Inflation, interest rate hikes, a tougher credit environment, cash refinances, new regulations, rent orientation in different sectors – the list of concerns of market participants in the sale of investments in New York goes on and on. and again and could easily include 20 additional questions that are of great importance today.
We are heading into a time of uncertainty, disruption and, unexpectedly, tremendous opportunity. Fortunes will be made over the next few years.
At the end of each quarter, this column reviewed the performance of the investment sales market, and this quarter will be no different. This week, we’ll be looking at the performance of investment sales in the Manhattan submarket for deals over $10 million south of 96th Street on the East Side and south of 110th Street on the West Side.
Given the feel and mood of the current market, it’s surprising how robust performance has been in the third quarter. However, it is important to remember that the transactions closed in July, August and September were negotiated and signed contracts several months before their closing, which had an impact on the data.
In the third quarter, there was $6.1 billion in investment sales activity. That put the market on pace for $32.6 billion if we annualize the first three quarters of the year, which would be up 107% from the $15.7 billion total in 2021. That pace would also be 192% higher than the 2020 $11.1 billion, a cyclical low. While those numbers have increased significantly from the past two years, that pace would still lead to an annual total 43% below the market’s cyclical peak of $57.5 billion in 2015.
Regarding the number of properties sold, there were 73 transactions in the third quarter in Manhattan. If we annualize the first three quarters of the year, the market is on pace at 215 sales for the year, which would be up 12% from 191 sales in 2021. This pace is 56% lower than the market peak of 484 sales in 2015.
Thus, the volume of sales in dollars should increase by 107% and the number of properties sold should increase by 12%. These are very encouraging steps, but the question is: will these trends continue?
The level of inflation has reached its highest level in 40 years, which at 8.2% worries the Fed, and its policy on interest rates has been clear for some time now. The Fed’s comfort level of inflation is between 1% and 2% per year, and we are currently well above that comfort zone. The Fed has already raised rates several times and, at the time of this writing, the prime rate is 6.25%; the one-month guaranteed overnight rate is 3.3%; and the 10-year Treasury is 3.94%. These numbers are all higher than a year ago.
Last week, the Kansas City Fed president said “the increases we’ve implemented so far haven’t had the desired effect.” This statement and the recent inflation figure lead economists to believe that further rate hikes are on the horizon. At a recent real estate networking event I attended, the question was asked: Will the 10-year Treasury be above or below 5% by the end of the year? The majority of respondents thought it would be higher.
These continued increases will put downward pressure on the value and volume of transactions. However, the reality that cash refinances will be required can bring a flurry of product to market as owners decide to inject additional capital into their assets to complete the refinance.
Some market participants believe that we are heading towards a period where values will continue to fall and where tensions will be felt in all sectors. If this happens, we should learn from the past and look in particular at the financial crisis of 2008 and 2009, and the savings and credit crisis of 1990 and 1991. During these times of uncertainty and disruption, investors with courage (and capital) have made some of the most profitable investments of their careers. The same is likely to happen this time around as price levels per square foot reach levels not seen in many, many years.
There is a huge amount of capital left there. The question is, will the courage be there too?
Robert Knakal is president of New York investment sales at JLL.