Manhattan Investment Sales Market Sees Most Dollar Volume Since 2018 In 'Dramatic' Turnaround
After nearly two years of depressed activity, New York's investment sales market rebounded with force to close 2021, with capital flow in the fourth quarter reaching a level not seen since 2018.
There were 100 large investment sales transactions in Manhattan in Q4 that combined traded for $6.2B, the highest dollar volume since the third quarter of 2018, according to an Avison Young report released to Bisnow.
The strong fourth-quarter numbers reflected two years of pent-up demand and demonstrate growing investor confidence in New York’s economic recovery, particularly its office and multifamily markets, investment sales experts told Bisnow. Although experts caution that the market’s explosive growth may have been inflated by fears of potential regulatory changes, they say the overall picture is one of momentum toward a true recovery.
“It’s a dramatic and much-needed result,” said James Nelson, head of Avison Young’s Tri-State Investment Sales group and one of the authors of the report. “There’s a lot of momentum, and I’m very optimistic for the first quarter of this year, although I think it’s going to be tough to replicate this kind of volume and sales activity because a lot of it was driven by external forces. But we’re heading in the right direction.”
The surge in dollar volume was driven primarily by sales of office assets, specifically a handful of high-profile Class-A properties. Although office assets were just 14% of total transactions, the sector’s $3.55B in dollar volume was responsible for 56% of Manhattan’s quarterly total. Q4’s office dollar volume was an astounding 431% increase over the trailing four-quarter average, and it was more than 60% of the year's total volume.
Leading the charge was CommonWealth Partners’ December purchase of Hudson Commons at 441 Ninth Ave. At $1.3B, it was the largest New York investment sale since 2019. (Google's deal to buy St. John's Terminal for $2.1B hasn't yet closed.) GFP and Northwind’s $850M sale of 100 Pearl St. to Germany's Commerz Real was the quarter's second-largest transaction, just ahead of ViacomCBS’ $760M sale-leaseback agreement for its news division’s longtime headquarters at 51 West 52nd St.
“The fact that we’re seeing these massive deals happening again is a really positive sign for the marketplace,” said Aaron Jodka, Colliers national director of Capital Markets Research. “I think we’ve turned the corner, so to speak, from a capital markets standpoint.”
Avison Young tracks all commercial transactions over $5M and retail deals over $1M. For all of 2021, the brokerage tracked more than $10.3B of capital markets deals, up from $8.5B in 2020 but far below the years before the pandemic, when volume fluctuated between $17B to over $30B.
Big-ticket sales are coming back into favor partially because of macroeconomic tailwinds pushing investors, particularly from Germany and South Korea, back to Manhattan trophy properties, Brookfield Managing Partner Ben Brown said at Bisnow's New York State of the Market event last month.
"Hedging rates have come in meaningfully, so Korean capital, German capital, a lot of the foreign capital that, in good times, really fuels the pricing competitiveness in markets like New York and global markets like that, it’s back in favor," Brown said.
Multifamily and mixed-use properties accounted for the highest share of total sales at 46%, and although the sectors represented just 23% of total dollar volume, the total of $1.47B was still a 190% increase over the trailing quarterly average. The total of 46 transactions was the highest since 2018, with the leading transaction Empire State Realty Trust’s year-end purchases of 90% stakes in 561 10th Ave. and 345 East 94th St.
Experts point to other signs of momentum in Manhattan’s multifamily sector: luxury condo sales returned to pre-pandemic levels, along with a surge in pricing and tightening cap rates.
Nelson said that although he expects momentum to continue into 2022 across asset classes, the skyrocketing growth trajectory seen last quarter is unlikely to continue. In addition to pent-up demand, he said the fourth-quarter numbers were likely inflated as fears about rising tax rates and other regulatory changes incentivized investors to close deals as quickly as possible.
On a local level, he points to uncertainty surrounding the fate of the 421-a tax abatement — considered vital to market-rate multifamily development — which expires in June. With the future of the abatement in doubt, owners of multifamily development sites rushed to close deals prior to the new year.
Nelson also cited previous concerns that the Biden administration’s Build Back Better plan would end 1031 exchanges, in which profits from a property’s sale are put into another property to avoid capital gains taxes.
“It reminded me of December 2012, which was the year right before they raised the capital gains rate, and we had exceptional activity in December of that year as well,” Nelson said. “A lot of our clients were saying they wanted to get deals done and get these exchanges teed up before the taxes potentially went up. So even though none of that came to pass, it had a massive impact.”
Jodka said those concerns impacted investment sales markets well beyond Manhattan — but macro trends tend to be amplified in the nation's largest commercial real estate market.
“We recently surveyed a number of our clients to really try to get a handle on investor sentiment, and one of the biggest concerns for our clients is tax law changes and government regulation and policy,” Jodka said.
Amidst the general optimism surrounding Manhattan’s capital markets heading into 2022, investors say office still presents the greatest area of uncertainty. Despite the fourth quarter’s enormous office dollar volume, the capital flow has been almost exclusively into Class-A properties. This flight to quality has left a tremendous amount of uncertainty regarding the fate of the lower end of the market.
“There’s been this dichotomy between Class-B and Class-A office, and Class-A office has been a clear winner in the pandemic,” Meridian Capital Senior Managing Director Ronnie Levine said at Bisnow's event. “The lenders chase these deals, and there’s a bidding war to provide debt to these Class-A buildings, and the B sector is probably underserved right now. There are potentially opportunities there, but there are certainly opportunities there for risk.”
CORRECTION, JAN. 11, 8:25 A.M.: A previous version of this story incorrectly stated that Q4 2021 had the highest dollar volume of investment sales in Manhattan since 2008. It is the highest dollar volume since 2018. This article has been corrected.