David prevails over Goliath: N.Y.C. middle market commercial real estate outpaces 2009 institutional market

2009 has been a year of frustration, head scratching and waiting for most N.Y.C. commercial real estate investors and professionals. The dollar volume for N.Y.C. sales transactions for the first three quarters of 2009 declined by an estimated -79% compared to the same period in 20081. However, the 1,977 N.Y.C. sales transactions reported to the CoStar Group in the first three quarters of 2009 represented only a decline of -26% when compared to the 2,671 sales transactions during the same period for 2008. The sales data highlights the trend that the middle market (sales under $25mm) has been more active than the institutional market in 2009. Manhattan has higher valuations, a higher variance in asset size, and is more heavily weighted toward institutional-size assets for which financing does not exist. Sales over $100 million have been few, with only nine sales transactions over $100 million in first three quarters of 2009 (compared to 62 sales transactions for same period in 2008). As a result, prime Manhattan had a -37% reduction in the number of reported sales transactions and an -82% reduction in dollar sales volume reported to the CoStar Group for the first three quarters of 2009 compared to 2008. The largest single asset sales for the first three quarters of 2008 and 2009 were the GM building and Worldwide Plaza, respectively. However, the difference in size and level of distress for the two largest transactions are indicative of the challenging times facing the Manhattan institutional-grade investment property and office leasing market in 2009. In July 2009, Deutsche Bank essentially took back Worldwide Plaza and the building had a high vacancy rate (58.3% leased as of Nov. 2009) and sold the note for the equivalent of $356 per s/f. The GM building previously sold for $1,400 per s/f in June 2008. Investment sales transactions in N.Y.C. below $25 million reported to the CoStar Group for the first three quarters of 2008 comprised 30.6% of the total dollar volume and increased tremendously to 51.3% of the total dollar volume reported for the same period in 2009. Furthermore, the 1,952 reported middle market transactions represent all but 25 sales transactions, or an estimated 98.7% of the total transactions reported to CoStar Group. Strong middle market demand has been led by the long-term private and family ownerships that were either net sellers or on the sidelines during the market run-up from early 2000s through the 2007 peak. These private investors are re-surfacing to enable liquidity and activity in the market, often at lower leverage ratios and in some cases, no debt. The supply of middle market investment properties in the past two years has been fueled by the private equity funds that entered the middle market arena with package and portfolio acquisitions of smaller assets looking to prevent further capital losses, create liquidity, or unwind legacy funds. The multifamily sector remains strong, as Fannie Mae continues to lend on multi-family properties. A -29.4% reduction in number of reported multifamily sales transactions is the second lowest decline of the main asset types. The only sector that had a larger percentage decline in the number of sales transactions (-70%) than the percentage decline in dollar volume (-54%) was the hospitality sector, which is based on a smaller sample size. Dollar volume there was boosted by Brack Capital's $123.1 million sale of the Hilton located at 63-67 W. 35th St., and also the Lam Group's $99 million sale of the Fairfield Inn at Times Sq. The boroughs of Brooklyn and the Bronx displayed the lowest decline, a -19% drop in the number of sales transactions reported to the CoStar Group for the first three quarters of 2009. These results are consistent with the fact that these two boroughs have a higher percent of assets that fall into the more active middle market segment, when compared to prime Manhattan (south of 96th St.) 1. Excludes Staten Island. Data obtained and calculated from transactions as reported by The CoStar Group. Matthew Slonim is COO of The Besen Group, New York, N.Y.