An increase in the number of large, class A office buildings that have come to market since the beginning of the year may signal that the New York City investment sales market is on track to becoming overheated, according to recently released research from Avison Young.
Total dollar volume of first-quarter New York City commercial real estate sales on a year-to-year basis was up 46%, increasing to $8.6 billion from $5.8 billion in the first quarter of 2012, and producing the best first-quarter results in several years.
Avison Young notes that the increase is attributed to the sales of four substantial properties since the start of 2013 — 550 Madison Avenue, 30 Rockefeller Plaza, 237 Park Avenue and 75 Rockefeller Plaza — which combined account for $3.8 billion of the quarter’s dollar volume.
Additionally, several other class A properties have been put on the market, including 125 West 55th Street, 425 Lexington Avenue, 499 Park Avenue and 650 Madison Avenue.
“Over the past 60 days, we have started to see a notable uptick in the number of large, class A buildings being put on the market. The persistently low interest-rate environment, coupled with cap rates moving downward and improving rental rates have created a veritable ‘perfect storm’ for sellers,” said Neil C. Helman, Avison Young, principal and a member of the firm’s New York City-based capital markets group.
“Many funds and REITs are now looking to sell as they feel the current environment is such that the returns they were seeking have or could be met with a disposition today.”
Avison Young principal Jon Epstein, also a member of the firm’s capital markets group, added: “In anticipation that current market conditions will continue to bode favorably for sellers of trophy properties, some large owners that are putting their buildings on the market now may be hedging risk by doing so, as we are still in the very early stages of this trend.”
According to Avison Young, the recent phenomenon of trophy buildings being put on the market is reflected by first-quarter results that show supply is still weighted toward value-add and opportunistic investments, particularly in Midtown South and the West Side of Midtown, which attracted close to 50% of all investment sales activity since the beginning of 2013.
The trend’s infancy is also reflected in the significant decrease in international investment in Manhattan office properties during the first quarter, which fell below its three-year average of 33%.
Ultimately, Avison Young predicts that the direction of international investment will begin to reverse itself as more large owners, seeking to capitalize on current market conditions to chase yield, place trophy properties on the market.
Avison Young’s research indicates that private equity firms are still the leading buyer of office properties in New York City, while institutional investors and user-owners trailed in terms of acquisition activity during the first quarter.
Recent activity shows that institutions are now net sellers of office properties and net buyers of residential.
In the New York City residential market, rental buildings remain the star performer, with overall prices increasing by more than 6% last year and on track to match that success in 2013.