Sales Market Keeps Roaring, But Is the End in Sight?
Frequent readers of this column know that I’ve often said 2014 was the best investment sales market I have seen in 32 years. Thus far, 2015 has been putting up a valiant challenge to that title. In some ways. it is not quite measuring up and, in others, it is well on the way to making history.
If we look at the dollar volume of sales in the New York City market, 2015 will undoubtedly set a new all-time record. In the third quarter of 2015, there was $17.9 billion in sales, bringing the year’s total to $55.43 billion. This sum is just $2.5 billion shy of the sales volume in all of 2015, in which there was $57.9 billion. The $55.4 billion pace, if annualized, will lead to a yearly total of $73.9 billion which would set a new record by a mile. The current pace would lead 2015’s total to be 27.5 percent above last year’s $57.9 total and, remarkably, 18.8 percent above the previous record, which was established in 2007, when sales volume reached $62.2 billion.
While the dollar volume has been astounding, much of its rise has been due to rapidly escalating property values. If the same basket of assets was sold this year, as compared to a prior year, the volume would be much higher based upon these increased values.
Today’s market is not quite as robust as last year’s is in the number of properties sold. In New York City, there were 1,287 properties sold in 3Q15, bringing the year’s total to 3,949. This metric is on pace, if annualized, to hit 5,265 for the year, which would be down 4.86 percent from last year. While this number is below the pace set in 2014, the number itself is a whopper. It is important to remember that in 2014, this metric established a new all-time record of 5,534 properties sold, which shattered the previous record of 5,018 by more than 10 percent. So, if the present pace were to continue through the end of the year, it would actually have established a new record, had 2014 not been such an amazing year. Notwithstanding the comparison to last year, 2015 will be a great year for the number of properties sold.
In the Manhattan submarket, the numbers have been equally impressive, with a higher dollar volume in the first three quarters of 2015 than in all of 2014. Thus far in 2015, there has been $42.13 billion in sales, ever so slightly eclipsing all of last year’s $42.12 billion. Here, the pace, if annualized, would reach $56.2 billion. This figure would break the previous record for this submarket, where the current record was set in 2007 at $52.5 billion. Thus far, the number of properties sold in Manhattan has been 811, on pace for 1,081 for the year, which would beat the 1,016 that changed hands in 2014.
So with volume rolling along, what is happening with property values? If we look at how they have performed for the year, all appears rosy. The price-per-square-foot metric has risen from a citywide average last year of $460 per square foot to $496 this year, an increase of 7.8 percent. This appreciation rate is the result of continuing capitalization rate compression, which is pushing cap rates to historic lows. Since the market started its recovery in 2011, the average compression in citywide cap rates has been about 33 basis points annually. The compression observed in 2015 from 2014 levels has been more than twice that: 69 basis points.
In the Manhattan submarket, cap rates have averaged below 4 percent across all product types for the first time ever. The average so far this year has been a shocking 3.82 percent. If we look at individual product types, we see a very tight range, due mainly to the investors’ exhaustive search for yield. More than ever, investors are searching across all property types, even if they have historically not been active purchasers for that type of property. At the high end of the average cap rate range are office products at 3.99 percent, while at the low end of the range are elevator apartment buildings, which have an average of 3.62 percent.
While values are certainly moving in the right direction, the statistics coming out of the 3Q15 results are slight cause for concern. It appears values per square foot have been flat quarter over quarter for the first time in 19 quarters. Additionally, capitalization rates rose in 3Q15 for the first time in those same 19 quarters. History has taught us that a single quarter does not make a trend, but we will be watching these two metrics very closely. Should the trend continue, it could mean that we are at the peak of the present cycle. If not, then this condition will just have been a blip on the screen. Either way, it makes the fourth quarter even more interesting than it would have otherwise been.
Robert Knakal is the chairman of New York Investment Sales for Cushman & Wakefield.