2Q09 NYC Investment Sales Better but Still Weak

The investment property sales market in New York City was slightly improved in the second quarter of 2009 (2Q09) versus the first quarter of the year. That being said, it couldn’t possibly have been worse than 1Q09 during which we saw the paralysis of 4Q08 manifest itself in a 1st quarter volume which we needed a microscope to see. However, even with an improved 2nd quarter, the first half of 2009 (1H09) was still a major disappointment for those of us relying on transaction volume for a living.

The total dollar volume of sales in NYC for 1 H09 was approximately $2.8 billion. This figure was down 81% from the 1H08 total of $14.47 billion and down a whopping 92% from the peak half year of 1H07 during which we had $35.8 billion in sales.

With regard to the number of transactions,  in 1H09 we had 562 closed transactions. This figure was down 65.7% from 1H08 and down 75.3% from the peak half year of 1H07 during which we had 2279 sales closed.

Because some transactions involved multiple properties, we also track the number of individual properties which have been sold.  In 1H09, 670 properties were sold.  This figure is down 64.5% from 1H08 and down 75.5% from the peak half year of 1H07 during which we had 2738 properties change hands.

To put these sales figures into perspective, we must look at historical averages and milestones. Since 1984, we have tracked a statistical sample of investment properties in New York that constists of 125,000 properties. Over a 25 year period, the average turnover rate has been 2.6% with the all-time low level being 1.6%. The 1.6% level was hit in 1992 and again in 2003. Both of these were years at the end of recessionary periods and were also years during which unemployment  reached cyclical peaks. We always assumed that this 1.6% turnover level was a “base line” which consisted only of people who were forced to sell because of death, divorce, taxes, insolvency, partnership disputes, etc. If we annualize the activity during 1H09, the turnover percentage is running at 1.07%!! We anticipate that activity will pick up slightly during 2H09 but that we will still hit a new record low of 1.2%-1.4% for the year.

Values are also taking a hit as office and retail properties have seen cap rates increase 200 to 250 basis points above their lows. The multifamily sector has held up the best with cap rates only about 100 basis points above their lows. In fact, in the Manhattan market (south of 96th street on the eastside and south of 110th street on the westside) during 1H09, walk-up buildings saw average cap rates of 4.58% with the elevatored average hitting 4.08%. Upward pressure on cap rates is present in every sector of the market.

In general, the New York City building sales market has seen a reduction in activity and value. The trend has certainly been towards smaller transactions, for which there is plentiful debt available from community and regional banks. We have also seen a resurgence of high net worth individuals and old-line families who had been overpowered by operators backed by institutional calpital for the past several years. We anticipate the volume of sales increasing slightly as we move into the second half of the year. Based upon current market activity , we expect volume to increase as prices drop due to eroding fundamentals caused by increasing unemployment.

(For a copy of the 25 year study or to recieve borough by borough building sales reports for the first half of 2009, please feel free to email me and I will be happy to send them to you)

10 Responses to “2Q09 NYC Investment Sales Better but Still Weak”

  1. 1 Greg E Schecher August 5, 2009 at 9:21 am

    Interesting analaysis Bob. The fed and treasury are still at a loss as to the CMBS problem. Maybe Tim and the gang will eventually figure out that if they clear CMBS backlog and create liquidity the real estate engine will drive the economic bus.Is anyone old enough on the Obama team to remember RTC? Unemployment is the second major drag on cre. We ought not be supporting spend and tax it is a proven disaster. Think LBJ, Carter; stagflation is definetly in our future if this congress and administration is not reigned in.

    Greg E Schecher
    Commercial Borrower Advisory LLC

  2. 2 Abe Hedaya August 5, 2009 at 10:59 am

    I wonder: do you expect the drop in prices for 2H09 and 1H10 be very significant? I find it hard to believe that more than 95% of NYC property owners are currently satisfied and solvent in their investments, especially in areas experiencing 30-40% drops in rent. Would I be correct in assuming that upward pressure in cap rates for every segment of the market should be a strong indicator of things to come, especially when you take into account the commercial real estate markets of the outer boroughs and New Jersey?

    It would be far more interesting, I think, to look at quarterly transactional volume over the past 6 or 7 years, rather than volume experienced at the beginning of the credit crisis.

  3. 3 Carll Todd August 5, 2009 at 2:58 pm


    My depression hardened pro. father said a successful RE. practice consists of the following service listed in their order of importance:

    1. Management – regardless of business conditions the building is always there and has to be maintained and vacancies rented.
    2. Brokerage – even in a static market there are always tenants in your managed buildings either vacating their space or need more that gives the management office first crack at their needs and also the manager has an established business relationship with the tenant and at times with the owner of the building you are relocating the tenant to. Also you get first crack at renting the vacated space.
    3. Insurance – obvious land lords and tenants need it and you’re in the best position to get the landlords’ and over time the tenants’ business.
    4. Appraisal – the local RE pro. involved with #1 & #2 are more knowledgeable about the immediate market conditions where they operate in and the class of property the handle. In the past the banks preferred the local professionals that were also appraiser for their outsourced appraisals as they knew they were more current and market specific knowledgeable than their in house staff. As a result the out sourced assignments were for much higher value properties than the the in house ones.

    It was only when the post WWII urban renewal, highway program and housing boom, especially the first two, created a demand for a larger supply of appraisal “experts” than the general offices could supply.

    We are living in interesting times as the old Chinese curse goes “may you live in interesting times” and we sure are and may have to re-think our business models for the coming new economic age especially in real estate.

  4. 4 rknakal August 5, 2009 at 7:23 pm

    Hi Abe, thanks for your post. I have turnover data going back to 1984. I will send you the 25 year study that we completed. Clearly, we are headed for another era of positive leverage which means significant upward pressure on cap rates. Look for double digets within two years as inflation kicks in based upon flawed government initiatives.

  5. 5 rknakal August 5, 2009 at 7:27 pm

    Hi Carl, I always appreciate your responses. And far be it from me to argue with your depression hardened pro father. Yes, priorities are important and do have to make adjustments in the current environment. At Massey Knakal, we implement the Stockdale Principle. We look the harsh reality in the face, and constantly adapt to a changing environment while remaining committed to our fundamental values and goals.

  6. 6 Jason Avishay August 7, 2009 at 6:59 pm

    What is your email address? I am interested in reviewing your 25 year study of cap rates. I cannot find your email address to request it.

  7. 7 Matt Ochalski August 13, 2009 at 8:13 am

    Hello Bob – You have been the market guru for over twenty five years. With NYC institutional buildings being offered at 8 caps, is this the new market valuation level for properties?

  8. 8 rknakal August 13, 2009 at 11:37 am

    Hi Matt, It is great to hear from you. I hope all is well with you and your family.

    Thanks for your post. Different segements of the market are reacting differently with respect to pricing. Clearly, office properties and retail are experiencing the most upward pressure on cap rates (not considering hotels) and this upward pressure will continue as long as unemployment continues to rise. The July numbers showed some positives on the surface but that is mainly because those who gave up looking for work are not counted. I will send you our 1H09 building sales reports showing exactly where cap rates are on the different major product types. Very best regards, Bob

  9. 9 rknakal August 13, 2009 at 11:43 am

    Hi Jason, my email address is rknakal@masseyknakal.com. I have your email address and will forward the study to you.

  10. 10 Carl Todd August 13, 2009 at 12:02 pm

    Please send me a copy of the study too – Thank you in advance of the send.

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