How the 2009 Building Sales Market Finished and a Forecast for 2010

Anyway you look at it; the building sales market in 2009 was horrible, hideous, revolting, gruesome, cruel, beastly, awful and ghastly! Choose your own word, but it was really bad.  

I have spoken at real estate conferences across the country and hear the same thing that the results in the New York market tell me. Sales volume was abysmal and values continued their downward slides. But enough of the adjectives, if you are a frequent reader of StreetWise, you know that I like statistics, not words, to describe markets and issues so let’s take a look at the numbers:

In New York City, we saw 2009 dollar volume of sales come in at a mere $6.3 billion. This was down 75% from the $25.3 billion in 2008 and down 90% from the record $62.2 in 2007. Of this 2009 volume, about one-third consisted of office building sales and 20% were multi-family sales.

Because there are many large transactions that usually occur in New York that are well into the hundreds of millions or billions of dollars, we always like to look at the number of buildings sold as a clearer sign of sales volume.

In our market, we track a statistical sample of approximately 165,000 properties. If we analyze this sample going back to 1984 (the year I started in the business and the year we began tracking market data), we see an average turnover rate of 2.6% of this stock annually. This indicates that in an average year, about 4,300 properties sell. The lowest turnover rate we had ever seen was 1.6% recorded in 1992 and again in 2003. These were both years at the end of recessionary periods and both years in which we saw cyclical peaks in unemployment.

We had always assumed that this was a baseline of sales as the only sellers in those years were forced to sell. Death, divorce, taxes, insolvency, partnership disputes, what have you…. Our theory about 1.6% being a baseline of sales activity was shattered in 2009.

In 2007, 5,018 properties sold in New York City or about 3.04% of the total stock. In 2009, there were 1,439 properties sold representing a drop of 54% from the 3,144 sales in 2008 and a 71% drop from the 2007 total. The 1,439 sales in 2009 equates to a turnover rate of just 0.87%. As a broker relying on transaction volume, this is a sickening number. The percentage reduction seems to be in line with what my colleagues across the country are seeing.

An interesting thing to note about New York’s turnover rate is that the 25 year average of 2.6%, indicates an average holding period for an owner is about 40 years. In 2007, the 3.04% turnover would indicate a holding period of about 33 years and the 0.87% turnover in 2009 indicates a whopping 115 years!

Interestingly, while the dollar volume of sales was down 90% from the peak, the number of properties sold was “only” down 71%. This difference indicates a clear bias towards smaller transactions. This is due, in large part, to the conditions seen in the financing market. We have seen local community and regional banks continuing to lend, primarily on multi-family properties. These banks tend to have a comfort level on individual loans at about $30 million which, with today’s 60% average loan-to-value ratio, creates a pricing plateau at $50 million beneath which activity was clearly much better than above this level.

In fact, most of the transactions which occurred over $100 million (there were only 7 in 2009) utilized seller financing or assumable financing to get done.  Nine-figure loans proved very challenging to obtain.

The good news regarding volume of sales is that, while the turnover in 2009 was the lowest we have ever seen, volume did increase on a quarter over quarter basis throughout the year indicating that we are likely past the low point in sales activity. Pricing is, however, another matter.

On a price per square foot basis, average values in New York were down 38% from their peak. It is clearly difficult to read much into this figure without looking at specific locations and property types as the reductions vary widely.

The sector that held up the best was multi-family. This was not the case in the rest of the U.S. but in New York we have a rent regulation system which keeps rents artificially low and, therefore, downside risks are minimal provided debt is used wisely. Here values dropped only about 18%.

The office sector was hit hardest with reductions in value approaching 55%. Office properties with significant market exposure ie, those having huge vacancies or lease rollovers in the short term, saw values drop nearly 70%.

The average price of a property which sold in New York City in 2007 was $12.4 million. This price dropped 65% in 2009 to just $4.4 million. In Manhattan, the 2007 average price was $52.5 million and in 2009, the average was $12.9, a 75% reduction.

In 2009, cap rate expansion continued with increases, from the lows, ranging from 114 basis points in multi-family to 284 basis points in the office sector. Average cap rates in the multi-family sector have ranged from 6.12% for elevator properties to 6.92% for walk-up buildings (this distinction is common in the New York market). Average caps in mixed-use properties were 6.43%. Retail property caps averaged 7.12%. Cap rates in office buildings were difficult to calculate based upon the substantial vacancies in many of the properties that were sold.

We believe that values will continue to slide in 2010 until we see a reversal in unemployment trends. Last Friday’s reduction from 10% to 9.7% is not meaningful as we lost 20,000 jobs in January. The only reason the rate dropped is because many people stopped looking for work. We need positive job growth to enhance our real estate fundamentals. And we must remember that we need 130,000 jobs per month just to keep up with population growth so seeing a minimum of 250,000 jobs per month is necessary for sustainable recovery.

If we hit a bottom in value around the time unemployment peaks, the question becomes, where do we go from there? The answer is dependent upon a battle between several factors:

  • The massive deleveraging process the market must go through (this exerts downward pressure on value).
  • The impact of increased supply of properties for sale as lenders begin to loosen their grip on distressed assets (this exerts downward pressure on value).
  • The impact of the Fed’s exit which will be negative on commercial real estate regardless of the method of exit chosen. Three of their four potential exit strategies will raise interest rates and the other will reduce the potential pool of capital from which real estate loans can be made (this exerts downward pressure on value).
  • All of the capital sitting the sidelines waiting for opportunities (this exerts upward pressure on value).

