Mixed-use properties (those that have at least 20 percent of total square footage occupied by retail) averaged $289 per square foot citywide, with the low average in the Bronx at $142 and the high in Manhattan at $599.
With regard to pricing trends, in 2009 the market that was most adversely affected, relative to its peak, was northern Manhattan, where, depending on property type, values fell from 39.4 percent to 55.1 percent. In Brooklyn, value held best with reductions ranging from only 5.3 percent to 21.7 percent.
As I mentioned earlier, price per square foot was up in the second half of 2009 versus the first half; however, we do not believe this is an indication that pricing in New York has hit bottom. We believe it was simply a reaction to an extraordinary drop in value in the first half, and better-quality assets trading in the second half. We believe that a bottoming in value will occur near the point at which unemployment peaks. This is when our fundamentals will be at their weakest.
NOW WE MOVE off that bottom will be dependant upon several things. The most important is the rate at which job creation occurs, which will positively impact our fundamentals. Other factors will include the de-leveraging process that remains on the horizon. We estimate that there are approximately 15,000 properties in New York City with negative equity today. There is approximately $165 billion of debt on these properties, and if underwritten based on today’s standards, they would support a leverage level of only $65 billion.
Clearly, $100 billion of this leverage will not be extracted from the market; however, we believe that before the dust settles, we will see losses in the $30 billion to $40 billion range. This de-leveraging process, which is likely to be most acute in 2011 and 2012, as the 2006 and 2007 vintage loans mature, will lower pricing.
Another factor that will have significant implications for our sales market will be the Fed’s exit from the marketplace. The Fed can use one of four mechanisms to accomplish this. Three of those-ceasing to purchase assets (which have mostly been mortgage-backed securities and treasuries), the selling of assets or the raising of the Federal Funds rate-will all increase interest rates, which will have a negative impact on value. The fourth, draining excess bank reserves, will reduce the potential pool of capital from which real estate loans could be made. The implications for real estate based upon the Fed’s exit are resoundingly negative.
On the positive side, the significant amount of capital on the sidelines will raise prices. After value hits bottom, we expect it to bounce along this bottom for an extended period of time. Whether that bouncing trends slightly upward or slightly downward will be dependant upon which of the previously mentioned factors dominate.
We expect sales volume in 2010 to increase to 1.2 percent for the entire marketplace, representing a nearly 40 percent increase in activity. In Manhattan, we expect volume to hit 1.6 percent, representing about a 37 percent increase. With regard to value, we expect average pricing to be in the range of flat to down 5 to 10 percent throughout 2010, subject, on the downside, to changes in bank regulator’s treatment of mark-to-market and, on the upside, to job growth greater than anticipated. Basically, 2010 should suck a lot less!
Robert Knakal is the chairman and founding partner of Massey Knakal and has brokered the sale of more than 1,050 properties in his career.
