Northern Manhattan market report: Some 2008 sales trends will continue into this year

2008 will go down as one of the most challenging years for investment property sales. For the year, Northern Manhattan saw a total of 210 transactions representing $736,627,456 in aggregate consideration. Compared to 2007 figures, trading volume decreased by 50% and dollar volume declined by 59%. Several factors led to these significant declines. First, whereas a large portion of 2007 trading activity came from the sale of portfolios valued over $50 million, financing for transactions of this size was not available in 2008. Second, while several transactions took place for properties below $50 million, there continues to be a disconnect between most sellers and buyers with regards to pricing as sellers cling to prices they are used to seeing from 2004-2007 vis-a-vis buyers believe price declines are more significant than they actually have been. As is the case throughout much of the New York area, townhouse shells and development sites shared the steepest declines. Lack of available financing and uncertainty about where sell out values will be upon project completion are the key downward pressures. These obstacles have proven much steeper for projects that require over $10 million in financing for acquisition and development. That being said, our team's recent sales and current marketing efforts for similar sites suggests that prices have not softened as much as many buyers would prefer. 228-38 East 117th St., 221 West 116th St., and 168-70 East 112th St. all traded this past year for prices about 15-20% below the highs they would have seen from 2005 to 2007. The key difference is the buyer pool, for while developers are still actively bidding on projects, they are being outperformed by several cash heavy owner-users and non-profits that have not seen prices at these levels in years. While townhouse activity is challenging from a seller's standpoint, it represents a tremendous buying opportunity for investors and users. For the first time in a long time, buyers can look to convert not only for future owner-users but can also reposition for rental income. Rent regulated multifamily buildings are proving to be the most resilient of Northern Manhattan real estate assets for several reasons. First, they not only provide cash flow today with future upside, but regulations also provide some level of downside protection. Second, assets with cash flow can still obtain financing from several regional and local banks. Since price points for uptown properties are typically below $25 million, this financing is readily available for Northern Manhattan buyers. While inventory is steadily increasing, owners that price and expose a property appropriately can rest assured that they will receive numerous offers at prices close to historical capitalization rates. The institutional financing available in 2006 and 2007 led to a surge in large portfolio sales was non-existent in 2008. As a result, several portfolio operators listed properties separately instead of as a package. We believe that this trend will continue through 2009 as local banks continue to do most multifamily lending and as owners capitalize on better prices they receive with smaller price points. This proved to be the case with several buildings we put in contract in November around Lexington Ave. and East 100th St. The contract prices for these assets show lower prices per s/f and rent multiples but reflect cap rates just above 5% capitalization rate. An interesting aside to these transactions is that the bidding pool is not only made up of recent and past Northern Manhattan buyers but also landlords of similar tenement buildings located in the East Village and Lower East Side. As investors price in softer retail and free market residential rents, investment properties with a significant portion of rent coming from such units should expect properties to trade at higher cap rates. While this reflects less upside, owners of such free market buildings also see prices that are much higher on a price per s/f and price per unit basis. Several major Northern Manhattan projects made progress in 2008 and should continue to do so in 2009. In October, the city announced plans for a 1.7 million s/f mixed-use and mixed-income project along 125th St. between 2nd and 3rd Ave. According to the Starwood Hotels, their new A-Loft subsidiary is scheduled to open at 2296 Frederick Douglass Blvd. in June 2010. Finally, the 2008 passing of the re-zoning initiative has laid the groundwork for a future transformation of the historic corridor. We look forward to our continued efforts in providing the Northern Manhattan community with the most informative and insightful market knowledge available. Shimon Shkury is managing director and partner for Northern Manhattan, the Bronx, and Westchester for Massey Knakal Realty Services, New York, N.Y.