Another reason we believe value will continue to slide is due to the imbalance between supply and demand in today’s market today. We see many buyers fighting over few available properties which has buildings selling for higher prices than current fundamentals would dictate. Activity in the note sales market clearly illustrates this dynamic. We have sold many notes at 95% to 100% of the value of the collateral (as compared to par). This means that by the time the buyer gets at the deed, they are into the asset for more than 100% of the property’s value. This is unsustainable.

We also saw prices per square foot increase in the second half of 2009 versus the first half. While one might say that this indicates a bottoming out in value, we do not believe this is the case. We believe that this value dynamic was created by severely distressed selling in the first half and generally better quality assets selling in the second half. Only time will tell if this is the case.

It will be interesting to see how 2010 plays out but it could be quite a while before tangible appreciation kicks in. The most distressed assets are those with 2006 and 2007 vintage loans which don’t mature until 2011 and 2012. We believe it could be 2013 before significant appreciation is seen. There are, of course, upside and downside risks to this forecast but we don’t expect 2010 to be much different from 2009. The good news is: It would be nearly impossible to be worse.

Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career.

12 Responses to “How the 2009 Building Sales Market Finished and a Forecast for 2010”

  1. 1 Tom Higgins February 7, 2010 at 11:57 am

    Bob, this is a great overview of the building sales market. What are the upside and downside risks that you mention toward the end of the article?

  2. 2 rknakal February 7, 2010 at 12:07 pm

    Hi Tom, Thanks for the post. The downside risks are that the economy regresses into stag-flation and that the climbing out of the hole created by the unprecedented government intervention proves more difficult than expected. Another downside risk is that mark-to-market regulation is tightened which would cause mayhem in the banking industry (only a slim chance here). The upside risks revolve around job creation occurring more rapidly than anticipated. Also, if the Bush tax cuts are allowed to sunset, the dividend tax rate climbs to 39.5% which could direct more investment dollars away from stocks and towards real estate, adding to the billions already on the sidelines.

  3. 3 HarryJ February 7, 2010 at 12:12 pm

    Mr. Knakal, I always love your blog because you provide more statistics and facts than I can find anywhere else. Thank you for all you do for the commercial real estate industry.

  4. 4 rknakal February 7, 2010 at 12:14 pm

    Hi Harry, Thanks you for your post and the kind words.

  5. 5 matt in philadelphia February 7, 2010 at 1:25 pm


    An excellent overview of the dislocation of sales volume and values in the NYC market during 2009.

    With many non-traded (private) REITs faced with significantly devalued properties and difficult loan refinancing going forward, how will 2010-2012 look for this universe of investors?


  6. 6 rknakal February 7, 2010 at 10:34 pm

    Hi Matt, thanks for your response. REITs which are public are extremely well positioned to take advantage of opportunities in this market. They have raised over $20 billion recently and have plenty of dry powder for this market. Pirvate REITS will face more challenges without access to public capital but scale should be helpful in a market like this.

  7. 7 Adam in Chicago February 7, 2010 at 10:43 pm

    Bob, I heard you speak at an event in Dallas and I must say, you know more about what is going on in the real estate world than almost anyone I know. I work for a national company and wish that they would bring you on as our CEO. You inspire me and teach me more than anyone else does and you do it through a blog. I can only imagine what your brokers learn from hearing you live everyday. You are a legend! Thanks for everything, Adam

  8. 8 rknakal February 8, 2010 at 11:00 am

    Hi Adam, thanks for your post. If I need a new PR agent, I will be in touch with you. Thank you for the very kind words.

  9. 9 Ben February 8, 2010 at 11:12 am

    Can you comment on how you feel an increase in lending rates will impact property valuations over the next few years? While many believe that a 50 bps or so increase will be absorbed by lenders narrowing spreads anything beyond that will result in higher interest rates.

    So just at the time that employment comes back and the economy starts to get moving won’t any increase in value from higher rents and occupancy be countered by downward pressure due to a higher cost of capital? Could this lead to flat valuations over the next 2-5 yrs?

  10. 10 Abe February 9, 2010 at 10:29 am


    I liked the punch line of your article which can not be argued,

    “The good news is: It would be nearly impossible to be worse”.

    From every negative there must be something positive.


  11. 11 rknakal February 14, 2010 at 10:06 am

    Hi Ben, thanks for your post. Your questions are very good ones and I wish I knew the answers definitively. Clearly, borrowing rates are going to increase as interest rates rise. Interest rates will likely rise as they cannot get any lower and the Fed’s exit from the market will exert upward pressure on rates. Real estate fundamentals will lag the general economy and the Fed’s actions will be in response to, what they believe to be, sustainable economic recovery. At the same time, inflation is likely to kick in. This is why we expect values to hit bottom around the time that unemployment trends reverse and then it will bounce along that bottom, bouncing up a bit or down a bit depending on which factors become strongest: deleveraging vs. inflation vs. Fed’s exit vs. all of the capital on the sidelines. It will be interesting to see what happens.

  12. 12 rknakal February 14, 2010 at 10:08 am

    Hi Abe, thanks for your post. It is just a reminder that the market is cyclical. It is also a reminder of the old real estate saying: “Leverage makes things better in good times but is extremely punishing during bad times.”

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