While recent activity prompts increasing pronouncements that the building sales market in Manhattan is overheated and prices are going to remain stagnant or decline, the first six months of 2005 show the market is as strong as ever.
Sales activity totaled more than $12.67 billion in the first half of the year, according to Cushman & Wakefield data. That puts it on track to topple 2004’s $15.1 billion mark before the year’s end.
With record prices being paid for buildings most notably Tishman Speyer’s $1.7 billion April purchase of the MetLife Building does it make sense to buy in an overheated market?
Some brokers say increased interest in the real estate market from people who aren’t experienced may be creating a fictitious frenzy. Some sellers factor the future into today’s asking price by including air rights and the potential to increase rents in the cost of a property, said Adelaide Polsinelli, senior executive broker at Besen & Associates.
“You could build higher even though 99 percent of the people aren’t going to,” Polsinelli said.
Polsinelli said some agents approach a potential seller with an unrealistically high price they say that they can get for their property.
When the offers come in below the seller’s expectations, the property will sometimes be taken off the market, and truly interested buyers ready to offer a more reasonable price have moved on and the property doesn’t get sold, she said.
In other cases, once an offer is made on a property and accepted by a seller, some agents continue to shop the property, creating a bidding war.
“We never heard of bidding wars before at least not as much as today,” she said.
The high prices whether or not they are artificially inflated have priced out some foreign investors who traditionally play a significant part in the Manhattan investment sales market.
German investors, in particular, are having trouble finding buildings with the capitalization rates they need to meet minimum yield requirements.
“As cap rates get lower, investors pull back because the market gets overheated and they don’t want to buy at the top of the market,” said Andrew Oliver, managing director and principal at Sonnenblick-Goldman Co.
Some German investors have entered joint ventures with U.S. partners to buy a property and to structure deals so that they can get the capitalization rate they need, said Andrew Osborne, director of capital markets and international capital markets liaison at Trammell Crow.
Aside from Irish investors still looking for long-term deals in the city, many European investors aren’t looking in the U.S. because of high taxes and legal constraints, he said.
Except for “the Germans and the Irish, I’m not seeing appetite from purely European groups,” Osborne said.
The high prices in New York City may have pushed some investors into what are considered secondary markets.
Haus-Invest Global, the German open-end investment fund that owns the Manhattan Mall, recently closed on an office complex in Richmond, Va., and bought Reliant Energy Plaza in Houston.
While many brokers say there’s not a lot of product on the market, many deals are being done quietly.
Brokers say there is plenty of capital out there. There are still some investors who want to take money out of the securities market and put it into something more tangible, and some of the money is coming from people who have sold a business and want to invest in something new. Many recent sellers are looking for more property to buy to take advantage of the tax benefits of 1031 exchanges.
Fortunately for those buyers, “Everybody has a price they will sell at,” said Marc Lewis, managing director of investment sales at MAI Investment Properties, the building sales division of Manhattan Apartments Inc.
Earlier this year, for example, Rose Associates sold the Sheffield, an 845-unit rental apartment building on West 57th Street for $418 million to a group of investors. “They said they would never sell,” Lewis said.
Many transactions are being kept hush-hush until they’re done. In some cases, sellers don’t want to deal with alarming tenants about an impending sale.
Also, some sellers and brokers want to avoid inexperienced buyers who want to get in on the real estate market because it’s hot, but haven’t done their research or who may not even be able to get the financing they need to close a sale, said Polsinelli.
She said some of her clients ask her to find the top three people who would likely buy their property and try to get a deal done without going public.
“Some people will buy before the marketplace knows about it,” she said. “Some people like a quiet deal and they will pay a little more for it.”
Broker Georgia Malone said that the process of high-profile bidding for big-ticket properties has been “out of control in the last year or two.”
Malone was the sole broker in the $240 million sale of the Pennmark rental building on West 33rd Street earlier this year, an off-the-market transaction.
“Sellers like [off-the-market deals] because they don’t want to be advertised all over the place,” she said. “Buyers like it because they don’t want other sellers to know what they are contemplating paying for a property.”
And then sometimes sellers prefer that things stay quiet just because.
“People don’t want people to know their business,” Lewis said.