Manhattan Investment Sales Have Just Barely Started To Pick Up

The investment sales market for Manhattan commercial real estate had its strongest quarter since the onset of the coronavirus pandemic between April and June, but it is still plagued by a dearth of big-ticket sales and lower valuations.

Only five Manhattan office buildings changed hands in Q2, after four such transactions the previous quarter, according to Avison Young's newly released investment sales report. The average price per SF was $1,039 per SF, up from the pandemic average but down 8.5% from Q2 2019's average of $1,135 per SF.

Across all asset classes in the borough, $1.8B in sales across 51 transactions closed last quarter, according to Avison Young, which comes out to around $35.3M per transaction, down from $63.2M in Q2 2019.

The lack of investment capital changing hands has diminished Manhattan's standing among real estate markets: Boston has passed it as the most liquid real estate market in the country for two straight quarters, according to Real Capital Analytics.

For the year, Manhattan is on pace to have lower dollar volume change hands than 2020, even as the total number of sales is expected to surpass last year's volume, according to Avison Young.

“[Q2] was the best quarter that we've seen since Covid. The first quarter was the worst,” Avison Young Tri-State Investment Sales Group principal James Nelson said. “So, in 2021, the first quarter was really a hangover and now … you see a big spike in sales. So even though it's up, when you compare it to 2020, it doesn't look great.” 

Nelson said the lack of activity is a sign of seller patience amid a market where occupancy has been slow to return: Office buildings in New York City were only 21.9% occupied the last week of June, compared to a national average of 32.7%, according to building security firm Kastle Systems.

“Commercial leases are longer-term leases and so, a lot of companies are waiting to see what their return to work will look like,” Nelson said. “There wasn't this immediate urgency [last quarter].” 

It could take up to another year for the office sales market to re-establish itself, Compass Vice Chair Adelaide Polsinelli said in an interview. 

“Once there is no sense of any distress, then I think it's work, it’s back to usual business, it’s back to building’s trading again,” she said. “What we want to see is a more solid foundation built by more trade and more confidence in New York City's market.” 

The full fallout of the virus for Manhattan office has yet to be seen, she said, and values are likely to come down.

“It’s going to take time … owners who have bought an office building any time between 2017 to 2019, you’re probably going to have some pain, especially if you bought at a higher price, and your loan is at a number that's not feasible today,” Polsinelli said. “What's going to happen is that those are going to have to get shaken from the tree, they've got to get settled and they've got to get worked out.” 

The largest office sale was California-based Spear Street Capital’s $325M purchase of 635-641 Sixth Ave. from SL Green. 

Polsinelli has sold two retail and office buildings along Fifth Avenue, she said, including 604 Fifth Ave. to Minamoto Kitchoan for $45M.

“That's not your typical office building per se, but it does send a message that prime locations are still commanding some attention,” she said. “It's always been the rule of real estate: location, location, location. It's also timing, timing, timing. If you can find the greatest location at the best time — the lowest point in the cycle — you're ahead of the game.”

As prices fall and Manhattan's historical buyer pool waits for the market to stabilize, a new class of buyer has emerged to cash in on deals, Polsinelli said.

"Just about 90% of my deals have been new buyers or international buyers," she said. "They're new to New York, they're new to the market or they haven't purchased before finding that those buyers have a use for the property for the most part, or see opportunities in New York City real estate, that they would not able to get involved in in prior years." 

These buyers are more interested in opportunities to get in on the market, rather than the asset class under which the purchase falls, she said, adding that it's a dynamic she hasn't seen in her five cycles of brokering deals in Manhattan.

Negotiations on many deals only began when vaccine efforts first started to ramp up, Nelson said. Vaccination rates among New Yorkers have only risen since then, with around 70% of Manhattan residents fully vaccinated as of Monday, according to the New York City Department of Health. 

“These sales reports are rearview indicators,” he said. “You can see the direct correlation between the vaccination rollout and contracts being signed.”

Q2 multifamily investment sale data illustrates more immediately where the recovery is going, Nelson said. 

As the mass migration back to New York began this quarter and the residential market picked back up, the number of apartment buildings sold in Q2 was twice the trailing four-quarter average; a total of 28 buildings changed hands.

“Residential again has already turned,” Nelson said. "We kind of know what that looks like, we can already see the recovery there."

That activity is still down from Q2 2019, when 39 Manhattan multifamily buildings traded at a time when rent regulations were the source of dampened deal volume.