Currently, the trends that we are seeing in the New York City investment sales market are that both the dollar volume of sales and the number of properties sold are declining sharply while values are continuing to inch up. This dynamic within the market began in the fourth quarter of 2015 (4Q15) and has continued for the past 25 months. This change in direction within the market came after the cyclical peak in the number of properties sold (in 2014) and the cyclical peak in the dollar volume of sales (in 2015). Simultaneously, downward pressure has been exerted on rents in the three major food groups of residential, retail and office.
Due to this downward pressure on fundamentals, values in certain sectors experienced drop offs. The land and hotel markets were the first to feel the impact with values in those sectors declining. However, the office building sales market has been fairly resilient with regard to holding its value, although the volume of sales in this sector has not been immune to the slow down that we have observed in the broader market.
Before going into granular detail on the office building sales market, it will be helpful to provide a quick overview of the broader market to provide relative perspective.
Through 3Q17, the number of buildings sold citywide is tracking to 3,961, 10 percent below last year’s total and 28 percent below the record 5,534 buildings sold in 2014. The dollar volume of sales through 3Q17 is on pace for about $33.2 billion, 43 percent below last year’s $57.9 billion and 59 percent below the $80.4 billion seen in 2015. On a citywide basis, the average price of all sales has hit $563 per square foot, a new all-time record and 6 percent above 2016’s $533 average.
The sales market for office buildings has followed the same general pattern that we have observed in the broader sales market.
The number of office properties sold citywide in 2017 is, thus far, on pace to reach 94. This would be 32 percent below the 139 sales in 2016 and 53 percent below the 200 sales that occurred in 2015. The 2015 total was a cyclical peak. In the Manhattan submarket, the reduction in volume is even sharper. The number of properties sold in Manhattan is slated to be 42, which would be 41 percent below the 71 sales that occurred last year and 63 percent below the 114 sales that occurred in 2015. In the outer boroughs, including northern Manhattan, the reduction volume is not quite as pronounced. Those submarkets are expected to hit 52 office building sold this year, which would be 24 percent below last year’s total and 40 percent below the 86 sales that occurred in 2015.
The dollar volume of office building sales citywide is on pace for $12.9 billion this year, 40 percent below the $21.4 billion last year and 49 percent below the $25.1 billion seen in 2015. Again, in the Manhattan submarket, the drop in volume was even more pronounced. The Manhattan market is on pace for $12.1 billion in office building sales, down 42 percent from the $20.7 billion last year and down 51 percent from the $24.5 billion cyclical peak in 2015. The dollar volume of office sales in the outer boroughs is actually on pace to be up 14 percent this year to $844 million, from $738 million last year. Investors who are priced out of the Manhattan submarket are increasingly seeking office building investments outside Manhattan.
The average price per square foot of an office building citywide has fallen 4 percent so far this year to $675 per square foot from last year’s record high of $704 per square foot. In the Manhattan submarket, the reduction in value is essentially flat with an average of $1,061 per square foot, down only $4 from $1,065 per square foot last year.
While capitalization rates are inching up slightly in most product sectors, interestingly, cap rates in the office sector continue to be reduced with a compression of 26 basis points in Manhattan so far this year to an average of 3.71 percent and a compression of 56 basis points in the outer boroughs down to an average of 4.82 percent. If downward pressure on office rents abates, it could bode very well for the office building sales sector moving forward.