Déjà Vu - All Over Again, Volume of Sales Nears Historic Low
(NEW YORK, NY) -- The sales volume of investment properties in New York City in the under $100,000,000 market is approaching its all-time low level. The two metrics we watch most closely are prices and the number of properties sold. This commentary will address the current trend in the volume of sales.
The 2008 turnover rate (which is expressed as a percentage of properties sold out of the total stock of properties) was 1.8% of the total stock of buildings and we anticipate this turnover level dropping to 1.6%, or lower, in 2009. The statistical sample used for this analysis takes into consideration Class C, D, S and K properties, eliminating some segments of these classes which are not applicable, in the five boroughs of New York City. The total number of properties in this segment is approximately 125,000. The 2008 turnover rate of 1.8% results in approximately 2,250 properties trading hands. This total represents a 40% drop in the number of properties sold from 2007 to 2008 (in the over $100 million market turnover is down 70% to 85% depending upon the report quoted). Since the mid-'70s the turnover of the total stock of buildings has been lower than 1.8% on only three occasions. The volume of sales was 1.7% and 1.6% during the recessionary years of 1991 and 1992 respectively. It also hit 1.6% again in 2003 as we were emerging from the recession caused by the technology bubble bursting.
We had always assumed that this 1.6% turnover level was a baseline rate of turnover; representing only those seller who had no choice but to sell. Death, divorce, taxes, partnership disputes, distress and insolvency were the motivations underpinning this baseline number. In the early 1990s, prices had fallen so precipitously that only those who had to sell, did. Interestingly, if you look at the chart below, you can see that sales volume decreases significantly during the recessionary periods as unemployment simultaneously spikes. The red unemployment line shows the increases in unemployment as the recessionary periods' progress. (Be mindful that you are not really comparing apples to apples looking at pre- and post-Clinton eras.)
2008 finished with an unemployment rate of approximately 7.2%. It is projected that by the end of 2009 unemployment will be approaching 9%. While our projection for sales volume is 1.6% for 2009, we would not be surprised to see this volume dip to a new record of between 1.4% and 1.6% as we are in unprecedented times which could cause a new record low number of properties sold.
The positive news is that even with a historically low turnover of 1.6%, which still translates into approximately 2,000 sales in the New York City marketplace. When comparing 2009 to the recession of the early '90s, a striking difference is that today there is a tremendous amount of patient capital waiting on the sidelines eagerly awaiting buying opportunities. The reduction in sales volume in the early '90s was primarily a function of lack of demand, as supply was significant. Today, the reduction in volume is much more a function of supply constraint as all of the negative news about the economy and our market has many sellers feeling as if they should not be voluntarily selling. Interestingly, prices, particularly in the multi-family sector, are only off their peak by about 10%. We are still regularly selling rent regulated assets at cap rates ranging from 4.5%-5.5%. Other segments of the market, such as retail properties and office buildings, have experienced much greater upward pressure on capitalization rates driving those prices lower. We expect 2009 to be a challenging year as brokers compete to sell the 2,000 (or fewer) properties that will sell this year.