Trends in 2023 Spark Optimism in 2024

Reflecting on NYC's 2023 investment sales yields a mixed bag of key takeaways. Despite a 55% YoY drop in dollar volume, the number of sales only decreased by 13%, indicating continued activity in the middle markets. Despite interest rate increases, there were some bright spots like the increasing trend of owner user acquisitions. Prada buying $835 million worth of property on Fifth Avenue single-handedly boosted the fourth quarter to the best of the year. Gucci was right behind them, paying over $900 million to establish their permanent residence on the luxury high street. Despite interest rate increases, foreign buyers were also incredibly active. As we reported to the Real Deal, foreign investment tripled last year with Dubai and Japan accounting for around $1 billion each.

Lastly, we also saw a change in seller profiles, in 2023 private sellers dominated by making up 69% of transactions, while institutions/REITs made up 26%, a shift from 2022's 33% private and 60% institutional seller breakdown.

The Avison Young Tri-State Investment Sales Team anticipates building on these positive trends and are already experiencing increased activity with a growing number of inquiries.

The decline in 2023 investment sales can be attributed to the unprecedented rate increases starting in June 2022. This not only put downward pressure on pricing but also introduced uncertainty as investors awaited future rate changes. With no rate hikes since July 2023 and lower inflation, hopes for rate cuts in the coming year are high. The current 10-Year Treasury at 4.10%, just under 100 bps lower than in October 2023, suggests a favorable environment for buyers.

Buyer inquiries in NYC have surged, driven by optimism and the perception that the market bottom may have passed. Additionally, a wave of loans, estimated at $540 billion, coming due this year could contribute to increased sales. Several of these maturities will necessitate cash-in refinancing if borrowers intend to retain ownership. However, not all borrowers will have the capability or inclination to pursue this option. Importantly, the absence of cash-in refinancing does not automatically imply distress or negative equity for many properties. In many cases, sellers possess equity in their properties but face a liquidity challenge that can only be resolved through a sale. It is noteworthy that Trepp's delinquency rate for CMBS in November 2023 experienced a slight decline, registering at "only" 4.58%.

Pricing predictions for 2024 are challenging and depend on asset class, submarket, and building type. While class B and C office prices may decline further in some areas, demand for Trophy and class A properties remain robust. Submarkets also make a big difference; Midtown South reached a 76% return to office rate. Recent rezonings may lead to office-to-residential conversions, addressing obsolete office stock.

Anticipated improvements in pricing for multifamily and retail properties are expected, driven by investor reluctance to take on negative leverage. This implies that the cap rate or stabilized yield on cost must meet or exceed the borrowing threshold for the financing to be accretive. The compression of cap rates is likely as borrowing rates have decreased since October.

Retail is poised for more price appreciation due to increased retail rents. Residential rents may stabilize after reaching their peaks, but the lack of significant rental development since the expiration of 421a suggests long-term stability due to a lack of new rental inventory. Despite challenges, the limited housing units filed in 2023 may contribute to favorable fair market pricing.

In conclusion, I feel a sense of gratitude and optimism as we welcome the new year. As I shared with a former colleague, we are not necessarily seeking a tailwind; we simply want to avoid a hailstorm every day!