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Investment Market Gathers Momentum as 2010 Draws to a Close
After an impressive rebound in price and activity during 2010 from the depressed 2009 levels, New York City’s investment sales market took a breather as 2011 began. Just one investment sale closed in the first quarter of 2011, and three other buildings were recapitalized.

By Peter Shakalis

By comparison, a total of 16 investment sales and recapitalizations were completed in the fourth quarter of 2010 and 33 for the entire year. This drop in activity raises the question about whether the recovery in activity in the office investment market has come to a halt. The evidence so far does not support that conclusion. In Manhattan, owners are offering fewer buildings to the market. The demand remains intense; it is the supply of product that is missing from the market. Moreover, at the national level the pace of activity was robust during the first quarter of 2011. Partial data for the first quarter indicate that for the U.S. as a whole the dollar volume of investment sales was up by 50 percent versus the 2010 first quarter level. Investors see opportunity in the still depressed values outside New York City and a few other coastal markets. Owners in Middle America are anxious to reduce their exposure to real estate and raise cash. With investors casting a wider net, owners in New York City may respond by introducing more assets to the market at more competitive valuations. Concerns about the strength of the economic recovery, rising inflation, and the possibility of higher interest rates could lead landlords to conclude that market values may have reached a plateau for the moment.

In the first quarter of 2011, the average sales price came in at $404/sf. This is down from the 2010 average level, but the thin volume and the special characteristics of one of the buildings brought the overall average down. Five buildings are reportedly under contract for sale and one other is likely under contract for a recapitalization. Combined with the market dynamics outlined above, these indicated sales point to a higher volume of closed transactions in the second quarter of 2011. The overall operating performance of the office market continued to improve in the first quarter of 2011. The average office asking rent in Manhattan increased from $48.62/sf in the fourth quarter 2010 to $50.18/sf in the first quarter 2011. The steady improvement in operating fundamentals provides support to valuations, fueling investor demand for Manhattan office buildings.

REITs were the most active buyers during the first quarter of 2011. The next most active groups were foreign and private market buyers. Institutions and private equity funds stood on the sidelines during the first quarter of 2011. Private equity funds were the most active seller in the first quarter of 2011. The next most active groups were institutions and private market sellers. REITs and foreign sellers stood on the sidelines after being the least active sellers in 2010.

The valuation cycle in Manhattan was particularly rapid over the last two years; and many buyers and sellers likely used the first quarter of 2011 as an opportunity to reassess their respective views about the market. For the rest of 2011, therefore, the evidence points to a resumption of activity.

Peter Shakalis is a Director at Colliers International NY LLC


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