Low Volume of Investment Sales Caused by Supply Constraint; Demand Still Strong

The volume of investment sales recently has been extraordinarily weak whether you look at aggregate sales price or number of transactions. In fact, we are on pace to see sales volume hit the lowest level we have seen in the 26 years we have been tracking these statistics.

Our recently completed analysis of the Manhattan property sales market, through the first three quarters of 2009, shows only $3.2 billion in volume; a remarkable reduction in the aggregate sales price of 82% from the first three quarters of 2008 and 92% from this cycle’s peak in the first three quarters of 2007. For those of you familiar with the Manhattan market, our study analyzes sales which occurred south of 96th Street on the eastside and south of 110th Street on the westside.

In the first three quarters of 2009, there have been 209 Manhattan sales. This number of transactions is down by 60% from 2008 and 75% from 2007.

The above data would lead one to believe that people are just not interested in purchasing investment properties in New York. Nothing could be farther from the truth. We have noticed trends in the marketplace and have been saying that the market is in a severe supply constrained dynamic since the middle of 2008. This is now manifesting itself in a very low volume of sales activity.

Average property value has falled in New York by 32% from its peak levels. Clearly, this percentage variesdepending on product type and building classification. Multi-family properties have been performing best, having lost only 16% of value while office buildings with significant expoure to the marketplace have been the most negatively affected, seeing a reduction in value of about 70%.

These reduced values have peaked the interest from the buying community as investors are looking for core assets at greatly reduced prices. Conversely, discretionary sellers are seeing these pricing trends as a tangible reason not to place properties on the market at the present time. The difficulties in the financing market have been a major contributing factor to the reduction in value. With banks underwriting more conservatively, additional equity is required and , therefore, prices buyers can pay have been going down. We are all aware that equity costs a lot more than debt does.

This supply constrained enviromnent is illustrated in the listings portfolio of my firm, Massey Knakal. At the height of the market in the first half of 2007, we had, at one point, 836 exclusive listings. Today, we have just 513 and have been below 600 for the entire year ( I am only using Massey Knakal data because this exclusive listing data is not readily available from any of the research firms as brokerage companies are not required to pubically divulge their exclusive listings ).

These dynamics have not, however, reduced demand for New York City investment properties. For the transactions that we have marketed and sold thus far in 2009, we’ve been pleasantly surprised by the number of bids we have received. For stable cash flowing properties,  we have received dozens of offers on each listing. Properties which are vacant or have a value-added component have also seen above trend numbers of offers.

Most interestingly, for the notes that we have sold for lenders thus far in 2009, we have had in excess of 50 offers for each of them. Where is this demand coming from?

Institutional capital was a significant driver of the increase in values in the 2005-2007 period. When the credit crisis tangibly took hold in the summer of 2007, this institutional capital all but evaporated. Fron the summer of 2007 until recently, nearly all of our properties have been sold to high net worth individuals and old-line New York families that have been investing in the city for decades. These buyers remain very active today and continue to seek opportunities to buy well located assets at today’s reduced values.

Additionally, we have seen tremendous interest from high net worth foreign based purchasers. Remarkably, these foreign purchasers are typically not real estate professionals in their countries of origin. They have made money in other industries such as technology, manufacturing or financial services. They are choosing to deploy theri capital into the U.S. which is perceived to be at the very low pint in the value cycle. We have not seen the influx of foreign capital that we have seen recently since the mid-1980s.

In addition, on the demand side, we have seen resurgence, within the past month or two, of institutional capital. As I mentioned earlier, this capital all but evaporated from the marketplace in the summer of 2007 and many of these institutional real estate players have formed distressed asset funds looking to buy properties. These funds are now in the market actively bidding on opportunities.

This all leads to an extremely healthy demand side for New York investment properties.

We remain hopeful that the supply side of the equation will get better as distressed assets appear to be coming to the market in slightly better numbers than we have seen thus far in the cycle. There have been a number of legislative changes that have created tremendous inertia within the distressed asset marketplace but, notwithstanding these modifications, we believe that fundamentally troubled properties will ultimately come to the market, in one form or another, before too long adding to our supply. This would certainly be a welcome happening for the brokerage community and all of the purchasers waiting for opportunities.

