Bright Lights, Big City: Manhattan, Again, Destined to Lead City Out of Market Downturn

In last week’s column, we looked at the third-quarter 2011 investment sales market on a citywide basis and noted that the dollar volume of sales dropped from $8.68 billion in the second quarter to $6.5 billion, a 25 percent decline. This would appear to indicate that the investment sales market is slowing. However, a closer look tells a different story.

If we discount the second-quarter total, the $6.5 billion volume observed this time around was the highest since the third quarter of 2008.

In fact, the number of properties sold citywide reached 548, up 8.5 percent from the 505 sales reported in the past quarter. That number marked the highest quarterly total since the fourth quarter of 2008.
blitt bob knakal Bright Lights, Big City: Manhattan, Again, Destined to Lead City Out of Market DownturnBoth of these metrics reflect positive trends in the building sales market, although a further decline in the dollar volume of sales in the next quarter would take some steam out of these positive trends. This decline would not be surprising given current market conditions.

As is always the case, the Manhattan submarket leads New York City out of market downturns, and this recovery is no different.

The Manhattan submarket (defined as south of 96th Street on the East Side and south of 110th Street on the West Side) has seen a significant comeback from the 2009 nadir.

In the third quarter, there was $5.7 billion worth of investment sales transactions in Manhattan. This figure, when added to 1H11 totals, brings the 1-3Q11 total to nearly $16.8 billion. Annualized, the Manhattan submarket should see about $22.3 billion of investment sales activity this year, remarkably close to the 2005 total of $24.5 billion.

On the present course, 2011 totals will rise 93 percent from the $11.6 billion that occurred in 2010. The projected total of $22.3 billion will also increase by more than five times the $4.1 billion of investment sales transactions that occurred in 2009. To provide some relative perspective, in 2007 there were $52.5 billion of sales transactions in Manhattan. So, while the dollar volume is up more than five-fold from 2009 levels, activity remains 57 percent below the levels observed at the peak of the market.

Looking at third-quarter totals, the charts show that the $5.75 billion in sales represents a 27 percent drop from the $7.9 billion that occurred in the second quarter. While this may seem like a negative trend, similar to the dynamics we have seen in the citywide data, it is important to be mindful that the $5.75 billion quarterly total is the highest total going all the way back to the third quarter of 2008, with the exception of the second quarter of 2011. The long-term trend is positive. In fact, the $15.7 billion of sales that has occurred so far this year is already well above the $11.6 billion that occurred in all of last year.

Explaining the reduction in the dollar volume of sales in the third quarter versus the second is straightforward, as there are two main factors we see for this pullback. The first is that the market is severely supply constrained. Discretionary sellers are returning to market, though cautiously, and the pace of distressed sales has slowed. Our extraordinarily low-interest-rate environment is creating hundreds of “zombie properties,” which, while having significant negative equity, still have positive cash flow. The flow of these distressed assets coming to market is more measured, as mortgage maturity is the most impactful variable determining the timing of lenders and borrowers facing these walking-dead assets.

While the dollar volume of sales is telling, the number of properties sold is more indicative of the true activity level in the marketplace, given the ability for very large transactions—particularly in Manhattan—to skew the dollar volume. For instance, last year the $1.8 billion acquisition by Google of 111 Eighth Avenue provided about 12.6 percent of the total dollar volume of sales for the year.

In the third quarter, there were 190 properties sold in the Manhattan submarket, the highest quarterly total going back to 1Q08. This figure, when added to 1H11 totals, reflects a total of 473 properties sold thus far in 1-3Q11. This figure is approaching the 488 properties that sold in the Manhattan submarket in all of 2010.

All projections point to 631 sales this year in all five boroughs, which would be approximately where we were in 2008, when 636 properties traded hands. Expect that 2011 results will be about 29 percent above 2010 totals and more than double the 2009 total of 305 properties sold.