NYC's Investment Sales Showed Signs Of Recovery In Q1, But Development Likely To Slow Down

The New York City investment sales market shows signs of turning a corner across most asset classes as the city enters its post-pandemic era, but development could be poised for a slowdown as the state deliberates subsidies for affordable housing construction.

NYC’s real estate investment sector appears to be shaking off the worst of the pandemic, according to Avison Young Q1 data provided first to Bisnow.

The office, retail and multifamily markets all appear to be on the verge of growth, the data shows. But despite a severe housing shortage in New York, development’s immediate future is cause for concern as the fate of the 421-a tax break hangs in the balance and so-called good cause evictions unnerve landlords.

“The amount of momentum coming out of last year was really good,” said Avison Young Tri-State Investment Sales Group principal James Nelson, citing a combination of pent-up demand among investors and property owners sitting on assets during recent quarters until their properties reached higher values. “We had not seen this for years.”

In Q1, 87 sales closed across all property types totaling $5.4B, according to Avison Young's data. That is down from Q4, a typically busy quarter, but it is well above Q1 2021's volume of 34 sales totaling $1B.  

“There were tax-motivated reasons why the end of last year was such an exceptional quarter,” Nelson said. “We had long-term owners who had decided to transact because they were afraid that either they would lose the 1031 exchange, or, if they were cashing out, the capital gains rate would go up.”

If the rest of 2022 continues at this pace, Avison Young predicts that NYC sales volumes will be more than double 2021’s total. But a breakdown of movement in each asset class foreshadows potential wobbles for development, despite office and multifamily moving fast.

Multifamily led all asset classes in the number of sales closed in Q1 with 54% of total sales, while development trailed behind at 16% and office at 13%. Office sales made up 62% of the total dollar value, with multifamily taking up a further 30% and development accounting for just 6%.  

“We've been incredibly busy on the multifamily front," Nelson said. "There's been a lot of appetite.”

The $873M sale of the American Copper Building to Black Spruce was the largest multifamily deal of the quarter. Other notable deals included 354 East 91 St., which sold for $128M, and a largely rent-regulated 2481 Broadway property, The Roxborough, which sold for $60M.

Nelson also voiced confidence in the office market, in which Q1 sharply rebounded from the lows of 2021. There were 11 office sales bringing in a total of $3.3B during the first quarter of this year, up from just four sales totaling $88.9M in the same period last year.

Nelson said the largest office deal by far was Google's purchase of St. John's Terminal. The 550 Washington St. property sale to Google completed for $1.97B this year, a little below the initial $2.1B announced when the deal was first reported last September.

“That was a huge, huge vote of confidence for New York, saying, ‘OK, we believe in New York, we want to take a long-term, we're going to continue to make a long-term investment here,'" Nelson said. 

Other significant sales pushing Manhattan’s office market on an upward trajectory included Extell’s $927.5M purchase of the Disney Campus Portfolio, and the Macquarie Group’s $130M deal for a fully leased building at 375 West Broadway whose tenants include design house Gucci, music streaming platform TIDAL and a crypto exchange. 

Retail lagged behind the multifamily and office markets, with just $101M in total dollar volume across 10 sales. But those 10 sales represent a 9% increase in total sales off the trailing four-quarter average, leading Nelson to believe that retail is budding and preparing to bloom.

Retail property values have suffered a huge value erosion since their highs in 2015 and 2016. In the years since, e-commerce, falling tourism numbers and the pandemic battered retail revenues in Manhattan, forcing sales to plummet in volume and value. 

Those effects aren’t equally spread across the city. Low levels of office attendance and high numbers of employees continuing to work remotely have resulted in retail suffering particularly badly in Midtown and FiDi, said Nelson, while neighborhoods like Brooklyn’s Greenpoint and Manhattan’s Lower East Side have been less impacted.

The conditions surrounding Manhattan’s retail market provided chances for real estate investors with capital to snap up some of the borough’s most sought-after locations during Q1. The biggest deal was 121 Spring St., a vacant 3,800 SF condo purchased by Acadia Realty Trust after being sold via foreclosure in early 2021.

“High street retail has just been punished,” Nelson said. “But I think the pendulum has swung too far. We're very bullish on retail.”

New York City's industrial sector is seeing exceptional levels of investor demand, Nelson said. 

Early last month, 620K SF of industrial space in Queens, at 184-10 and 184-60 Jamaica Ave., sold for $73.5M to developers KABR Group and FCA-Orbita Group, despite having different features to traditional, suburban-style industrial spaces.

“I think that narrative continues that we're gonna be able to figure out a way to get goods to New Yorkers and that industrial users are going to have to learn to become more flexible,” Nelson said.

But development’s future in Manhattan gives Nelson pause. While Q1 2022’s $302M in sales represented a 26% increase on the trailing four-quarter average, Nelson told Bisnow that the 421-a Affordable New York tax break’s uncertain future could result in an imminent slowdown.

“The total dollar volume has stayed pretty static. It’s a far cry from the type of development that we saw in 2015,” said Nelson, adding that this long-running slowdown is making existing properties more expensive, pushing up rents and the dollar value of deals despite significant demand for housing.

With 421-a set to expire in June and rental profits under threat of NYC’s proposed Good Cause eviction law, Nelson says developers are hesitating. Exacerbating the slowdown is the tax break’s proposed replacement, a measure called 485-w, which is designed to create deeper levels of housing affordability and is unpopular with developers.

“This is going to really decrease land value, certainly in prime locations," Nelson said. "If you run the numbers based on the main requirements and the cost of development, the land value in some places dropped by a third."

As a result, Nelson believes that 485-w is likely to result in property owners holding onto assets rather than selling to developers, meaning that more affordable housing will be built farther and farther away from the city center.

“You're going to see luxury condos,” he said. “You're not going to see the kind of market-rate apartments that we desperately need.”