19 Responses to “Low Volume of Investment Sales Caused by Supply Constraint; Demand Still Strong”

  1. 1 Mojo October 19, 2009 at 10:03 am

    Were the demand side of the equation strong, and the supply side failing, wouldn’t we be experiencing rising prices due to scarcity, rather than a 32% average property value decline since peak? I think something has to be said for declining demand here…

  2. 2 Elliot Bogod October 19, 2009 at 11:30 am

    Hello Bob,

    I have really enjoyed reading your blog. I couldn’t resist leaving a comment because this subject is important to real estate investors as much as to the brokerage community. Many locals and foreign buyers are interested in acquiring a property in Manhattan and are dependent on leverage.

    However, it is obvious that foreign buyers (most of them don’t need loans) are not only looking for real bargains and trophy locations but for other perks as well. As you have rightly noted – institutional capital has all but evaporated from the market and it would be an excellent idea for legislation to add additional incentives such as a benefit of visas as well as other benefits for foreign purchasers. We would see much faster commercial and multifamily real estate recovery and banks would restart lending again as they are now trying to eliminate risk and equity requirements in this declining market. We see a lot of interest from foreign buyers and see a real benefit of additional stimulus help in obtaining visas and leagal residence status. Current legislation based on EB-5 visas and regional centers is very weak initiative and amendments needs to be explored by Federal Government to help market recovery.

    Thanks again for your insightful thoughts and observations.

  3. 3 Ken Miller October 19, 2009 at 5:37 pm

    I am certainly no expert in Manhattan real estate, but it sounds like there is cash on the side lines waiting for the prices to reset to today’s values. Same story in my market as well…Northern California.

  4. 4 rknakal October 19, 2009 at 5:56 pm

    Hi Mojo, thank you for your post. Demand has been strong and, notwithstanding this demand, prices can still drop based upon the degrading of fundamentals that we have seen. The relentless increases in unemployment have forced rent levels, in both residential and commercial properties, to drop causing reductions in value. The difficulty in obtaining financing also contributes to this dynamic. Lower LTVs alone will reduce value even if fundamentals remained constant. With upward pressure on cap rates and net incomes droping, a significant reduction in value is impossible to avoid.

  5. 5 rknakal October 19, 2009 at 6:02 pm

    Hi Elliot, Thanks for your post. Its good to hear from you. Your points about immigration have been discussed within the industry for quite a while now. As importantly, if not more importantly, modifications to the FIRPTA guidelines would produce tremendous incentives (or I should say, would eliminate tremendous disincentives) for foreign capital to target U.S. properties. The present protectionist attitude in Washington now will make these changes difficult to implement.

  6. 6 rknakal October 19, 2009 at 6:05 pm

    Hi Ken, thanks for your post. The issue I am trying to address here is that many participants in the market are under the impression that demand has been greatly reduced, which is not the case. Demand is still very strong here and it is encouraging to see that it is the same in your market.

  7. 7 JM October 20, 2009 at 8:08 am

    Supply will eventually rise as the next decade plays out inflationary. 1970’s style inflation or even worse will cause many building owners to give up properties their children refuse to manage or are incapable of managing. At this time, why sell when you are sitting pretty? When expenses outpace rents as was the case in the 70’s, owners will cry out.

    Bob, how long has it been since building owners have cried out? 25-30 years? Since the mid 80’s it has been an environment very profitable for building owners. That cycle will change with poor fundamentals.


  8. 8 Faye October 20, 2009 at 4:37 pm

    Hi Bob,

    For a multi family in Brooklyn, where the yearly Net income is $7,200,000.00 what in your opinion would be considered a good deal?

  9. 9 rknakal October 20, 2009 at 10:20 pm

    Hi JM, thanks for the post. You are correct that owners have not been crying since the early 1990s. Our fundamentals have been degrading for quite a while now with rent levels dropping across the board and vacancy rates increasing. For those who found plentiful, cheap credit too alluring, there is much pain today. Look for the pain to end only when unemployment reverses and the massive delverageing we have to go through is complete.

