By James Nelson
After a slow stretch, there is positive news for the commercial real estate market in New York City. Sales and transaction volume in some areas have increased during the last months, per the findings of Avison Young’s Manhattan Property Sales Report for the second quarter of 2023. Inflation cooled to 3% in June, marking its smallest increase since March of 2021. In the same month, after a series of increases, the Federal Reservedecided to not raise interest rates (however, the Federal Reserve increased the federal funds rate by .25% to a target range of 5.25% to 5.5% on July 26).
While the overall market activity is still down compared to historic averages, looking at recent figures in context reveals some upward trends. The current annualized sales activity for 2023 in New York City is $10 billion, which is significantly less than the 10-year average of $34.21 billion, according to Avison Young’s report. The data reflects hesitation which was triggered last year by the June 2022 interest rate increase by theFederal Reserve. When rates marched upward during the following months, the transactional activity dropped precipitously as buyers moved to the sidelines.
Thus, much of the data from early 2023 reflect deals that were negotiated in 2022, amid the rising interest rates. However, from the first quarter to the second quarter of 2023, the total sales volume in New York City rose by 26%, and the total sales climbed 21%. In Manhattan, total sales volume increased from $1.17 billion in the first quarter to $1.61 billion in the second quarter, marking a jump of 37%. During that same period, the total sales climbed from 47 to 58 in Manhattan, which was a 23% increase.
Multifamily Investors Consider Mixed UseIn the second quarter of this year, the total dollar volume for multifamily was down $900 million compared to the trailing four-quarter average in Manhattan. Interestingly, the number of sales was the same. Collectively the figures could be a result of a decline in significant multi-trades that often happen in large quantities.
For multifamily, the question of whether the property has units with rent regulations attached to them typically arises. Most of the time, the transactions that investors have executed involve buildings in which most the units are fair market. In some cases, buyers are finding that a fully rent-regulated building might present challenges due to the interest rates and capped rental increase potential.
In addition, some private investors have been seeking mixed-use properties, which are often viewed as having more stability due to the diversity of tenants and income. Lenders also may find lower risk for these types of buildings. For instance, a mixed-use property at 103-105 MacDougal Street recently sold for $48,905,000 to a private investor.
Development Remains Slow though Values IncreaseDuring the second quarter of 2023, the average price per buildable square foot rose to $541, a 27% increase from the trailing four-quarter average. This increase could be largely attributed to the 37 West 57 th Street sale of $77,500,000, which is on a site with a project that will ultimately have 119 units, plus a 158-key hotel.
Also notable in development was a sale for $46,800,00 at 930 & 936 First Avenue & 409 East 51st Street, involving 113,000-square-feet (sf) and projected to be a condo. At 533 West 27th Street, buyers stepped in when a property foreclosed with a base of 60,000 buildable square feet. The transaction included air rights, for a total of 78,000 buildable square feet, for a sale price of $24,500,000.
In all, there were just five development transactions during the second quarter of 2023. By and large, developers are finding that construction financing is a challenge in today’s market conditions. If the land market continues at a slow pace, there will be fewer residential spaces available in the next years.
End Users Purchasing RetailAmid rising mortgage rates and a changing economy, the total dollar volume for Manhattan retail sales was down 71% in the second quarter compared to the trailing four-quarter average. There were just eight sales and the average price per square foot was $1,173. However, activity among end users purchasing their own unit has grown, especially for those who can take advantage of small business financing and qualify for low interest rates.
For instance, a sale on 50 Riverside Boulevard for $10,000,000 involved Collegiate School buying a space they were previously leasing. Another transaction at 249 West 49th Street for $5,800,000 million was a tenant purchase who had been leasing the space. Also of note was a 35 West 36 th Street sale for $5,460,000.
Short Sales in OfficeWhile the total dollar volume for office sales in Manhattan was down 44% in the second quarter compared to the trailing four-quarter average, the number of sales remained unchanged. Some properties are selling through foreclosure, which was the case for a transaction involving 126 East 56th Street for a price of $113,000,000. Another end user, New York University (NYU), purchased 400 Lafayette for $97,500,000, which includes a 120,000-sfoffice building. NYU plans to use the place for faculty and administrative office space.
Prices per square foot fell 25% to $588 compared to the trailing four quarter average. When purchasing office properties, buyers need to consider factors such as concessions and tenant incentives. Given current market conditions, tenants may be looking for more of these when leasing a space.
Pricing and Cap Rates ShiftA look at historical data reveals that pricing per square foot for retail has bounced around, though is currently on the upswing. Retail pricing tops multifamily, office, and development, which have collectively tracked more closely. Cap rates for retail, multifamily, and office have expanded, with retail hitting 6.62%, followed by multifamily at 5.24% and office at 4.58%. The exact pricing and cap rates depend on a multitude of factors, including the asset type, class category, and fair market versus regulated units.
One of the largest drivers of sales activity has recently been from owners who have loans coming due. For the most part, there is equity left in these transactions, but the borrower either does not have the ability or the desire to pay down the loan due to debt service coverage ratios and/or a more conservative approach by lenders. Thistrend will likely only become more pronounced in coming months.
In the coming months, we could expect to see additional activity, as investors who have been waiting for opportunities in the market make a move. Some may be looking for deals related to foreclosures, while others are acting on value-add properties. If buyers find ways to take advantage of financing options, obtain the needed equity, and calculate a long-term yield on cost in their favor, we could see an upswing during the remainder of the year.
Real Estate Weekly Article.