe that the market is slowing or that the upward pressure on values is abating. Nothing could be further from the truth. The reason for the slight drop in average price per square foot is that, last year, there were several high-profile retail property sales that exerted tremendous upward pressure on this average. Some of these sales occurred at tens of thousands of dollars per square foot. So far this year, there have not been many of these exorbitantly priced transactions.
Further proof of this is that the market is continuing to see capitalization rate compression. Back in January, unlike any of our peers, we forecasted continued cap rate compression. The rationale for this was that in past cycles the market has experienced periods of negative leverage, meaning cap rates were lower than lending rates. This occurred notably in the mid-1980s and again in the mid-2000s. We had not seen negative leverage thus far in this cycle, however, we are inching closer. If we look at Manhattan for example, the average cap rate has fallen below 4 percent. Looking at different product sectors, we see mixed-use assets selling at cap rates at 4.1 percent, office buildings at 4.0 percent, retail properties at 3.7 percent, elevator apartment buildings at 3.5 percent and walkup apartments at just 3.4 percent.
In past columns, I have drawn analogies between 2014 and two peak years from the past, 1988 and 1998. After 1988 the market tanked and after 1998, the market ran for another nine years. Interestingly 1989 and 1999, the years following the peak years, both performed well. Therefore, the results thus far in 2015 are right where we expected them to be and are not providing any clarity into what 2016 will hold. So, as The Cars’ “Good Times Roll” says, “let them leave you up in the air,” the performance of the investment sales market in 2015 thus far is doing just that. What the future will hold is still up in the air.