  10. 10 rknakal October 20, 2009 at 10:29 pm

    Hi Faye, thanks for your post. There are many additional questions that would have to be answered to give you a proper response. Some of them include: 1) How many gross square feet are there in the building? 2) Is there any retail space in the property? 3) Is the property subject to rent regulation? 4) What is the gross revenue? 5) What is the payroll expense in the property? 6) What is the neighborhood/location of the property? I will send you an email to discuss this with you further.

  11. 11 Jeffco October 21, 2009 at 8:49 am

    My experience with my small (under 30 mill each) NYC investment properties has been that there are multiple buyers. Demand is excellent; however the banks are shooting themselves in the foot. They are valuing these assets so low that most buyers are unable to purchase. The cash flowing seller has no need to lower the price to the banks desired levels. This has contributed to the lower appraised values, which also lowered the REO values as well. The banks are now more interested in dumping their loans, than making new ones. The banks are only interested in their balance sheet and their stock price. I think they are missing the boat on a seldom found opportunity. Many people are painting the entire real estate investment atmosphere with the same doom and gloom brush. Only a relatively small segment of property owners must sell at these levels. Eventually the sideline money will jump in big time. The experienced landlords are not making long term decisions based on short term economics. The smart ones are just sitting it out, or buying performing loans from short sighted banks for pennies on the dollar.

  12. 12 Faye October 21, 2009 at 8:50 am

    Thanks Bob! Waiting to hear from you!


  13. 13 Doug Taylor October 21, 2009 at 12:48 pm

    Property values cannot increase as long as an inverse rationship exists between labor and value. With the loss of the conduit market the constraint on sales will continue and so will low interest rates. Unless these things change the synergy to lift the market will not exist. My prediction??? Hold your breath…. The end is no where in sight.

  14. 14 Bennyb October 21, 2009 at 2:21 pm

    Hi Mr. Knakal,

    I couldn’t agree with this entry more. I have been interning for a broker who has a client looking for a UES/Lower East Harlem multi family 6-8 unit building currently occupied for around 1.5 mil.

    When he gave me the research project to look into he said, “it is going to be easy to find something that works for this guy due to the nature of market.”

    I nodded my head and started digging through OLR, Property Shark, your companies website and even Craigslist for potential listings. I told him that there was not a plethora of listings like he originally anticipated and came up with a list of about 8 East Harlem buildings ranging from 4-6 unit Multi-families.

    He did not believe me and could not make any sense of the research I did. I suspected that properties that would normally be for sale were being held by either banks or private owners waiting for the market to show strength.

    Just forwarded this entry to him – cleared a lot up.

    Best Regards

  15. 15 Mojo October 21, 2009 at 4:08 pm

    Wow, that makes blinding sense, thank you Robert, and thanks for the article as well!

  16. 16 rknakal October 26, 2009 at 10:09 am

    Hi Jeffco, thanks for your post. People are indeed sitting on the sidelines waiting to pounce on what they deem to be good opportunities. These people know they can’t buy at the absolute bottom but are happy to purchase at what they perceive to be near the bottom.

  17. 17 rknakal October 26, 2009 at 10:11 am

    Hi Doug, Thanks for the post. Clearly, we have a long way to go. There will be interesting dynamics between the money on the sidelines and the increasing supply of available opportunities. Throw increasing interest rates into the mix and it will be interesting to see which of these is dominant.

  18. 18 rknakal October 26, 2009 at 10:15 am

    Hi Bennyb, Thanks for the post. Even in the best of times there is never a plentiful supply of buildings for sale in NYC. The highest turnover rate we have seen in the last 26 years has been 3.9% of the 125,000 properties we track. This suggests an average holding period of over 25 years, even in the best of times. Best of luck finding some good properties for your buyer.

  19. 19 Faye October 26, 2009 at 11:09 am


    There is a very pertinent article today in The Real Deal covering the above issue.

    See this:

    Dry powder piles up | The Real Deal | New York Real Estate News
    Source: therealdeal.com



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