WHITE PAPER: The Switch Has Been Turned Back OnSeptember 1, 2021
By James Nelson
“How’s the market?” That’s question I’m asked at least a dozen times a day, if not more. In the last month or so I’ve replied that the switch has been turned back on. After battling through the last 18 months, contracts are finally getting signed, and deals are closing.
During the pandemic pause, we saw a few “must sells” from estates and partnership disputes, but very few discretionary sales as most investors stayed on the sidelines. What’s different now is that both sellers and buyers are willing to transact. Sellers realize that we have as much certainly as possible in the market today, with the exception of the proposed tax policies (read my blog here for more details). We have a COVID-19 vaccine, and we know who our elected officials are on the federal level and have a clearer idea of who they will be on the local level. The residential market is back, and offices are becoming more flexible.
Long-term owners are now placing their bets on either doubling down on New York or diversifying by owning in Red states. Some are transacting with the hope of beating a proposed capital gains increase, while new buyers, many of them foreign, are seeing an opportunity to enter the New York market for the first time.
Buyers have realized that they missed the bottom on pricing. Looking at our comparison of pricing from pre- to post-COVID, multi-family, retail and land sales have already hit a low and are on their way back up. Multi was down by 16% in 2Q20 through 1Q21 compared to an increase of 4% in 2Q21; retail down 25%, now up 6%, and land was down a dramatic 36% but has bounced back 9%. Only office values never dropped, with a surprising increase of 14% since the start of the pandemic. This aberration is due to a very small sampling of office sales and there may be a correction in store for the office sector in the future.
For investors, the financing available today is accretive above and beyond years past. Even if multi-family cap rates are back in the mid 4%s, New York City assets are still 100-150 bps higher than “growth” markets like Austin and Nashville. Therefore, borrowers taking advantage of the low interest rates, in some cases in the sub-3% range, can produce double-digit cash on cash returns.
Now that the playing field is level, the amount of pent-up demand is tangible. Although RTO (return to office) hasn’t happened as quickly as we had all hoped due to the Delta variant, we are now seeing New York City return to life. My residential broker friends tell me they haven’t been this busy in years. Young professionals who left the city to live with their parents or work virtually from the mountains of Colorado, are now back bidding on apartments that were impossible to rent last year. Returning students are joining them.
You can feel the increased activity on the commute. Although subway ridership remains down 52% from before the pandemic, it’s up 500% from the low point. MTA and LIRR ridership is down 40% from pre-pandemic levels, but up a staggering 1495% from the low point. Bridge traffic is up 6% from before the pandemic so I wouldn’t advise driving into the city after Labor Day! Lastly, pedestrian traffic is up 122% from before the pandemic. More people are on the streets hopefully supporting our struggling retailers.
If Avison Young Tri-State Investment Sale Group’s activity is any indication of what’s happening in the market, the pipeline couldn’t be stronger. We have more exclusive listings today, 60 assignments valued at $1.5B, than at any time since our inception as a group in 2018. Year-to-date, we’ve already seen 30 transactions either close or put into contract with around 20 contracts out. We are once again seeing bidding wars.
With this level of activity spread across Manhattan, the borough could end 2021 closer to the 10-year average of $27.3 billion dollars. Buckle your seat belts….