2009 Volume of Investment Sales Could Hit New Low

Opportunistic buyers call me every day looking for “good deals” on “distressed assets”. I have not had much to send them recently. Thus far, we have not seen tremendous buying opportunities with enticing cap rates because of the distress in the market. Why are these opportunities not presenting themselves?

In order to answer that question, let’s take a look at some history. In the early 1990’s, the S & L crisis created buying opportunities but only after banks had gone through a long foreclosure process. The Dow crashed in October of 1987 but the effects were not felt in the real estate market until 1990 when the number of sales started to shrink and prices finally started to drop, and drop they did. As an example, multifamily properties that we sold in 1988 for 14 times the rent for co-op conversion (condos were very rare in NYC at that time) were being sold for 4 times the rent in 1992 and 1993.  As prices started to fall in 1990 and 1991, defaults began and the foreclosure process was initiated by lenders.

This foreclosure process took  12 to 18 months. While the wave started in 1990, properties did not start to hit the market until 1992. Most of these foreclosures came to market in 1993 and 1994.  There were  real opportunities available for cents on the dollar. The reason why these opportunities were so good was that few people had equity, of any substance, that they were willing to invest.

We are once again in troubled times. Thus far, the properties in financial trouble are still working their way through the pipeline and have not found their way to market in substantial numbers. Lenders are still going through the process of determining whether they will sell their notes or go through the forclosure process. The insatiable need that lenders have for cash today is likely to lead them to sell notes to get cash today rather than go through a foreclosure process, which would delay the cash injection which is so desperately needed. 

So, where are we in this cycle of processing these troubled properties? I believe we are at the beginning of the process. We determine turnover, or volume of sales, as the number of properties sold out of the total stock of existing properties. In New York City, we track 125,000 multifamily and mixed-use properties which have had a turnover rate which has been averaging 2.5% annually, of that total stock, over the past 20 years. This volume had hit an all-time low of 1.6% in 1992 and again in 2003. We believed that this 1.6% level of turnover repressented a baseline of turnover consisting of only those sellers who had to sell without discretion. They sold for reasons including death, divorce, taxes, insolvency, partnership disputes, foreclosure, etc. Both of these years ended recessions and had experienced peaks in cyclical unemployment. In 2008, this volume of sales hit 1.9% which was down about 40% from the 3.0% experienced in 2007.

We are projecting a turnover rate of 1.6%, or less, in 2009 as discretionary sellers are not yet capitulating to current market conditions and sellers who will be forced to sell, are still going through the process of determining how they will be going to market and what they will be going to market with, notes or real estate. We expect unemployment to hit its peak in 2009 or 2010 which is when we should see turnover hit its cyclical low point.

We are currently faced with constrained supply and we do not expect this supply to increase, in any meaningful way, until later in 2009 which will result in sales in 2010.

Opportunistic buys are in the marketplace now but only sporadically. Could we hit a volume of sales lower than the all-time low of 1.6% in 2009? Sure we could. We expect a trough in 2009 with volume picking up in 2010. 

A key difference today, as opposed to the early 1990’s, is that there is plenty of equity on the sidelines waiting for opportunities to present themselves. They are starting to appear and will continue to over the next few years as deleveraging progresses.

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15 Responses to “2009 Volume of Investment Sales Could Hit New Low”


  1. 1 chris hauser March 4, 2009 at 12:20 pm

    Bob, If I owned property in New York, you would be my broker.

    Want to open shop in Washington dc? Call me.

  2. 2 rknakal March 4, 2009 at 12:30 pm

    Hi Chris, thanks for the kind feedback. With regard to DC, you never know what the future holds.

  3. 3 Joe March 4, 2009 at 4:03 pm

    Great article! It goes a long way in concise order in explaining a plausible cause for the prolonged log jam in sales activity despite the widespread asset distress. Bottom line it all makes good sense to me and thanks for sharing this critical and thoughtful perspective Bob.

