WHEN ASKED WHERE we are in this cycle, is very important to differentiate between the two main sale metrics, as they do not necessarily move in tandem. These metrics are what we refer to as the “Two V’s”: volume and value. With respect to the volume of sales, we are clearly past the bottom, which was very obviously occurred during the second quarter of 2009; we are now well off of that bottom. And even with the substantial increases we saw in 2010, fortunately, there’s still a long way to go in terms of the volume of sales to get back to the long-term trend lines. We expect that the turnover ratio will increase in 2011 into the range of 2 percent to 2.2 percent, which would represent about a 25 percent increase in the number of properties sold, but would still be well below the historic trend of 2.6 percent. We also expect the 2011 dollar volume of sales to increase into the $18 billion to $20 billion range. If this occurs, it would represent about a 50 percent increase in dollar volume.
With respect to value, contrary to popular opinion, it is not clear that we have hit an absolute bottom yet. In fact, in 2010, our statistics showed that the average price per square foot of properties sold in the Manhattan submarket dropped approximately 8 percent from 2009 levels. This is very different from the general perception within the market that prices are increasing. We believe the reason for this is that there is a significant divergence today between core, or institutional, assets and the rest of the market. In 2010, there were 32 sales which took place at prices in excess of $100 million. Each of the sales was widely reported in the media. It is clear that upward pressure has been exerted on pricing in this core sector. However, in the non-core sector, stresses placed on fundamentals continued to exert downward pressure on value. Reduced rent levels, along with slightly increasing capitalization rates, have placed downward pressure on value per square foot.
If we look at different property types in Manhattan last year, almost all of them suffered reductions in value per square foot. Mixed-use properties bucked the trend and performed well, showing the biggest value increases of approximately 8 percent. Office condominiums also performed well, showing an increase in value of about 2 percent to $850 per square foot; office buildings remained unchanged at $533 per square foot. All other product types, including elevator and walk-up apartment buildings, retail properties, development sites, hotels and specialty-use properties, saw values drop.
While these statistics were surprising, and to some degree alarming, all of the news on the value front was not negative in 2010. Perhaps the most interesting dynamic on the value side is that the rate of decline in value per square foot slowed significantly in the second half of 2010, with more product types turning positive, although not all of them. Based upon this data, we believe that later on in 2011, we will be able to retrospectively look back at the marketplace and determine that value in Manhattan bottomed out in either the third or fourth quarter of 2010 or in the first quarter of 2011. If this occurs, the other submarkets are sure to follow in time.
While we seem to be bouncing along a rocky bottom, there is clearly a light at the end of the tunnel. Let’s hope the tunnel is not too long.
rknakal@masseyknakal.com
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and in his career has brokered the sale of more than 1,125 properties, having a market value in excess of $7 billion.
