Building-sale bounce

Manhattan towers may not be selling like they were at the peak, but there's life in the sales market again
By Melissa Dehncke-McGill | September 01, 2010 07:00AM

Paul Massey

Of all the different slices of the real estate market in New York City, perhaps there was no segment harder hit by the downturn than buildings sales. In fact, the building sales market came to a virtual halt in Manhattan last year, down 92 percent to just over $4 billion from over $50 billion at its 2007 peak.

But that officially started changing during the first half of this year. Indeed, while sales volume is still nowhere near what it was a few years ago, it was up 87 percent from the same time in 2009.

This month, The Real Deal talked to commercial brokers about the kinds of buildings and land that are selling. Several sources said that the number of so-called discretionary sellers, those who aren’t being forced to sell, has increased. One key factor driving those sales, they said, is the pending capital gains tax increase. In addition, sellers are starting to come to terms with the fact that values will probably not skyrocket in the next few years.

One broker cited the owner of a 250-unit Brooklyn building who’s opting to sell because he or she wants to retire and believes that “we are not going to see meteoric rises in prices over the next five years.”

Still, banks are squeamish about lending on mega-transactions, and big building sales are rare. As a result, the under-$25 million segment of the market has taken center stage.

With relatively little inventory on the market, those quality midsize buildings that come online are drawing lots of bidders and actually pushing up prices again slightly in some areas. For more on the building sales market, we turn to our panel of experts.

Paul Massey Jr.

CEO/founding partner, Massey Knakal

What are you seeing on the building sales front these days?

During the first half of 2010 there were 230 Manhattan building sales — up 87 percent from the first half of 2009, but still down 61 percent from the peak of the first half of 2007. Dollar volume in Manhattan for the first half of 2010 reached $5.2 billion, which is up 170 percent from the first half of 2009, but down 83 percent from the peak of the first half of 2007.

Reports also found more transactions under $25 million. What are you seeing in terms of the size of buildings selling?

The trend seems to be toward smaller transactions. The average Manhattan building sale price in 2009 was $13 million, considerably down from the 2007 peak average of $52.5 million.

There’s also been an increase in dollar volume of Manhattan development sites that have sold. Who are the primary buyers in that category?

Local players and REITs have been active. Many of the development sites that are selling [are going] to users — an example would be the new Whitney Museum. Residential development buyers who have been active in the market in the last two years are Toll Brothers, Avalon Bay, DDG and Equity Residential.

What are the most surprising trends in terms of building and land transactions in New York right now?

We’re seeing more discretionary sellers coming back into the market, specifically ones who are beginning to put their property on the market now rather than deal with the potential future capital gains increase. An example is the person in Brooklyn with a 250-unit building who’s electing to retire, and in 2007 put things on hold to see where the market was trending. That person is now deciding to … sell by the end of the year. I expect to see a big spurt in activity in the last quarter of 2010, especially from [these discretionary sellers]. Their perspective is that if we are not going to see meteoric rises in prices over the next five years they might as well [sell].

Statistics show that building sales are up in Brooklyn and Queens. What’s going on with transactions there?

Brooklyn and Queens are not really up as much as you would think. The real story is that they’re lagging Manhattan. [But] the velocity is starting to move up there, too. In Brooklyn, 267 buildings sold in the first half of 2010, up 14 percent from the first half of 2009, but down 74 percent from the first half of the 2007 peak. In Queens, 165 buildings sold in the first half of 2010, up 4 percent from the first half of 2009, but down 74 percent from the first half of 2007’s peak.

Can you give us an example of a recent deal you worked on that illustrates what’s going on in the market?

We had a 56-unit apartment building at 2105 Walton Avenue in the Bronx, a bread-and-butter multifamily. We had 30 offers in 30 days and it went into contract at 10 percent above the asking price. When something is priced right there is significant demand. The price on that one was $3.725 million with a 7.7 cap.

We’ve heard that broker commissions are down on building sales these days. Is that happening as part of negotiations?

Some firms may be lowering commission, yet we feel that buyers need us more now than ever. Our fee percentage is up 15 percent over the same time last year.

Alan Miller

senior director, Eastern Consolidated

Are you seeing an increase in smaller transactions?

There are well-capitalized buyers, but the deals are smaller. Banks don’t lend on large transactions. The reason you find [smaller] deals is that people can pay cash or banks lend up to $30 or maybe $40 million. They’re not going to lend $50 or $75.

