Navigating Turbulence: Manhattan's Investment Sales Market
Navigating Turbulence: Manhattan's Investment Sales Market
The Manhattan Investment Sales market has experienced significant turbulence over the past five years due to three major impactful events reshaping its landscape. Initially, the 2019 rent laws had a substantial effect, followed by the onset of the pandemic, and subsequently, a rapid increase in interest rates after four decades of generally declining rates. While numerous narratives and analytical approaches can be applied to interpret the data, the combined influence of these events on both fundamental factors and the capital markets environment has shaped the current state of the market.
In Avison Young’s recent report on the overall market trends, titled ‘Trends in 2023 Spark Optimism in 2024’, our team highlighted that we are currently operating at less than a third of the 10-year average, and no asset class remains immune to the pricing correction. Upon closer examination of transaction composition, distinct trends emerge regarding asset prices and buyer profiles.
The Avison Young Tri-State Investment Sales group tracks our pipeline metrics meticulously, and given our 16% market share in Manhattan transaction volume, it is a good indicator of what’s going on in the market. Over the last handful of years, we’ve seen our average deal size nearly cut in half while simultaneously experiencing the average time on market increase by 20%. Together, these two stats don’t paint the whole picture but exemplify what is going on. In an up market, sellers are happy market participants where new comps often set new market records and transactions can happen quickly. In this market, sellers have past price points ingrained in their internal valuations and as a forced sale becomes more imminent, they drag their feet and continue to chase down the market as comps set new low points for the cycle.
Expanding the viewpoint to include all the market transactions, the market has seen average pricing drop by 59%, and the median price drop by 32%. The discrepancy in these two figures can be partially explained by the lack of blockbuster transactions. It was not uncommon to have several transactions break the billion-dollar threshold each quarter before the market was disrupted, and recently we only saw two arms-length transactions in the last 24 months cross this mark.
Addiitonally, with asset pricing in constant change, both owners and lenders are looking to fight for another day, and workouts have become more common, essentially kicking the can down the road. As expected, when transactions are integrated into the private capital market ($5-$25M), the middle market ($25-100M), and the institutional market ($100M+), the smallest segment has experienced the largest growth. The percentage of deals in the private capital segment increased to over 80% in 2023 after being nearly 10% lower in the years prior. This is where owners of smaller assets are feeling the heat of maturities and expiring rate caps, forcing sales.
The transactions in the private capital segment have tailed off slightly on an absolute basis but increased as a share of overall trades. In this segment, the market has seen a proliferation of all-cash buyers. This is not a surprising trend considering that the check size is much more manageable when buying an asset in this pricing tranche vs one that is $50 or $100M+ – not many groups have the powder to do that or want to concentrate it in one asset. In a sample of recent transaction data, 45% of the buyers did not use debt to acquire the real estate and all but two were below $25 million. One of these two was putting debt on post close in the form of a construction loan which would likely require the equity into the total project cost first.
By buying all-cash, these investors avoid interest rates that are high in comparison to what was available for the preceding cycle. In the event rates do come down, they will be able to refinance a large portion of their equity while avoiding the higher debt costs of today’s market.
For the transactions that used debt financing, there is also a smaller trend of transactions where the total debt from the seller exceeded the debt taken on by the buyer. This would make sense in many of the instances where the asset value dropped and the assets can’t carry the same level of debt as the previous owners enjoyed. Even in instances where NOIs were stable or experienced some growth, a DSCR with rates double or triple the previous loan will naturally pull down the loan proceeds available. Foreign buyers are one segment of the market that we’ve tracked closely. Avison Young executed 7 transactions to foreign buyers in the last 18 months or so, and all of them were all-cash buyers and fell within that private capital segment of the market.
Until more owners of higher value assets are pushed into forced sale situations, we can anticipate the private capital segment of the market to continue retaining a majority of the velocity where buyers are more capable of completing all-cash transactions.