Office buildings have been one of the best asset classes within the investment sales market in New York City this year. On a relative basis, they are performing much better then any other type of asset. This is particularly true within the Manhattan submarket. This week we will take a closer look at the investment sales market for office buildings within the Manhattan submarket.
Before we dive deeply into the office sector, it is important to review how the broader investment sales market is doing in New York City and, especially in Manhattan.
We believe the city’s investment sales market is about one year into a correction. Market metrics support this observation as the volume of sales is slowing and values appear to be plateauing. This condition typically exists when the market is turning, as sellers who do not get their price simply do not sell. This temporarily keeps values up while activity slows down.
Thus far in 2016, the dollar volume of sales is on pace to hit $63.1 billion—an 18 percent reduction from last year’s all-time record of $77.1 billion. The number of properties sold is on pace for 4,514, 13 percent lower than last year’s 5,191 sales and 18 percent lower than 2014’s all-time record of 5,532 trades.
In conjunction with these reductions in the volume of sales, property values are slated to be up 15 percent this year on a citywide basis. While this number appears to be very positive, this percentage drops to 7 percent if we eliminate two transactions of retail condos that sold on Spring Street in Soho at over $17,000 per square foot each.
Capitalization rate compression is also starting to slow as average cap rates citywide this year are down just 19 basis points from last year with an average of 4.55 percent.
In the Manhattan submarket, the performance is a bit more sluggish.
Here, dollar volume is set to drop 24 percent and the number of properties sold is on pace to end the year 29 percent below 2015’s total. Value appreciation has been 23 percent, but if we eliminate those two retail condo sales above $17,000 per square foot, the appreciation rate decreases to just 4 percent.
In this market cycle, office buildings, and the entire office sector, have become much broader geographically then we have seen in the past. Areas like Park Avenue South, Downtown Brooklyn, Long Island City and even Bushwick have become robust office locations. However, when we talk about the office sector and investment sales, the Manhattan submarket is king.
Through the first half of 2016, there have been 70 office buildings sold in the Manhattan submarket, down 39 percent from the 114 office buildings sold in all of 2015. While the number of properties sold is down, the dollar volume of office sales in Manhattan is on pace for $25.4 billion this year, a 3.7 percent increase over last year’s $24.5 billion.
These metrics show us that the average office sale is significantly larger today than it has been in the past. This year, the average office building transaction in Manhattan has averaged $363 million. This is well ahead of 2015’s average of $215 million. (The 2014 average was just $164 million.)
Looking at value metrics, we see some interesting statistics. The average price per square foot of a Manhattan office building that has sold in 2016 is $1,147. This figure is 10 percent higher than 2015’s average of $1,042 per square foot. However, if we remove the sale of 693 Fifth Avenue from this data (as it occurred at a whopping $5,100 per square foot), the market is about flat. Additionally, we see that cap rates in the sector have actually risen by 9 basis points to an average of 3.91 percent this year. This is the first time cap rates have risen in this sector in several years.
To determine where the sector is headed, we will keep a close eye on rent levels. Based on reports from office leasing brokers, to see office rents falling within the next six to 12 months would not be surprising. Clearly, office buildings are doing very well right now, mainly due to the fact that New York City has seen approximately 700,000 jobs created over the past six years. While this has helped the sector significantly, will it be enough to keep the sector healthy if the rest of the sales market slows down?