Happy New Year! We are pleased to report that for the first time in two years, the Manhattan investment sales market recorded quarterly sales activity at pre-pandemic levels. For the fourth quarter of 2021, Manhattan had 100 transactions for just over $6.2 billion in total dollar volume. This represents increases over the trailing 4-quarter average of 117% and 307%, respectively. This was the highest quarterly dollar volume since Q3 2018 and largest for total transaction count since Q4 2018. In 2021, Manhattan investment sales totaled $10.34 billion across 240 transactions, a 21% and 50% increase off 2020, respectively.
This surge in market activity was fueled by multiple factors. There was certainly positive traction as New York came back to life before Omicron paused this momentum. Based on Avison Young’s Vitality Index, Manhattan ranked #2 in the U.S. in terms of return-to-work efforts with “only” a 51.7% reduction compared to a mid-December week in 2019. The Manhattan unemployment rate also continued to compress in October 2021, approaching the prior 20-year historical average of 6.1%. Furthermore, there has been positivity about our new Mayor and hopes that Governor Hochul will also be a friend to real estate.
With this positive backdrop, many of our clients sold to preserve the 1031 tax free exchange before it was potentially eliminated while others looking to cash out attempted to beat a potential capital gains increase. Although neither of those fears came to pass, it no doubt spiked sales in the 4th quarter with 100 Manhattan trades accounting for 61% of 2021’s total dollar volume. There was a tremendous amount of pent-up demand with great financing on hand to meet this new inventory.
Unlike in 2020 when Manhattan saw strong foreign interest, the majority of these 4th quarter sales were from domestic buyers looking to expand their portfolios. Anecdotally it seemed that many of the buyers, especially the multifamily operators who had looked to the southeast for more business-friendly environments, quickly found that those markets were overheated with cap rates, in some cases below 3%. New York soon became the contrarian play. There are still no doubt regulatory headwinds, but the returns offered here would seem to offset the risk, especially for long-term investors.
The Manhattan multi-family and mixed-use market recorded 46 transactions for just over $1.47 billion in total dollar volume, a 98% and 190% increase off the trailing 4-quarter average, respectively. The average price per square foot increased by 4% to $738 and the average cap rate decreased by 24 basis point to 4.69% in comparison to the trailing 4-quarter average. In many cases, residential rents are at the same or higher levels than pre-COVID. However, this uptick in sales activity will be stalled if Good Cause eviction picks up more support. (Please see prior white paper here).
Meanwhile, the Manhattan retail market recorded 16 transactions for just under $530 million in total dollar volume, which was a 178% and 328% increase off the trailing 4-quarter average, respectively. The average price per square foot equated to $2,381 per square foot, a 52% increase off the trailing 4-quarter average. The leading transaction for the quarter was Aurora Capital Associates purchase of the retail condo at 530 Fifth Avenue for $192 million, equating to $3,331 per square foot and a 5.10% cap rate. The retail condo is occupied by Duane Reade, Chase Bank, and Five Below. Neighborhood retailers have also found their way back, although high street retail still awaits the return of the international traveler. This is an asset class where the pendulum on rents have swung too far and should provide investors with opportunity.
Next, the Manhattan office market recorded 14 transactions for $3.55 billion in total dollar volume, a 155% and 431% increase off the trailing 4-quarter average, respectively. The average price per square foot equated to $980, a 5% decrease in comparison to the trailing 4-quarter average. Office leasing activity increased by 16.6% year-over-year to 28.1 MSF. Q3 to Q4 2021 was the most active six-month period since Q4 2019 to Q1 2020. That being said, hampered by weaknesses in the commodity and sublease sectors, the total availability rate remains near record levels, totaling 18.1% as of Q4 2021.
There has no doubt been a flight to quality for office. Tenants have increasingly favored trophy properties, causing base rents to rise to new heights in recent months. The Class A sector has comparatively struggled, however, reporting net effective rents that are -11.8% versus 2019. It is not a surprise that the leading transaction for the quarter was CommonWealth Partners purchase of the 441 Ninth Avenue for $1.03 billion, equating to $1,480 per square foot.
Lastly, the Manhattan development market recorded 13 transactions for $473 million, an 100% and 152% increase off the trailing 4-quarter average. The average price per buildable square foot equated to $472, a 28% increase in comparison to the trailing 4-quarter average. The leading transaction for the quarter was Gotham Organization’s purchase of 550 Tenth Avenue, which included 159,390 of buildable square feet equating to $496/BSF. This was part of an assemblage, with Gotham planning to build a 453-unit rental property. Based on the uncertainty on the extension of the current Affordable New York Program (see my prior white paper here) the land sales market will likely be the barbell moving forward in that only land priced for fully-affordable or luxury condos should gain traction. There is certainly demand for both, especially the luxury sales market, which achieved record sales velocity not seen in decades.
Although there are too few industrial, medical and life sciences to track quarterly changes, there is no doubt incredible demand for this asset class. For 2022, there should be plenty of opportunities for investors who have been sitting on the sidelines.