NYC's Investment Market Has Started To Thaw As Prices Drop

The pace of New York City commercial property sales picked up in the last quarter of 2020 as sellers started dropping their prices.

Last year, $8.5B worth of Manhattan commercial property changed hands across 160 transactions, according to Avison Young data released Wednesday. That marks a 51% drop in the sales volume from 2019, per the brokerage. Overall, 2020's dollar volume was 66% below the 10-year average.

"In the second quarter, a lot of us, myself included, we were deer in headlights ... there were people in the summer saying, ‘OK, there is going to be a vaccine and it's just a matter of time,'” Avison Young's Tri-State Investment Sales Group principal James Nelson said.

“Sellers are [now] saying, ‘Hey, if I was looking for a quick rebound, that’s not going to happen, we're going to be in this for a while. If I need to sell, if I need to do something, better now than have to wait years to get through this.'”

Overall, $2.2B worth of properties sold in the final quarter of 2020. Multifamily and mixed-use sales total reached $512M, a 35% increase over Q3, but the average price per SF plummeted 15% from the previous year to hit $834, and cap rates went up 51 basis points to reach 4.85%.

The office sector saw $1.4B in sales during the quarter, and just $5B in total dollar volume in the entirety of 2020, which is a 47% decrease from 2019. Price per SF in that asset class slid by 6% year-over-year and cap rates held firm at 4.5%.

Sales in the long-troubled retail sector tanked in the fourth quarter, with total volume diving 68% to hit $60M.

The average price per SF went down 25% to reach $1,538 per SF. In the development market, there were 10 transactions throughout the quarter for a total of $152.3M — and while that figure was a significant jump on the previous quarters, it is a 58% drop from Q4 2019.

Nelson, who expects it could take years for prices to return to pre-COVID levels, began seeing many long-term owners opting to sell toward the end of last year, and predicts that trend to continue through 2021. The recovery of the market, he said, hinges heavily on the office leasing market and companies returning to their workplaces.

“We are all watching very closely what's happening with [Facebook, Apple, Amazon, Netflix and Google]," he said. "On the one hand, they are saying they are giving employees the options, but they are also taking more space as well ... We need those high-paying jobs, and we need people to return to New York." 

Major deals in Q4 included One Union Square South, which Related Cos. sold for $211M to Argentinian firm Raghsa, making it one of the biggest multifamily transactions since the onset of the coronavirus crisis. Thor Equities sold its retail property 164 Fifth Ave. to a member of the Qatari royal family for $40M, a deal that made up two-thirds of retail sales in the quarter.

In a blockbuster deal for the year and the country's largest office sale during the pandemic, SL Green sold 410 10th Ave. to 601W Cos. for $952.5M. The building is anchored by Amazon.

“I think that New York City is going to need a while to fully recover, but there will be a real uptick in activity over the next two or three quarters,” Ackman-Ziff Managing Director Marion Jones said. “There is transactional demand, and after a while, people have to make business decisions about their portfolios. It is not sustainable not to make decisions for a year or more.”

Like many brokers, she is seeing investors seeking to deploy capital and invest outside of the city, but doesn’t expect that to be too damaging.

"The story of a flight of capital outside of New York City to me is not so threatening,” she said. “Right now, there is a ton of investment going into some Southeastern markets because those markets do have good talent pools. I think we are going to see that trend continue, but at the same time, we will see that pendulum swing back to New York City. It’s very hard to compete with the city when it operates the way it's supposed to.”

Real estate players are pinning their hopes on federal funds flowing to the city, which most believe is likely with the Biden administration soon to take office and New York Sen. Chuck Schumer set to become Senate majority leader.

Still, there is growing angst about various state and city policies amongst the industry. A new tax on second homes in New York, known as the pied-à-terre tax, is a priority for the state legislative session this year, which has riled the industry. Many are still smarting from Amazon’s departure two years ago, and blame the sweeping rent reform for pummeling the multifamily market.

Meridian Capital Group Senior Executive Managing Director David Schechtman said that unlike in 2008, sellers have accepted quickly that there has been dislocation in the market and their prices have come down. He remains concerned about anti-business sentiment in the city and capital flowing out of the city.

“I have handled $7B worth of sales in the past almost 15 years, and six years prior as an attorney, and never have I see such headwinds like we are facing today,” he said, adding that he is working with people who are looking beyond New York to places that are “not hindered by a socialist City Council.”

“What’s fascinating about Q4 was the recognition by material and credible owners nationwide and globally, who see the barrier to entry in New York — i.e. pricing and competition for assets — diminished,” he said. “Once you lower that barricade to entry, there are people waiting in the wings.

"New York, at the end of the day, will always rise.”