Expensive land, high seller expectations and a complicated legislative environment all led to the sales market taking a beating in 2019.
There have been fewer buildings trading, observes Savills’ Woody Heller of the lower totals. Volume is down from 2015’s high of$59.9 billion to what is expected to total $35.6 billion for 2019.
“The rules of the game were changed for residential, and that changes the values,” says Douglas Harmon of Cushman & Wakefield, nodding to legislation that changed laws for residential development and rent-stabilized housing.
For buildings with all apartments under rent stabilization, the value may be down 30 percent or more, says Andrew Scandalios of JLL about the dramatic price drop that has roiled both owners and lenders.
“Values from 2015 across the board are down, but the toughest sectors are retail, hotel and residential and retail condos,” adds Scan-
Lower retail rents have hurt those who own the stores. “When rent goes from $600 a foot to $400 a foot, that is a diminution of value,” he says.
Since the residential condominium market has been oversupplied with luxury product, that market is also challenged, says Newmark Knight Frank’s Dustin Solly, who focuses on capitalizations.
Bob Knakal, also of JLL, notes some portions of the office sector are already benefitting from the residential rout. “Investors who have historically purchased multifamily [buildings] are turning to small office buildings,” Knakal explains.
But that added competition is one reason office buyers like Kevin R. Wang of KRW Realty Advisors have a difficult time adding to their portfolios. “Pricing is high, and it’s hard to find good opportunities,” Wang says.
“Every asset class has some headwinds,” adds Harmon.
While the average price per foot for Class A offices peaked in 2015 at $1,158 per foot, 2019 did hit $1,069 per foot — up from a mere $1,000 per foot in 2018.
Office sales remain somewhat steady, however, because office rents have surged.
The average office asking rents leaped from $73.36 in 2018 to $80.43 in 2019, CBRE found. “But the cost to retain and attract tenants has doubled,” says Harmon. For that reason, owners continue to invest millions of dollars into upgrades from lobbies to roof decks and amenity floors.
For instance, the next owner will upgrade Paramount Group’s 36-story 900 Third Ave.’s 598,000 square feet that is being marketed by Harmon, who says, “New York is viewed as a safe spot to invest with both appreciation and liquidity.”
‘New York is viewed as a safe spot to invest with both appreciation and liquidity.’
– Douglas Harmon, Cushman & Wakefield
It’s one reason Related, the developer of WarnerMedia’s offices at 30 Hudson Yards, paid $2.2 billion through Harmon to buy and lease
them back to the media company for ongoing rent.
Gregg Kraut of K Property Group, who owns small office buildings in the Nolita area, agrees: “This is one of the most liquid markets (in the world).”
Because interest rates remain low and the American economy is generally strong, there is confidence in investing in American assets.
Eric Michael Anton of Marcus & Millichap says the US “is keeping the whole world out of recession.”
There is still “lots” of money coming into New York from US companies’ pension funds, plus a range of private capital, says Darcy Stacom of CBRE.
She recalls many of 2019’s sales took years to complete. “There was a rare amount of complexity that went behind them,” she says.
For instance, the 99-year lease of a portion of the Morgan North Post Office facility at 341 Ninth Ave. to Tishman Speyer took four years.
477 Madison Ave. was in litigation for four years until its sale to RFR for $258 million.
There is also a growing excitement in the market over upcoming offerings.
Viacom hired Stacom to review its entire portfolio and will likely sell the old CBS office building, Black Rock, at 51 W. 52nd St.
While retail space owners bemoan the reduced rents, the rise of e-commerce is boosting industrial buildings that bridge the “last mile” from large warehouses to the consumer’s home. “The biggest bright spot is logistics,” says Scandalios, citing the official name for the industrial warehouse market.
Nevertheless, warns Harmon, “Every deal has to be priced right and have a good story to get that right price.”