WHITE PAPER: Now Is The Time to Buy NYC!2 Dec 2020
By: James Nelson
As we approach year end, it is hard to be optimistic about the New York City investment sales market. We clearly have some rough years ahead to recovery. Even with the extremely positive news from Pfizer and Moderna on a vaccine, it doesn’t appear that people will rush back to the office anytime soon. In fact, it has been the opposite. The amount of Manhattan office sublet space has more than doubled since COVID and now accounts for 17 million square feet. That all being said, if you’ve read my past blogs (See: Bravo Jerry Seinfeld), you know that I am bullish on New York for the long term. You might still be questioning me why.
With the exception of industrial and medical real estate values, pricing for all the other major asset classes has suffered dramatically. An office market leasing recovery will need to occur before other asset classes can show meaningful improvements in value - then residential tenants will return, who will in turn bring retail back to life. In the meantime though, vacancy rates across the board are scary. Manhattan’s office has risen from 10% to 12% and Avison Young projects this could go to 15% in the next two years. Meanwhile, the residential vacancy rate has doubled from 3% to 6%. However in looking at many recent rent rolls, I’ve seen vacancy at 20-25% or even higher for fair market units. I wouldn’t even venture a guess for retail.
The investment sales market has taken quick notice. When combining the second and third quarters of 2020 and comparing it to 2019, NYC sales volume has dropped 66%. The values have dropped significantly along with them. Fortunately, our Tri-State Investment Sales team was able to close all the deals we had in contract pre-Covid, but in many cases we had to give 10-15% discounts to get buyers to the closing table. Now, that there has been enough data over the 2nd and 3rd quarters, it has become apparent that Manhattan sales values have dropped even more significantly when compared to 2019. Land has suffered the most, with a 30% decline, followed surprisingly by multifamily at 29%, and then office and retail with drops of 24%.
It might not be that much of a surprise that land sales have dropped the most. Construction financing is incredibly challenging to secure except for sponsors with long term lender relationships, and even then, recourse is required. The developments also need to underwrite as rentals. This means Manhattan land sale pricing at below $400/BSF in some cases, which has not been available for over 10 years. Those looking to build condos will benefit from a better basis. If you didn’t see my blog post from last month on the topic, go back and take a look here.
Meanwhile, multifamily has been hit significantly twice in the last two years. First as a result of the 2019 rent reform and now Covid. Cap rates which were historically in the 3-4% range are averaging 4.8% for 2Q&3Q 2020 or $742/SF. This is pricing which we have not witnessed since 2011 when caps were just above 5%. Keep in mind that back then borrowing rates were much higher - the 10-year treasury was at 2.78% opposed to sub 1% today. This means that the cash-on-cash returns are substantially higher today and even reaching the high single digits.
As far as office, I believe the jury is still out. As mentioned above, it will really become a question of the return to office. How significant will work from home remain post vaccine? Luckily, it would seem there has not been a mass exodus to the suburbs on the work front. Our leasing brokers in our NJ and CT offices have told us they have mostly been doing short term leases for satellite offices.
As a result office sales for 2Q&3Q 2020, averaged $901/SF with an average YTD cap of 4.57% compared to the last trough in 2014 of $825/SF or cap rates back in 2012, which averaged 5.04%, according to Real Capital Analytics.
Lastly, on retail, it would seem that high street has been massively impacted with rents in some cases at 25% off peak. That being said, the retail which is more service oriented is seemingly doing better. Just take a look in the boroughs and see the difference with the vacant space. Regardless, retail has become a dirty word to most investors, the cap rates available today average 5.42% compared to the last trough in 2011 at 6.21%, according to Real Capital Analytics. Meanwhile, the drop in the average sales price per square foot is staggering. Our 2Q&3Q 2020, average is $1,597 compared to the 2016 peak which was more than double at $3,485.
All in all, this seems like a pretty bleak picture on New York City values. When I speak to my Avison Young colleagues, they tell me multifamily deals are still trading in the mid-4% cap rate in the Carolinas and Texas. Multifamily occupancy rates are as high as 97% in Florida and office condos are selling briskly there as well. Sometimes I wonder if we live in the same country.
However, when considering that you can borrow money in the 3% range, and even sub 3% for multifamily agency debt, the cash-on-cash returns available in New York are unprecedented. If you’re a long-term holder, acquiring at these low prices and locking in long term debt seems like a winning strategy.
Remember 2009? How about the following years when everyone said they wished they had bought? How about World Wide Plaza? Do you remember when everyone couldn’t believe George Comfort & Sons bought at the depths of the recession? They paid $590 million or $297/SF. Within two years, it was resold for over $1.7 billion dollars.
Do I believe prices will almost triple in two years? No, but I do believe we are nearing a bottom. Next year will be the year for buying distress and there is plenty of cash on the sidelines, so it will go quickly.
One thing I’ve witnessed in my career is NYC always comes back. People will soon return to live, work, and play here. Don’t bet against it! Wishing you and all your family the best for the holidays.