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NEW YORK CITY-Not surprisingly, New York commercial property sales fell off a cliff in the first half of this year but volume is expected to rise over the next six months, says Massey Knakal Realty Services. However, prices will continue declining along with fundamentals, according to Massey Knakal’s newly issued building sales reports.

“I don’t think anybody’s expecting the market to return to the irrational levels we had in 2006 and 2007 anytime soon, but we’re expecting more normal levels of activity as this year winds up,” Massey Knakal’s managing director Ken Krasnow tells GlobeSt.com. “That’s a big divergence from where we were six months ago.”

The preceding six months saw transaction volume reach 25-year lows across the four markets Massey Knakal covers in its reports: Manhattan, Northern Manhattan/the Bronx, Brooklyn and Queens. In Manhattan, where volume is down 74.1% year over year and 84.1% from the early-2007 peak, turnover for the first six months of 2009 was 0.73% of the total stock of properties on an annualized basis. “To put this number in perspective, the lowest turnover we have seen in the last 25 years was 1.6% in 1992 and 2003, both of which were years at the end of recessionary periods and cyclical highs in unemployment,” according to the Manhattan report.

A similar rate of turnover was seen in Brooklyn, where year-over-year volume was down 65.3% although the market led the way with 207 transactions compared to 143 in Queens, 95 in Manhattan, 85 in the Bronx and 34 in Northern Manhattan. Turnover in the Queens market is even slower at 0.69% of the total stock of properties, with the number of transactions down 67.2% from early 2008, Massey Knakal says.

However, the rate of decline is shallower in Northern Manhattan and the Bronx, where the turnover is 1.1% and 1.0%, respectively, and the 12-month drop-off in volume is 51% and 52.0%, respectively.

“There’s a lot of stability in the Bronx market,” says Krasnow. Investors “didn’t get hurt” there over the past couple of years, which has helped keep up demand.

Across the board, the decline in dollar volume outpaces the drop-off in the number of transactions. “Financing is still coming from the mid-sized and regional banks; it’s not at the high-end institutional level yet,” explains Krasnow. “That’s why our reports show that volume is off more on the dollar side than on the transactional side. There are more smaller and mid-sized deals being done, because that’s where financing mechanisms are still available.”

Until institutional-level financing comes back in to normalize the market, deals in the nine- or 10-figure range will be far and few between, at least until sometime next year, says Krasnow. He notes that one bigger transaction we may see in the next several months is S.L. Green Realty Corp.’s 485 Lexington Ave., for which the REIT is asking around $500 million. Absent a deal of that size, though, “You’d need 10 transactions of $50 million to equal the dollar volume.”

Along with high unemployment weakening fundamentals, loan defaults will contribute to declining prices–and, eventually, more inventory coming to market. “A lot of people thought that we’d be seeing more distressed inventory, but now they’re coming to the realization that it probably won’t be the flood or tsunami that they were expecting,” Krasnow says. Therefore, as investors see assets in the property types or locations they’re looking for, “they’re not hesitating to get back into the game a little bit.”

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