2Q20 Investment Sales Activity was no Surprise. Unfortunately.

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It should come as no surprise to anyone that the performance of the Manhattan investment sales market in the second quarter of 2020 (2Q20) was dismal. The quarterly total dollar volume of sales has reached the lowest level in 43 quarters, going back to 4Q09. And the projections for 3Q20 activity in New York are not likely to improve the market’s performance for the year as contract execution activity in 2Q20 was limited by broader externalities. 

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Before we get more deeply into the 2Q20 numbers, it is important to take a look back and where we are in the cycle to determine where we might be headed. Looking at the Manhattan investment sales market for properties over $10 million in value, we see the peak within the volume metrics was clearly in 2015. At that time, there was a record $57.5 billion of sales volume. In 2015, we also saw the highest total number of investment sales over $10 million, with 481 properties trading hands. We have always looked at those two volume metrics as being indicative of market activity although the number of properties sold has always been a more prominent indicator of activity as a few mega transactions can skew the dollar volume metric significantly. Since that peak year of 2015, the dollar volume of sales and the number of properties sold have both decreased consistently as a market correction was initiated in October 2015. Therefore, as of this month, we are now in month 58 of this market correction. 

The market provided a significant head fake to us in 4Q19, when sales volume hit $9.4 billion, the highest quarterly total in 16 quarters going back to 1Q16. At that time, we were 49 months into the correction and felt that something would break to reverse the trend. The longest correction we had seen previously was the 47-month correction that occurred in the early ‘90s during the Savings and Loan Crisis. Based on this, we felt that something would happen to pull the market out of its funk, and we hoped that a surge in 4Q19 activity would be that thing.

As we reported in this column in January, we were cautious about reading too much into the 4Q19 numbers. Trends are established over two or three quarters, so we were anxiously awaiting the first-quarter numbers and, unfortunately, 1Q20 activity was disappointing. The volume of sales was $4.9 billion, down 48 percent from the prior quarter and that activity had very little, if anything, to do with COVID-19, as many of the contracts that would have closed in 1Q20 would have been signed in 4Q19, when we were really not familiar with the existence of the pandemic. Therefore, the robust activity in 4Q19 turned out to be an isolated event.

By mid-March we were all well aware of the severity of the virus and the impact it would have on our daily lives. In the few weeks after mid-March, many transactions that were under hard contract did close, although that has become less prevalent in the market as most transactions that were under hard contract pre-Covid have either closed by this point or may not without adjustment.

These factors are impacting current market conditions profoundly. In 2Q20, there was $1.28 billion of sales volume in Manhattan. This was the lowest quarterly total in almost 11 years going back to 4Q09. Combined with the 1Q20 total of $4.9 billion puts the market on pace for $12.4 billion for the year, which would be the lowest annual total going back to 2010, when the volume was $11.9 billion. For perspective, in 2009, there was $2.95 billion in sales volume. However, to accurately compare the $12.4 billion pace we are on in 2020 and the 2009 $2.95 billion total, we would need to price adjust the basket of assets sold in 2009 and then make the comparison. The dollar volume pace we are presently on would result in a total that is 57 percent below last year’s total of $28.6 billion and 78 percent below the 2015 peak of $57.5 billion.

If we look at the number of transactions over $10 million, we see a 2Q20 total of just 18 trades, the lowest quarterly total going back to 3Q09, in which there were 13 sales recorded. The 2Q20 total was down 50 percent from the 36 sales that occurred in 1Q20. It also puts the market on pace for 108 for the year, which would be down 50 percent from the 2019 total and down 78 percent from the 481 sales that occurred in 2015.

Much of our time these days centers around trying to figure out where the market is headed and where to peg current property values. The small number of sales that have occurred are creating challenges in analyzing values as each individual sale is much more impactful with such a small sample size. Most of the insights we are getting relative to today’s values are being obtained by watching existing listings and bidding activity on those properties. The number of buyers looking to invest today is encouragingly high, and activity on some appropriately priced assets is robust. It will be interesting to see what the third quarter brings. Notwithstanding what happens, we remain very optimistic about the future of New York City and firmly believe it will remain the greatest city on the globe.