What are you seeing in terms of prices?

Income-producing multifamily rental buildings still have very strong prices. That’s the safest investment long-term. If you are holding a multifamily rental property in Manhattan, Brooklyn, Queens or the Bronx, there are no fire sales. Residential properties are financeable.

What kinds of properties are selling most and least?

There is not a lot of product in any category. Multifamily probably sells the most. Land sells the least; banks aren’t giving money to build. There are not a lot of retail deals right now. There are not that many office buildings, but there may be when they go into foreclosure in the next year or two.

What kinds of buyers are you seeing on most transactions today?

Cash buyers: those who can write the check, whether it is institutions, funds, families. For land it’s a lot of foreigners. I closed deals this year with overseas groups — Irish, Asian, Turkish, French and Israeli. Also, old-line money — institutions and high-net-worth people as well.

What are the most surprising trends with transactions in New York these days?

That land can still command so much money. When transactions happen, they are at a surprisingly strong level. Whether another mini-bubble is forming or people really believe that New York is coming back [is unclear].

Are broker commissions down for building sales these days?

Yes, I’d say the commissions are less. Owners are more shrewd, especially a bank or someone selling at a loss. You have to compete. You don’t want to go too low, you want to keep your business model. If your competition will charge half of what you want to charge, that’s tough to compete with. If you’re a seller trying to save $100,000 in commission, but you’re leaving $500,000 on the table, then the outcome is not too good.

What other factors are impacting building sales right now in New York?

The lack of financing and leverage. Cap rates are still low, so if Eastern Consolidated takes a prime residential building to market at 2.5 to 3 cap, they can’t afford to do that today unless it’s really special. [Buyers] have to get at least 4 or 5 cap and they want more than that.

Adelaide Polsinelli

associate vice president of investments, Marcus & Millichap

What are you seeing on the Manhattan building sales front these days?

Activity has picked up considerably. Lenders are entering the market more than they were six months ago. Funds see this as an opportunity to buy at what most perceive to be the bottom of the cycle. While the selling of the past few years resulted in huge profits, today’s sellers consist mostly of those who have to sell. Some believe lenders will start dumping their inventory of foreclosed real estate and loans that are, and will be, in default in the next few years, [and that] the excess supply could depress prices even further. That makes a case for selling now, rather than later.

What are you seeing with prices?

Prices have begun to creep up ever so slightly for trophy properties. However, tertiary areas are still declining in price, especially multifamily in the Bronx.

What are the most surprising trends you’re seeing in the industry right now?

The delay in lenders foreclosing on delinquent loans.

Can you give us an example of a recent deal you’ve worked on that illustrates what’s going on in the market today?

An owner I’m working with paid $40 million for a package of multifamily properties in 2007. He got a mortgage for $30 million and put up $10 million. The properties are worth $20 million today. I helped him buy back his loan at a discount. Selling was not an option.

What other issues are impacting building sales right now in the city?

Factors that are putting pressure on a recovery are the pending increases in capital gains taxes, real estate taxes, estate taxes and the onerous regulation of multifamily properties.

Richard Baxter

executive managing director, Jones Lang LaSalle

Are brokers diversifying the kinds of building sales they’re doing?

Yes. Our team sold buildings like MetLife and 666 Fifth Avenue, which traded in the billions. Today we’re working on numerous retail transactions and other development buildings being sold for $50 million or less. We are expanding our practice into what’s known as the middle markets arena.

What are you seeing in terms of prices?

To cite one example, 417 Fifth Avenue is a building our team sold in 2007 for $600 a square foot. We sold it in June for $350 a square foot. … So we are looking at anywhere from a 40 to 50 percent diminution in value. There’s certainly some recovery since the beginning of the year, but it’s very asset-specific.

What kinds of buyers are you seeing on most transactions these days?

The REITs are, of course, very active, especially SL Green, in particular in Manhattan. There’s also lots of foreign capital. That’s mostly private. We call it the parade of billionaires, like 417 Fifth Avenue, where Carlos Slim was the purchaser. We had several others lined up from Israel and Canada, all private capital, all seeking that illusion of a bargain.

Who are the sellers?

