NEW YORK CITY-Despite the concerns of some investors and market watchers, CRE in Manhattan appears to be thriving. Valuations for prime office properties in Manhattan are approaching levels established at the 2007 market peak and valuations for similar quality multifamily assets already have surpassed peak pricing, according to an office & multi-housing capital markets report released Monday by CBRE Global Research and Consulting. The report found that strong investor demand for top notch Manhattan office and multi-housing assets is expected to result in select properties trading at valuations surpassing their peak pricing levels of 2007.
Mark Godfrey, VP, CBRE’s valuation and advisory services group, tells GlobeSt.com, “There’s always demand for trophy assets in proven, gateway markets like New York. I think we’ve seen this before where New York outperforms rest of the country,” he says. “Mix the availability of capital with the lack of return of other investments and its simple math: demand is going to rise, which pushes prices up.”
Among the report’s other highlights: capitalization rates remain at lows approaching the levels of the 2005 to 2007 market peak; prime yields are forecasted to remain low; debt capital is more widely available than at any point since the market peak; underwriting standards are more conservative but a higher number of lenders are in the market and are more aggressively pursuing assets than at any time since the 2008 financial crisis, according to CBRE.
Also, a greater number of Class B assets sold in 2012 compared to previous years as investors felt comfortable chasing higher yields; and fewer trophy assets sold in 2012 than in 2011. Fewer trophy asset sales occurred only in 2009 and 2010, the years immediately following the 2008 global financial collapse.
The small number of trophy sales is not due to disinterest by investors, CBRE notes. Rather, the limited number of properties for sale has made owners hesitant to sell trophy holdings, the company’s report explains, as there may not be a worthwhile reinvestment option. As a result, there have been an unprecedented number of partial interest transfers, refinancings and recapitalizations, which allow owners to monetize an asset while retaining the option to sell at a later date.
Or put another way, Godfrey tells GlobeSt.com, “Investors are working to unlock some of their capital but there isn’t enough product on the market to give them the chance to reinvest. There are opportunities in Midtown South, because of the increase in rents there, and there’s also interest in the Meatpacking District and the area around 200 5th Ave. But these properties are 100,000 to 200,000 square feet; whereas Midtown features buildings with 500,000 square feet to 1 million square feet.”
Meanwhile, Manhattan multi-housing rents have passed their pre-recession highs. Even when inflation is taken into account, multi-housing rents are at the highest levels recorded since CBRE Econometric Advisors began its index in 2000.
“We are seeing pricing in Manhattan approach pre-recession peaks for the best assets in New York City,” says Bill Shanahan, vice chairman, CBRE Investment Sales Institutional Group, in the release. “Capitalization rates are near 2007-levels, but with current low-cost financing the returns are actually better now.”