2013 will exceed our expectations both in term of value and sales volume. The mass sell-off in 2012 was attributed to the rise in capital gains, and our company predicted that the number of NYC sales in 2013 would be off by 20-25%. We did believe the decline in total sales volume would be less severe due to large scale transactions. What we did not expect was the massive uptick in pricing for virtually all asset classes across the boroughs.
Beginning this year, our listing inventory was completely depleted after the record number of sales in 4Q12. At the beginning of this year, we had 425 listings compared to 2007’s high of 750. This was woefully inadequate to satisfy the global demand that we track from 131 different countries. As a result, pricing shot up for existing buildings. Across NYC, pricing will likely end up more than 5% higher compared to 2012, with Manhattan’s increase far greater at around 15%.
The biggest story of 2013 is the rise in land values. As commercial sale inventory reached a low, so did residential condos. Many investors also sold apartments in 2012 to bank the low capital gains. As a result, the inventory of Manhattan apartments dropped from about 7,500 to under 5,000. With land making up only 3% of the Manhattan geography, there has been little for developers to build on and create new inventory.
In much the same way the office market also improved. The tech boom filled up Midtown South driving rents over $60/SF and sending many of the older tenants searching elsewhere. Office development, predominantly in Hudson Yards and at the World Trade Center, has only been built with tenants in hand, leading to single digit vacancy. These considerations have led to four sales of over a billion dollars in 2013, while there were none in 2011 and 2012.
These strong fundamentals will end up driving close to $40B in sales in 2013. This will come very close to 2012’s $41.1B, but still off 2007’s high of over $62B. When all is said and done, we also expect close to 4,000 buildings will trade hands, which almost reaches 2012’s level.
With all this in mind, here are five predictions for 2014:
1) Sales Volume –Listing inventory should double as discretionary sellers and funds, who repositioned assets from the down years, look to cash in. This product will be met with open arms by new buyers coming into the market. 2014 will produce a record number of total sales value for NYC, eclipsing 2007’s $63B in sales
2) Foreign Buyers – will account for more than $15B of these sales. Real Capital Analytics tallied $10.5B in foreign purchases from 2013 and $6.5B in 2012. China, Singapore, Canada, Norway and Australia will continue to lead the charge. If the FIRPTA tax is lowered this could even have a more exponential impact.
3) Pricing – Land in Manhattan will rise well above 2013’s average of $510/BSF. It will hit $750/BSF, as prime sites reach well into the $1,000/BSF. Meanwhile, cap rates for retail and multifamily will stay flat as buyers will refuse to take on negative leverage and remain fearful of increased operating expenses.
4) The Outer Boroughs – will be even more sought after. This year, 79% of all NYC sales were in the outer boroughs, compared to 2011’s 68%. This figure will rise above 85%, as investors chase yield and these neighborhoods become more established for institutional investors. Brooklyn has already met that requirement. Expect Long Island City to lead the way for Queens. Northern Manhattan and the Bronx are next up for investors searching for deal flow.
5) Debt – will remain plentiful and cheap, but loan to values will remain in check. CMBS which totaled $80B in 2013 is expected to reach over $100B in 2014. The Fed will need to keep interest rates low to keep the machine going, but historically low rates will only last a year or two before a spike when the economy begins to recover. We are advising long term owners to lock in 5-10 year money now.
Here are the three major concerns moving forward:
1) An Asset Bubble – Historically, low interest rates over a long period of time create these. Just as the extended period of time when interest rates were low during the Greenspan chairmanship of the Fed led to the housing bubble in 2005- 2007, we believe a strong case could be made that the low interest rate environment of today is creating the same type of asset bubble in the commercial property market.
2) Increased Operating Expenses: Top line revenue growth is being eroded by the real estate tax increases that have been implemented by the City leaving net operating incomes flat. To the extent this condition continues and interest rates rise, cap rates will rise accordingly producing a lower value in the future. Given these dynamics, we believe that there is better than a 50/50 chance that property values for properties with stable cash flows could be lower in two years than they are today. Clearly, over the long-term, properties will be worth more in the future, but in the short-term we could be facing a condition where property values do drop, particularly if the City continues to use income producing properties as an ATM machine to plug holes in the budget.
3) Core assets are overvalued – I have heard by many industry experts that the pricing of core assets in NYC is a direct result of new capital coming into the market. To the extent that the fundamentals change and investors search elsewhere for yield, core values could erode. This would encourage an acquisitions focus on value-added plays and selling properties with stable cash flows. It will no doubt be a seller’s market to take advantage of these market dynamics.
These last few remarks may seem extremely self-serving; however, if you follow the points I outline above, you may agree with my conclusions. To the extent that there is anything in your portfolio that you would consider selling, or know of anyone who might consider selling a property, I would be more than happy to discuss these market conditions in more details. Please call me at 212-696-2500 x7710 or email me to discuss further. I look forward to being in touch.