Transaction figures are now in for the month of October and show only four multifamily properties trading uptown for a total consideration of $8.4 million. Low figures for Upper Manhattan were unusually low for both September, which showed only 3 transactions totaling approximately $14 million in gross consideration, and August, which showed merely 2 multifamily properties totaling $5.5 million in gross consideration trade.
Several questions arise from this very low volume:
Why is so little trading?
Much of the lack of sales volume continues to be a lack of available inventory. Demand is not a problem as old and new investors continue to hunt for product in the market while boasting about their ability to obtain inexpensive financing. Aside from the product we market, which if appropriately priced can fetch at least a dozen offers in a 3-4 week time period, we continue to hear stories of investors seeing more and more listings coming to market with the vast majority being overpriced. So since buyers are eager to buy and banks are willing to lend, in some cases rather aggressively with 70-75% LTV ratios at rates as low as 4.25%, it appears reasonable to assume that the major impediment to higher market volume in 2010 has been on the seller’s end as they demand more than the market can currently bare.
Given the near constant buzz one hears about banks having balance sheets full of properties underwater, shouldn’t there be more sales volume?
Simply put, yes. Perhaps understandably so, banks were woefully unprepared for a financial crisis of the magnitude that we recently experienced. A deluge of bank failures, mergers, bailouts and stimulus programs – not to mention the general level of pricing confusion expressed by most market participants at the height of the financial crisis – left us financial institutions that did not have the will nor capacity to move a significant number of properties off of their balance sheets in a timely manner.
Yet in the second half of 2010, financial institutions began taking clear steps to address these issues by selling several large pools of troubled loans. The foreclosure process may move at an excruciatingly slow pace, but investors should expect much more product coming to the market in 2011 and 2012 as the buyers of these loan pools foreclose on delinquent landlords and look to either sell or recapitalize their positions.
What do the few sales that are trading tell us about the current status of the market?
Looking at the 83 transactions that have occurred uptown since the June 2010, the median and average transaction size by dollar volume is $1.45 million and $2.89 million respectively so clearly we are in a market where small transactions rule the day.
Recent property’s my sales team has sold suggest a strong market for sellers. Our sales team recently closed on 208 East 124th Street, a 15 unit walk-up building in East Harlem that traded for $1.65 million or nearly $168 per square foot. This price is especially notable since 4 of the units were vacant and in need of several hundred thousand dollars worth of rehabilitation. It is also notable because the price achieved is nearly 10% higher than the highest offers that were received in 2009.
We also recently closed on 2006 Amsterdam Avenue, a 50’ wide, 6 story mixed-use walk up building for $2.2 million. Despite some vacant retail space and the pending expiration J-51 abatement in two years, the price roughly translates to a 7.5% return. Again, this price is approximately 10% higher than offers we received when we marketed the property in 2009.
Do recent contract signings point to more sales data coming out in the near future?
Yes and no. Recently my team and I put in contract a portfolio that consists of 176 units located throughout Northern Manhattan, The Bronx and Brooklyn. All units in the portfolio are subject to LIHTC and other HPD affordable housing regulatory agreements. This product type has a small but active buyer pool that is always in the market.
It also appears that several contracts we signed earlier in 2010 will carry over into the first quarter of 2011. Such delays are largely due to banks, which are offering competitive financing but appear to be scrutinizing every loan with much more care than in the past.
More sales and more data will appear as banks become more active sellers and discretionary sellers re-enter the market. Until then, identifying broad pricing trends will remain a hit or miss endeavor.
Rental Market/Vacancy: While we usually use our Month In Review to Highlight trends in rental rates and vacancy, Citi-Habitat has yet to release its figures for the month of November. We will provide this information in next week’s regular addition of Weekly Market Watch.
Expenses: Heating oil prices came in at $3.39 per gallon at the end of November, which represents a 14.3% increase from one year ago. (http://www.nyserda.org/energy_information/nyepd.asp) The implications of the end of the Bush Tax Cuts are still undecided as an apparent game of chicken between Democrats and Republicans over 2011 tax policy continues.
Financing Market: Earlier in November, the Fed announced its second Quantitative Easing program (dubbed QE2) in an apparent effort to keep interest rates low. Yet the policy appears to be having trouble doing so, for the market of 10 year Treasury bills is up nearly 60 basis points since then and is now hovering around 3%. This activity is filtering into other lending markets and the resulting higher rates could mean higher borrowing costs and downward pressure on asset prices in the near future.
WEEKLY MARKET OBSERVATIONS
The unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000), the U.S. Bureau of Labor Statistics reported.
Forecasters had expected the economy to add 150,000 jobs. More than 15 million people were unemployed in November.
Manhattan home sales fell in November, but prices remained stable and the local housing market was in far better shape than in the rest of the country. Brokers are reporting an increase in contracts signed and said those figures will be counted in early 2011.
Due to continued concerns about inflation, China announced plans to tighten its monetary policy next year. China’s economic policies have kept its currency weak, which resulted in a trade policy that favored exports and discouraged imports.
MULTIFAMILY ACTIVITY GRAPHS:
Monty to month dollar and transaction volume activity of multifamily properties