Predominantly institutional sellers. I’d say maybe 30 percent of those were distressed in some way. I think the more savvy sellers [think] there is nothing for sale so they should put it out now just to take advantage of the pent-up demand. Between the lack of product and the diminution of values, there is a new breed of seller: those that are facing increased capital gains taxes in 2011, who are starting to feel that now is the time to sell.

Who are the primary buyers hunting for developable land right now?

Typically domestic developers who are coming back into the market. They’re looking at opportunities for prices that are discounted 50 to 60 percent from the height of the market. The deals are very difficult to finance, so typically they have a strong capital partner ready to go.

Which areas are seeing the fewest building and land sales?

The Financial District. For office product, I think there’s a concern about the World Trade Center and Freedom Tower opening. However, we are starting to see increased demand for potential residential properties and conversions Downtown.

What’s going on with commissions?

Our commissions are pretty much what they always were. What we are seeing more of now is the request for, quote, “incentive-based fees,” so once we hit a certain threshold in pricing, we’re getting higher fees.

Timour Shafran

vice president of investment sales, Capin & Associates

What are you seeing on the Manhattan building sales front these days?

There are more deals getting done, but [inventory] is so dry out there. … People in Manhattan, even if they’re struggling, will beg, borrow or steal to keep their properties. They have held on this long, and they figure they will do whatever it takes, which is why they’re not selling. The extremely low interest rates have allowed people to refinance their way out of problems.

How far have prices come down?

I’ve seen as little as a 10 to 15 percent drop on certain assets to as much as 30 percent. If a company bought a property in 2006 or 2007, toward the peak, and then reworked some of the leases and repositioned the property so it has more income, the value may have remained the same or only dropped a little. If somebody bought an asset where the rent roll is the same and the income has changed very little, [that] will have caused the property value to drop drastically.

Are all sellers distressed in some way?

No, I see a lot of people who bought early in 2002 to 2005 who see an opportunity to sell some of their B Class assets because there’s still room to make a profit from when they bought, and they can move into A Class, which they couldn’t afford a few years ago. There is a lot of that upgrading.

Which areas are seeing the fewest sales?

Probably the Upper East Side and Chelsea. I would also say Washington Heights, where the sales volume has shrunk dramatically — not that there’s a lack of people who want to buy; there is just a lack of people who want to sell there.

Vincent Carrega

executive managing director of investment services, Grubb & Ellis New York

Is there a trend toward smaller deals?

Yes, currently smaller transactions are easier because financing is relatively easier to obtain. We just marketed 555 Sixth Avenue, where we had significant interest and received in excess of 20 real bids. The property sold at $67.4 million.

What are you seeing in terms of prices?

Manhattan office sale price per square foot has dropped from a high of $500 in the second quarter of 2009 to $314 a square foot in the first quarter of 2010. Manhattan retail sales prices have dropped from a high of $800 per square foot in the first quarter of 2009 to $539 in the first quarter of 2010. However, multifamily prices have actually increased since the first quarter of last year, from $300 per square foot to $324 in the first quarter of this year.

What can you tell us about transactions in the outer boroughs?

Brooklyn led the charge in the second quarter with 141 transactions, followed by the Bronx with 75 transactions and Queens with 69 transactions.

Helen Hwang

executive vice president, NY capital markets group, Cushman & Wakefield

What are you seeing on the Manhattan building sales front?

As of the second quarter, the market has already surpassed last year’s year-end sales volume by 60 percent — $5.6 billion versus $3.5 billion of closed transactions, with another $200 million under contract through June 30.

Is there a trend toward smaller deals?

Interestingly, deal sizes have begun to grow again, with 21 transactions larger than $100 million closed so far in 2010, including recapitalizations and partial-interest deals. This compares to only seven such transactions in all of 2009.

What types of properties are selling most and least?

At the moment, Class A office properties continue to dominate in terms of [total dollar] volume. … So far in 2010, office properties account for 47 percent of the total, followed by multifamily, which accounts for 21 percent, followed by hotel at 11 percent, land/development at 8 percent, retail at 6 percent and special use, such as hospitals, at 7 percent.

What are the most surprising trends you’re seeing in the industry?

The stigma of bringing a transaction to market, which had previously signaled potential distress, is quickly vanishing. … Loan-to-own acquisitions are taking place quietly, but not at the expected pace, although that could change as shorter-term, 2006-to-2008 vintage loans approach maturity.