After a long run-up, building prices throughout the city are stabilizing and could recede, according to a recent report by building sales brokerage Massey Knakal.
In a newsletter to clients last month, firm Chairman Robert Knakal said he expects building values to drop 3.5 percent in 2006 as sales volume falls to 2.6 percent.
The firm had anticipated that prices would top out in the second or third quarter of 2005, which appears to be happening, Knakal wrote, adding that the impact is not all bad.
“Price appreciation across the board has halted, and, while this is viewed as a negative by some participants in the market, it is actually a positive thing, given our relative pricing levels compared with six or 12 months ago,” he said.
The volume of sales so far this year is down compared to last year, and expected to stay that way.
“In the first quarter of 2006, Massey Knakal sold 119 properties, a reduction of 18 percent from our 2005 average,” Knakal wrote.
The number of buildings sold as a percentage of total building inventory reached 3.3 percent in 2005, the highest level in 16 years with the exception of 1998.
But Knakal expects sales volume to return to 2004 levels this year. “We are anticipating a drop in the volume of sales back to the 2004 levels of 2.6 percent in 2006,” he wrote.
The market for buildings being sold as possible condo conversion candidates is also cooling. “These properties are off approximately 5 percent in their value from six months ago,” Knakal wrote.
Land prices, too, have dropped as construction costs rise and the apartment market cools.
“Softness in pricing has affected the land market where prices are presently off 5 to 15 percent,” Knakal wrote.
On a macroeconomic level, interest rate hikes are doing their part to drive down prices, making money more expensive to borrow.
In March, the Federal Reserve increased rates another quarter point, which left the federal funds rate at 4.75 percent, its highest level since April 2001.
While some observers see the rate going to 5.25 percent by the fall, “we believe that it is more likely that this target rate will top out at 5 percent,” Knakal wrote.
Still, there is some potentially good news on the horizon, with money coming from rapidly developing countries abroad.
“A noticeable influence is the constant capital flows from Mexico, India, and China into our market,” wrote Knakal. “Of the 579 properties that Massey Knakal sold last year, a growing percentage has come from these rapidly expanding markets. This is leading to more and more of a globalization of the small to mid-size building sales market here.”
Knakal expects hotel and office properties — condo conversions were noticeably left off the list — to be the hottest selling properties over the next two quarters.
“The hotel market is as strong as it has ever been, as the elimination of thousands of hotel rooms has created upward pressure on occupancy levels and room rates,” Knakal wrote. “We also believe that the office component of the market will be excellent in the coming quarters as leasing activity increases are causing reductions in availability.”