Commercial property sales in New York, driven by a decline in Manhattan, slumped by more than half in the first quarter from the end of last year as higher interest rates and worries about a looming recession seized up lending and investment across the country.
The plunge is setting the city up for its worst annual commercial property sales expected since 2009, according to a study from real estate firm Avison Young.
New York, as the largest U.S. commercial property market, is a closely watched bellwether of investors’ attitudes about buying and selling.
First-quarter commercial real estate investment sales in New York fell 53% to $2.21 billion from the fourth quarter and dropped 59% from the trailing four-quarter average, Avison Young said in its first-quarter market report. Driving the results was Manhattan’s 64% investment volume decrease to $1.17 billion from the fourth quarter, a slide of 71% from the trailing four-quarter average, and a slump of 81% from the trailing 10-year average. Brooklyn and Queens sales also sank.
It’s a “pretty significant decline,” James Nelson, Avison Young’s principal and head of tri-state investment sales, said at a webinar with clients Tuesday, adding the sales volume probably reflected contracts that were negotiated in the fall as the Federal Reserve was already in the midst of its series of rate hikes that began in March 2022. “This starts to feel the chilling effect of the rate increase. ... There’s downward pressure on pricing with rising rates. Sellers and buyers push off decisions.”
Avison Young projected 2023 New York investment sales of $8.9 billion, which would be less than half of the $21.2 billion total last year and just about 13% of a record $68.5 billion in 2015. It would be the smallest volume since 2009, when sales totaled $5.2 billion during the Great Recession.
New York isn’t the only market feeling the squeeze of higher borrowing costs. The brokerage firm CBRE, for instance, forecast a 15% year-over-year drop in U.S. commercial real estate investment volume in 2023, though it expects total volume will exceed the pre-pandemic record annual total in 2019. Investment activity probably will bottom out in the first quarter and then gradually improve, CBRE said.
Apartment Sales Plummet
The first-quarter drop in New York was seen across many property types. Manhattan residential rental sales dropped 77% to $430 million from the trailing four-quarter average as the number of deals fell 45% to 22, thanks both to higher interest rates and New York’s 2019 rent regulation law that limits the ability for landlords to raise rents, Avison Young’s Nelson said.
With the June expiration of the 421-a program that gave developers tax incentives in exchange for a percentage of their apartment project being set aside for affordable housing, the Avison Young study found total annual filings for new multifamily developments by both square footage and units fell to their lowest levels since at least 2012.
Development sales last quarter dropped 72% to $87 million from the trailing four-quarter average with only four deals inked, which Nelson said the expiration of 421-a was to blame. Developers including MaryAnne Gilmartin of MAG Partners recently told CoStar News the program is a key part of making multifamily developments work in the city.
As office vacancies and available sublet space in New York have surged to new record highs amid cutbacks from the tech industry and other sectors, first-quarter office sales slumped 73% to $395 million from the trailing four-quarter average with a 56% decrease in the number of transactions, Avison Young data shows.
Smaller Top Deal
The top office deal of the quarter was automaker Hyundai’s purchase of 13-17 Laight St. in lower Manhattan for $273.5 million, in sharp contrast in size to Google’s $2.1 billion purchase of the St. John’s Terminal building at 550 Washington St. in the Hudson Square neighborhood on the west side of Manhattan just a year earlier.
In what Nelson described as “a vote of confidence,” Hyundai paid more than $2,532 per square foot for the Laight Street property as the average price per square foot for Manhattan office sales last quarter rose 17% to $1,098 from the trailing four-quarter average.
Retail was one bright spot last quarter. Total sales rose 48% to $179 million from the trailing four-quarter average across 12 deals, according to Avison Young.
“Retail has made a really nice recovery,” Nelson said, adding New York has seen a return of tourists. “You see the vacant storefronts fill up. Once you have that occupancy, you can start to see that rental growth.”
Big drops in investment sales aside, many industry executives have said there’s still plenty of capital to be spent, and investors are hunting for deals.
“It's still challenging,” Scott Singer, principal and co-head of tri-state debt and equity finance at Avison Young, said during the webinar. There’s “almost no transaction that would look easier to do than it was a year ago. … [But] for transactions that are structured appropriately for this environment, it’s possible to secure financing debt and equity project by project. We are having conversations with groups who see opportunities to invest in New York."
Singer pointed to a recent transaction involving a "highly regarded" New York borrower concerning a property that's "primarily retail in nature." Avison Young reached out to 60 investors and got six proposals back in comparison to a year earlier when he said he would have gotten 58 proposals back.
"We were [still] able to create competition," he said. "The pullback that exists creates opportunities for others. Many banks [and other lenders] are still active.”