In 2020, The Pandemic Kicked NYC Landlords When They Were Already Down
As the curtains fall on a harsh year for New York City’s real estate market, its investors are bracing for the pain to extend well into next year even as some glimmers of hope emerge.
The city is on pace to see $8.4B in building sales volume in 2020, a nearly 70% drop off the 10-year average, per Avison Young’s latest data. That figure represents a 50% decrease from last year.
Pricing and values are another matter — brokers point to reductions of as much as 30% in some cases, as well as their growing concerns that investors are turning their backs on the city in favor of more business-friendly parts of the country.
“The landlords already were taking a bloodbath on their valuations,” Meridian Capital Group Managing Director Shallini Mehra said, pointing to rent reform legislation that was passed by the state government last year.
She said most buyers who closed on multifamily assets during the coronavirus pandemic got an extra 2% to 10% off the price. Now, the general feeling among investors is that prices have further to fall.
“We have a lot of landlords who bought in the last five to seven years, and there is a certain amount of devaluation that has gone on," Mehra said. "Maybe they want to exit the New York City market and they just want to be in other markets because of the rent laws or they’ve just decided to cut their losses."
Mehra closed on a deal to sell a six-story apartment building at 5 West 91st St. for $20M this month. The building originally came to market asking $34M before the new rent laws were passed last summer and the health crisis affected the city.
“There are a lot of [buyers] sitting on a lot of cash looking to take advantage of lower pricing,” she said.
Though brokers said much of the year has been spent trying to salvage deals with renegotiations and trying to soothe skittish buyers and sellers, 2020 hasn't been completely devoid of sales.
Amazon paid $978M to WeWork for the former Lord & Taylor Building on Fifth Avenue, and 601W Cos. dropped $952.5M on SL Green’s 410 10th Ave. Munich RE closed on its $900M purchase of 330 Madison Ave. from the Abu Dhabi Investment Authority.
Still, Avison Young Head of Tri-State Investment Sales James Nelson said that, on the whole, some of the investment sales pricing in the city hasn’t been seen in a decade.
“Ten years ago, the 10-year treasury was at 2.6%. Today it's under 1%,” he said. "If you can lock in good 10-year financing, the cash on cash returns you can get today, I haven’t seen them in my 22-year career."
“If you take the second quarter and the third quarter and you compare it to 2019, the price of land dropped 30%, multifamily was [down] 29%, office and retail [down] 24%," Nelson added. "The only thing we have to compare this to is 2009, when sales volume dropped 90% from 2007.”
Newmark Capital Markets Debt and Structured Finance co-Head Dustin Stolly said borrowers who have a "fighting chance" are being given more time in the form of forbearance.
“The distress will be situational and asset-specific," he said. "It will take a while for it to pop its head up. There's plenty of capital in the system."
Though President-elect Joe Biden's victory and the vaccine rollout have been shots in the arm for New York City and the panic phase of the crisis has passed, brokers agreed there is still a ways to go before activity and prices return to their pre-pandemic levels.
“It was a year in which the pandemic converted a 53-monthlong correction in investment sales from a volume correction to a value correction,” said JLL New York Investment Sales Chairman Bob Knakal, adding that October 2015 is when the bull market officially ended.
Buyers offered less and sellers have balked at their offers this year, so Knakal expects this sales volume to hit a cyclical low in 2020.
“I thought the savings and loan crisis was the worst thing I ever saw, and that was only 47 months," he said. "This is 62 months now and not over yet."
Knakal said he sees rays of sunshine in the luxury residential market's recent uptick, which could bode well for the coming months. Overall, he says Manhattan values have taken a bigger hit than the outer boroughs, likely because it has seen the largest drop in population.
B6 Real Estate Advisors Senior Managing Director D.J. Johnson, who handles the firm’s Brooklyn business, says there has been an increase in transactions this month as the market has begun to find its footing. There were around 25 transactions over $1.5M per month in the third quarter, he said, but that figure will be closer to 50 in December.
He recently sold 617 Johnson Ave., a 15K SF warehouse on the border of East Williamsburg and Bushwick, for roughly $500 per SF, which he said shows the resiliency of that particular asset type.
“What we’re starting to see is confidence in the market,” he said, adding that price drops on properties will vary significantly. In some cases, there is no discount, and in others, it could be as much as 30%.
He noted the investment sales market has been hit by increasing taxes, rent reform and now the health crisis. As businesses start to stabilize, he said he expects the city to begin to recover.
“The biggest hurdle out of the pandemic was price discovery, investors knowing what they are underwriting against,” he said. "It's not that they are expending higher-yield debt so low; it’s that they just don’t know what cash flow is like. It’s been a big learning experience these last six months trying to figure out how to price."