Manhattan Investment Properties See Uptick in Pricing

Manhattan Investment Properties See Uptick in Pricing

With the 2nd quarter behind us, we can now analyze a full year of investment sales data gathered since the onset of the COVID-19 pandemic to help us understand the correction and subsequent uptick in pricing in Manhattan.  

According to Avison Young’s Tri-State Investment Sales Report for 2Q21, Manhattan multi-family sales values increased 4% to $742/SF in the 2nd quarter compared to the trailing 4-quarter average; retail was up 6% to $1,545/SF; office pricing rose 10% to $1,039/SF; and development sites increased by 9% to $434/BSF. Manhattan’s sales activity picked up in the 2nd quarter with a total of 51 sales, the most since the 1st quarter of 2020.  


Anecdotally, most multi-family investor appetite has been for buildings with primarily fair market units. Institutional interest is starting to creep back with investors’ willingness to accept low- to mid-4% returns on today’s rents with the hope that once the office workers return in large part in the fall,  concessions will continue to burn off and rents will begin to recover. Manhattan office employers are increasingly mandating their workforces to return to the office, a leading indicator for stronger multi-family renter demand. As of the week of June 13, 2021, activity levels based on extrapolated cell phone data at representative Manhattan office properties was +345.2% greater than the post-COVID quarantine week of March 29, 2020, but remained -78.4% below pre-COVID activity levels reported during the week of March 1, 2020, per Orbital Insight. The average multi-family cap rate for 2Q21, was  4.67% which is considered an attractive return compared to other popular Southeastern cities, especially in a low-interest rate environment.

Although multi-family pricing rose 4% to $742/SF in 2Q21 compared to the trailing 4 quarters, that is 14% below  the average pricing of $867/SF recorded in the six quarters before the Housing Stability and Tenant Protection Act (“HSTPA”) was passed in June 2019.


For retail, pricing dropped by 24% from $2,029/SF before the pandemic to $1,545/SF in the 2nd quarter which isn’t surprising. For one, NYC restaurants were closed for indoor dining from March 16, 2020 and not fully reopened until May 19, 2021. Unfortunately, around 1,000 restaurants permanently closed in the process. Meanwhile, online sales increased 32.4% year-over-year across the U.S., now accounting for 14% of all sales. These factors have put strong downward pressure on rents in a market where residential neighborhoods have fared better than more touristy locations.

According to the REBNY’s Spring 2021 Manhattan Retail Report, average asking rents dropped by less than 15% on the Upper East Side compared to rents in the Spring of 2019. In contrast, corridors dependent on tourists and daytime commuters – such as Madison Avenue and Fifth Avenue – saw declines of more than 25% during the same period. In SoHo, average asking rents have fallen by nearly 40%, which is prompting international retailers to take advantage of the new opportunities by signing new leases. 

The decline in tourist activity has been significant. NYC & Company predicts 36 million visitors to New York City in 2021, down from pre-pandemic numbers of 71 million.  As a result, hotels have been hit the hardest. According to STR, May 2021 occupancy was at 54.6%, up from 47.8% a year earlier. We still have a way to go and can’t expect a return to normal until 2025, according to NYC & Company. Despite this, the average price per square foot for Manhattan retail properties sold in 2Q21 rose 6 percent compared to the trailing 4-quarter average, which is a positive sign for the market.


Office properties have been the most surprising asset class. Sales values have increased since the pandemic, rising 8% from a pre-pandemic level of $967 to $1045 in the 2nd quarter.  I would be quick to point out that these averages were drawn over only 5 sales per quarter during the pandemic, compared to some of the pre-COVID quarters which had more than triple the amount of sales. The average high price per square foot could be attributed to several core transactions, like 410 Tenth Avenue where Amazon was the anchor tenant, and a host of end-user sales.


We have yet to see a negative impact on office pricing because of the rising availability rate. The 2Q21  availability rate represents a post-2000 high in terms of sublease (4.4%) and total (19.2%) percentages. In addition , net effective rents  have dropped 10.8% from April 2020 to June 2021 although they  have shown signs of stabilizing since March 2021, signaling that demand has incrementally risen.  There has no doubt been a flight to quality with 82.8% of the leasing activity happening at Trophy and Class A properties compared to a combined 72% pre-pandemic level.

Manhattan still has a fair amount of sublet space to lease with 24.1 MSF in the market, a high since 2005. Of that, 1.5 MSF has already come off the market as companies rethink their plans. This should be helped by the now 8.3% Manhattan shrinking unemployment rate.  The historically tightened labor market conditions were halted by the pandemic, which caused nearly 213,000 job losses by May 2020. However, reopening efforts enabled the local economy to recapture more than 110,000 jobs year-over-year, an increase of 15.4% of the labor force.


Lastly, the land sale market has no doubt been the most impacted asset class with a 36% decline in value compared to pre-COVID pricing.  Most sites now are being purchased for rental development as condo sellouts were called into question last year. That should soon change. In the second quarter, Manhattan apartment closings surged 152% from a year earlier, the biggest annual increase in data going back to 1990, according to a Miller Samuel report.  The report also said the momentum is continuing as the number of contracts signed in the quarter soared 619% year-over-year to a record 4,633 transactions. Demand is likely to continue as foreign buyers, largely absent for over a year, eventually return. 

In the rental market, the listing inventory of available units dropped 38% in June from the previous month to 11,853, according to Miller Samuel and brokerage Douglas Elliman Real Estate. While still elevated from pre-pandemic levels, the inventory has been reduced by more than half since January.

Pricing in the development sales market rose 9% to $434 BSF in the 2nd quarter compared to the trailing 4-quarter average, but it is important to note that this was only a result of the average of 5 sales. Pre-COVID, it was not uncommon to see more than triple the amount of sales per quarter. We are expecting a huge surge of sales activity due to the possible elimination of the Affordable New York 421a program which delivered a very attractive 35-year abatement.

This race to the finish off the year could also be spurred by long-term owners looking to close before year-end to minimize the capital gains tax, which may increase to over 50%, and the potential elimination of the 1031 Exchange. Please read my recent white paper, which reviews these tax proposals: A Tax Wave Is Coming.

Above all, we are waiting for New York to come back to life. Leading the charge will be the election of our next mayor who will hopefully bring safety and order back to our City. We are also waiting for Bellwether companies to return to the office. Goldman Sachs and JPMorgan Chase already began their return-to work efforts on June 1, which could have a trickle-down effect on other financial services companies and office-using industries.  It would definitely seem like we are headed in the right direction.

James Nelson is Principal and Head of Avison Young’s Tri-State Investment Sales group where he leads a group of three dozen professionals in the sale of multi-family, office, development and retail properties throughout the country.