The Boroughs and Building Sales

The average price of a property sold in Queens in 2009 was $1.7 million. This was down 26 percent from

The average price of a property sold in Queens in 2009 was $1.7 million. This was down 26 percent from the $2.3 million dollar average in 2008, which was also the peak.

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Capitalization rates for walk-up buildings averaged 6.32 percent, up 82 basis points from the low. Gross rent multiples averaged 10.66, down three-quarters of a multiple from the peak. Elevator properties had average cap rates of 6.04 percent, up 74 basis points from the low and gross rent multiples of 9.14, down 3 multiples from their peak. Mixed-use properties had average cap rates of 6.46 percent, up 46 basis points from the low point.

In terms of price per square foot, walk-up buildings average $179, down 21.1 percent from the peak. Elevator properties average $137 dollars per foot, a reduction of 18.9 percent from their peak; mixed-use properties averaged $251 per square foot, down 16.1 percent from the peak.

Retail properties performed solidly in Queens, with an average price per square foot of $377. Eighteen office buildings sold, at an average of $249 per square foot. There were 50 development sites sold in 2009. However, if we eliminate those with buildable square footages under 10,000 square feet, there were 22 sales, with an average price per buildable square foot of $65.

 

Conclusion

Perhaps the most interesting statistics are those that show that the average price per square foot for walk-up buildings exceeded the price per square foot for elevator buildings across all submarkets. This is the first time that we have seen this dynamic at work; and the question we ask ourselves is whether this is symptomatic of very poor-quality elevator buildings being sold or whether this is a sustainable shift based upon the high tenancy turnover level in walk-up buildings relative to elevator properties.

Our inclination is that we are seeing a tangible shift in market dynamics as average rent-per-square-foot levels continue to escalate in walk-ups due to the relatively higher tenancy turnover versus elevator buildings. If this is a trend that continues, it could be the first concrete sign that the inevitable stresses that regulated elevator properties will suffer are setting in. Decades of operating expenses, particularly real estate taxes and water and sewer charges, growing at a much more rapid rate than regulated rent increases, places these properties on a slippery slope on which net operating income will evaporate without structural changes to the rent regulation system.

Another noticeable trend in 2009 was the fact that prices per square foot increased in the second half of the year from the first half. Upon casual observation, one could conclude that this is an indication that pricing has bottomed and an upswing will occur in 2010. We do not believe this is the case. We think that an overshoot to the downside occurred in the first half of 2009, as most sellers were very distressed, and a generally better-quality asset came to market in the second half.

We also believe the constrained supply of properties for sale has created a large imbalance in the supply/demand dynamic. There are many investors fighting over few assets, which drives the prices higher than fundamentals would dictate. This is transparently observed in the note-sales market where prices represent 95 percent to 100 percent of collateral value. By the time a foreclosure process is completed and the deed is obtained, the note buyer is into the property for more than 100 percent of its value. We expect supply to increase as banks and special servicers loosen their grip on distressed assets. We have already seen this happening in the past four months and expect the trend to continue.

We certainly expect 2010 to be a better year than 2009. Heaven help us all if it’s not.

rknakal@masseyknakal.com

 

Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and has brokered the sale of more than 1,050 properties in his career.

The Boroughs and Building Sales