As we enter the fourth quarter of 2015, there are many questions about where the investment sales market in headed in the next 12 to 24 months. Will the market crash or will it keep running on its upward trajectory for several more years?
In order to try to determine where we are going, it is important to look at where we have been.
2014 was the best year I have witnessed in my 32 years brokering in New York City. The dollar volume of sales was a very healthy $58 billion, which, while being up a whopping 51 percent from the $38.4 billion in 2013, was still shy of the all-time record of $62.2 billion seen in 2007. More remarkably—and why I look back so fondly on 2014—the number of properties sold last year was 5,533, an all-time record for the city by more than 10 percent. A surge in the supply of properties for sale created this epic year. And these properties were easily absorbed by the overwhelming demand that was exhibited by thousands of buyers hungry to purchase properties in the Big Apple. The swelling supply was caused by increasing property values, which rose by nearly 20 percent. Potential sellers found these new values far too compelling to sit back and decided to take advantage of the fantastic conditions by putting their properties on the market.
Over the years, the supply/demand relationship has almost always been dominated by supply with respect to how the market has performed. On average, over the past 32 years, just 2.6 percent of the total stock of properties has traded hands annually. To illustrate what this statistic means, when someone purchases a property in New York City, they hold onto it for an average of 40 years! With supply generally limited, and demand always high, the number of properties for sale is the most important factor in determining market performance. (It is noteworthy that in every year except 1992, demand has greatly exceeded supply. In 1992, the Resolution Trust Corporation was dumping thousands of properties from failed banks and supply exceeded demand, causing property values to plummet more that 50 percent.)
Coming off the record number of sales in 2014, we predicted that we would see a reduction in the number of properties sold by about 10 to 15 percent in 2015. This was not because of a pessimism about the market but, rather, for two other reasons. The first was that over time the metric reverts to the long-term average and we have never seen two successive cyclical peaks in consecutive years. The second is that we believed that the tremendous price appreciation in the second half of 2013, and into 2014, caused a wave of discretionary sellers who would find these values too tempting. History shows us that discretionary selling generally ebbs and flows in waves caused by market conditions.
As expected, after a very robust first quarter, the slightly constrained supply at the beginning of the year started to be felt in 2Q15, in which there were 1,232 properties sold, the lowest quarterly total in seven quarters. We have seen supply continue to slow. Annualizing the sales in the first half of 2015 shows a pace that is about 7 percent below last year’s record. We believe the presently constrained supply will lead to a further slowdown, resulting in an annual total within our predicted range.
In January, we had also predicted a new dollar volume record for this year of approximately $65 billion. Through 1Q15, we were tracking toward $80 billion and through 1H15, the tracking dropped to $75 billion. The third quarter numbers will be finalized within the next couple of weeks and we expect that the yearly total will be closer to our $65 billion projection than the current $75 billion pace.
On the demand side, we are seeing an increase, but not an even increase, from all demand segments. Many of the investors who have been active in the local market for decades have recently decided to sit on the sidelines or purchase assets in other locations as they feel the market in the city is over-inflated. However, the new first-time buyers from around the U.S. and around the globe have swooped in to fill this void and more. So with demand growing and supply tightening, upward pressure on value remains.
Even with the reduction in the number of properties sold this year, it will still be outstanding given the absolute number. So, will 2016 bring the market correction that an increasing percentage of market participants are anticipating, or will the market continue to run for several more years? If rates stay low, and demand continues its torrid pace, we could see continued growth. Time will tell, but how the market performs in 4Q15 could be very insightful in terms of creating our forecast for 2016.