  4. 4 Randy Eigen March 4, 2009 at 4:07 pm

    I’m seeing the very same thing you are. I just spoke to a prospective seller who is facing a partnership dispute and needs to sell. Naturally he’d like to think that this economic mess we are in isn’t going to affect his price but we as professionals know that the market dictates pricing. He was rather indignant when I told him that now wasn’t a good time to sell. He could have gotten at least 15% more just a year ago and this is a stabilized investment deal.
    Thanks for the good info.
    Randy

  5. 5 rknakal March 4, 2009 at 4:22 pm

    Hi Joe, Thank you for your post. The sales market is difficult to figure out today so we are happy to do what we can to shed some light on current conditions.

  6. 6 rknakal March 4, 2009 at 4:25 pm

    Hi Randy, It’s good to hear from you. Good luck with the seller you are dealing with. Educating buyers and sellers is among the most important things we as brokers can do today. I hope all is well with you and look forward to speaking with you again soon.

  7. 7 nathan isikoff March 4, 2009 at 4:27 pm

    I enjoyed blog. With regard to DC, call me and I will talk to you about it.

  8. 8 Michael Z Chicago March 4, 2009 at 5:02 pm

    Bob,

    I recently stopped talking to owner’s whose property debt exceeds today’s values because they won’t sell for a loss. I’ve been talking to banks, some with stock prices less than $1 and dropping, who are not yet motivated to sell notes or REOs at today’s values. Do you believe we are headed for an RTC-esque auction process if/when FDIC takes control of insolvent banks, or pressures marginal banks to clean up their balance sheets?

  9. 9 Marc Shapiro March 4, 2009 at 9:15 pm

    To echo Chris’s comment (above), if I owned property in New York, you would be my broker. (Wait — I own property in New York, and you are ALREADY my broker….)

    Your analysis is spot-on. Cash constraints and significantly backlogged court dockets, which will extend the foreclosure process to 24-36 months, will motivate lenders to loosen the reigns and increase the pace at which they dispose of troubled assets. Additionally, the lenders can’t fight with everyone; they have to do some triage and figure out where resources will be best spent.

    Ultimately, we will cross a significant threshold once lenders start routinely financing the purchase of these loan assets. Those of us who lived through the last cycle will recall that seller financing facilitated a lot of activity. Until that happens, however, the velocity of sales will remain largely a function of the liquidity in the debt markets.

  10. 10 rknakal March 4, 2009 at 10:50 pm

    Hi Nathan, I will give you a call.

  11. 11 rknakal March 4, 2009 at 10:55 pm

    Hi Michael, I am not sure if an RTC type of structure will be used or if the FDIC will simply serve in that function. Many sellers need to capitulate or they will suffer an unnecessarily slow death. We are in a market that will take years to correct, leaving an underwater seller with few options. I would speak to the banks as they will, eventually, have to monetize as many assets as they can to create as much capital as possible to prove to the government that they are worthy of additional support. “Stress tests” will look at this capital ratio and selling assets will improve the bank’s position.

  12. 12 rknakal March 4, 2009 at 11:01 pm

    Hi Marc, thanks for your post. I agree with you completely, however, I am not sure that we will see as much seller financing as we saw in the early 1990s as banks need cash on their balance sheets, not mortgage assets. “Cash is king” has never been more appropriate. Banks need to liquidate assets to show that they are worthy of subsequent support. With regard to liquidity, banks are very liquid, they just dont have the capital they need to show a healthy balance sheet. Lending is, indeed, the key and based upon the wide spreads and low risk today, banks should be lending excessively, IF they have the capital to lend. Today, that is a very big if.

  13. 13 Michael Z Chicago March 5, 2009 at 10:48 am

    Bob,
    I spoke with a lender this morning who said they are not eager to shed assets because of hope the FDIC will take the assets off their hands at a better price. I spoke with a home owner who stopped mortgage payments on his underwater home because he will seek govt assistance. Punch line – Obama’s campaign promises of help for everyone, coupled with lack of plan specifics are contributing to the malaise. Perhaps this is what Obama wants – businesses and families to rely on the government to take care of them.

  14. 14 rknakal March 5, 2009 at 11:23 am

    Hi Michael, a very interesting perspective. The perspective the lender mentioned to you will reinforce the delay that we anticipate with regard to troubled assets coming to market. With regard to the homeowner who stopped paying their mortgage, well, that’s an entirely different conversation and a very complicated issue.


  1. 1 The FED releases TALF Details & Timelines « Newark, NJ Commercial Real Estate Trackback on March 4, 2009 at 4:29 pm

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