It is starting to feel a bit like 2007 again, pricing has surged to a point where most buyers complain that nothing makes sense, bidding wars are the norm as buyers scramble for what little inventory exists, condos are selling out off of plans at record prices and although lending rates have crept up 100 basis points, debt is still plentiful. Private equity shops have raised billions to put out as LP capital. As a result, developers find themselves only putting in 5 to10% of the equity, which in many cases they further syndicate.

Since the market bottomed out in 2009, sales volume in NYC has almost doubled every year going from $6.2B in 2010, to $14.4B in 2012, to $28.8B in 2013. In 2012 it began to level off at $41B missing the all time high of $62.2B in 2007. That being said, 2012 did prove to be a record year for the number of transactions in Manhattan with 1,194 sales, which was above 2007’s 999 sales and quadruple 2009’s sales. This translated to 4.32% of the Manhattan properties turning over last year, which was unprecedented. 

Last year’s boost in activity was a result of the increased capital gains tax, as long term owners looked to avoid the federal capital gains increase to 20% from 15%, along with the Healthcare surcharge of 3.8%. Unfortunately, for many in Manhattan, the tax savings the sellers’ benefited from was more than erased by the 13% increase in prices from last year, as the average 1H13 price per foot (PPF) for Manhattan elevators, walk-ups, mixed-use, office, and retail was $1,020 PPF compared to 2012’s $901 PPF. Manhattan pricing today is up a whopping 55% on average from 2010.

The lack of inventory and increased demand is a major factor in why Manhattan pricing has risen to such an unprecedented level. In 2007, our company had 750 exclusive listings. This dropped into the 500s last year. After the mass sell off in December, we started 2013 with about 425 listings. With buyer interest from around the world, there is not enough product to satiate the demand.

Meanwhile, pricing in the outer boroughs has remained flat from last year, therefore those who sold properties located here benefited from the tax savings. The average PPF for 1H13 and last year is identical at $470/SF up 28% from 2009’s low water mark. Cap rates across the board are a healthy 6% on average throughout the boroughs, which makes for an attractive investment when you can still borrow at around 4% and get positive leverage. Investors were not as lucky in 2007 when there was negative leverage.

Thus, much of the market craziness centers around Manhattan where certain asset classes have well surpassed the 13% average. Land, in particular, is off the charts. We recently sold 239 Tenth Avenue, a corner development site in Chelsea, for $850/BSF. This was almost 50% above the last sale in the area. This pricing was in no doubt fueled by record condo prices, which are in rare supply. According to the Miller Cicero report, there are only 4,795 Manhattan apartments for sale today compared to 6,981 in 2012, a decrease of 2,186 or 31.3%. In much the same way, a great deal of the inventory was cleared out when owners, who held apartments as investment, also chose to sell to avoid the tax increase.


How long will prices continue to rise? Will the supply demand imbalance remain? Will rising interest rates be our downfall?


On the residential side, Leonard Steinberg, one of Douglas Elliman’s top agents, says we are about to be hit with a wave of new condo inventory. This new product could certainly slow down absorption and in turn soften the residential sales market.

Meanwhile, the office market’s supply of new office product should be kept in check. Hudson Yards and the World Trade Center are proof that developers will only build once they have a tenant in hand. Very little new office produce is being built elsewhere.

Luckily, the recent rise in interest rates has not been a major factor yet, but we are closely watching it. We seem to have hit a wall with cap rates for credit retail as buyers are unwilling to accept negative leverage. Historically, as rates rise, so do cap rates, but this change could be gradual. 

So it appears that we are in a pocket not a bubble, as the overall fundamentals are increasingly strong. As a result, buyers from around the world are drawn to NYC as a safe haven. Our returns and prices per foot are affordable compared to other top global cities. Although some discretionary sellers are listing properties again, it appears this new inventory is being met with open arms in the near term.

That all being said, the overall US economy could be the dark clouds on the horizon. The lack of job creation and risk of ramped inflation are major considerations. NYC has been lucky in that we have become a mecca for the tech industry, which has helped job creation. According to a report from Center for an Urban Future, there have been 486 new digital start ups in NYC since 2007, and was the only city to see an increase in the number of VC deals at 32% compared to Silicon Valley, which lost 10%. 

NYC is not immune if the US economy falls back into a recession. Currently, investors from around the world flock here for our safety, but that could quickly change. We are also closely watching the next mayoral election. The fear of additional taxation could drive away companies and top earners. NYC’s real estate taxes, which have covered half of the City’s massive budget, are already many multiples higher than other cities. Coupled with double digit increases in other operating expenses, they will continue to erase any gains from increased gains. None of these threats seem immediate, but they do loom in the future.   



James P. Nelson, Partner


James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 250 properties and loans with an aggregate value of close to $2 billion in the NY Metro Area. He can be reached at or 212-660-7710.


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