In the first half of 2010, we have seen a significant increasein the number of investment property sales in New York City. Iunderstand, from speaking with many of you across the country, thatthis trend is being seen elsewhere and, while perhaps it is not assharp and increase as in New York, the trends are positivenonetheless.

|

In all of 2009, 1436 properties were sold in the Big Apple and,in the first half of 2010 (1H10), there were 818 buildings sold.The dollar volume of sales also increased significantly, going from$6.26 billion in all of 2009 to $6.49 billion in 1H10.

|

The projected annualized increase in the number of buildingssold is 14% while the annualized dollar volume increase isprojected to be 131%. These figures illustrate two very tangibledynamics. The first, and most obvious, is that activity is pickingup significantly and, the second is that the average sale price oftransactions is increasing sharply. The average sales priceof a New York City transaction in 1H10 reached $7.9 million, upfrom $4.4 million last year.

|

We believe that, although we have seen very significant volumeincreases thus far in 2010 from 2009 levels, the activity will pickup even more dramatically during the second half of the year asseveral important factors come into play.

|

The first of these factors involves distressed assets. We areseeing distressed properties and notes coming to market in muchgreater frequency as lenders and special servicers look to takeadvantage of current market conditions. As I have written aboutfrequently on StreetWise, current demand substantially outweighssupply leading to achievable pricing that is surprising (to theupside) many market participants. Lenders and servicers have beennoticing the recovery possible on these sales which is proving tobe compelling.

|

Additionally, the Fed’s highly accommodative monetary policy hasallowed for a massive recapitalization of the banking industry overthe past two years. The profitability these banks have enjoyed isaffording them the ability to absorb losses incurred due to thedisposition of distressed assets. Many have indicated a desireand/or a need to clean up balance sheet problems by the end of2010. We believe that we will see increasing activity with respectto REO and note sales as this balance sheet cleanup occurs and thenecessary deleveraging process occurs.

|

The second factor revolves around the interest rate environment.Rates hover around record lows as the Fed is keeping them there tohelp stimulate the economy. Trouble in Europe has created a flightto safety and quality which has exerted significant downwardpressure on Treasury rates. The 5-year has been well below 2% forweeks and the 10-year has been below three for a good part of thatperiod. This is keeping commercial lending rates down, which, inturn, is keeping capitalization rates down and prices up. Aseconomic indicators are weak and not responding they way anyonewould like them to, it would appear that the Fed will keep rateslow in the short to medium term, unless of course, indicatorsdramatically improve. This low interest rate/high value dynamic isluring both distressed and discretionary sellers alike.

|

The third factor involves tax policy. We are seeing significantactivity from discretionary sellers who are concerned that capitalgains tax increases in 2011 will create a disadvantageous sellingenvironment. We have received dozens of exclusive listings over thepast few months from discretionary sellers who are desirous ofbeating the capital gains tax increase.

|

If you do not believe that tax policy impacts private sectordecision making, look no further than the dreaded New York Statecapital gains tax (the “Cuomo Tax”) increase implemented in theEmpire State in the 1980’s. This tax was an additional 10%tax on top of the existing capital gains tax on any property saleover $1,000,000. Then Governor, Mario Cuomo, felt that this tax on“rich real estate investors” would raise needed revenue for thestate. Transaction volume slowed to a crawl during this period.Ironically, when the tax was eliminated, the tax dollars collectedactually increased as transaction volume exploded.

|

If we examine history, it is not surprising that we are seeingthis activity in anticipation of a tax increase. In 1981, whenRonald Reagan announced tax cuts, which would become effective in1983, economic activity ground to a halt in anticipation of a moretax-friendly environment. Today, the reverse is true and, as theyanticipate a less friendly tax environment next year, investorswill be rushing to get transactions done this year.

|

These factors will increase the supply of properties for salewhich will increase transaction volume across the board. Demandexceeds supply to such an extent that this additional supply shouldnot impact value in a negative way…..at least for the rest of2010. We, therefore, believe that we will see significantsales volume increases in the third, and particularly the fourthquarters of 2010.

|

The balance of this year should be very strong for theinvestment sales business. How things proceed from there will bedependent upon many things. I will keep you posted.

|

Mr. Knakal is the Chairman and Founding Partner of MasseyKnakal Realty Services in New York City and has sold over 1,075properties in his career having a market value in excess of $6.5billion.

|

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.