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In last week’s column, we took a look at the overall New York City building sales market and compared its recent performance with past periods. This week, we will take a similar look at the first half of 2011 (1H11) but will analyze the performance of each individual geographic submarket.

As I have written for some time, we fully expected the Manhattan market to lead the entire marketplace out of the downturn and are indeed seeing this happen. Sales volume picked up in Manhattan before it did in other submarkets, and we are starting to see value appreciation in Manhattan.

In the outer boroughs (including northern Manhattan), sales volume has been lagging and, in some cases, has only recently started to recover. Value in these areas remains uneven with some product types experiencing continued slides in the price-per-square-foot metric.

A detailed look at each of these submarkets will highlight how each is performing.

Visit the Commercial Observer for Bob's full Concrete Thoughts article

Agents: Robert Knakal

In the third quarter of 2010 (3Q10), the investment sales market in New York City suffered a surprising setback, with a reduction in sales volume from trends established in 2009 that continued into the first half of this year. This is true if we look at total dollar volume as well as number of buildings sold.

In 3Q10, the total dollar volume of sales was $2.65 billion. This figure represented a 30 percent drop from the $3.76 billion in sales volume in 2Q10. In terms of the number of properties sold, there were 377 properties sold in 3Q10, representing a 23 percent reduction from the 488 properties sold in 2Q10.

The reason these reductions are surprising is that they were not expected based upon recent trend analysis.

In the Manhattan marketplace (defined as south of 96th Street on the East Side and south of 110th Street on the West Side), we had seen six consecutive quarters of positive volume increases. Northern Manhattan also experienced a positive volume trend for many quarters running. In 2Q10, we saw transaction volume turn from negative to positive for the first time in this cycle, both in Brooklyn and Queens. The Bronx was the only submarket in which volume did not change course from its consistent slide in transaction volume. Our expectation was that transaction volume would turn positive in the Bronx in 3Q10 and that we would have positive volume trends marketwide.

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Agents: Robert Knakal

Without a doubt, the most important economic indicator for the commercial real estate market is employment. No other metric more profoundly impacts the fundamentals of our market than the number of people who are productively working. Unfortunately, news on the jobs front, thus far in 2010, has been lackluster and well below most economists' forecasts. This is the main reason why momentum has been lost in what little traction the economic recovery had displayed.

The reason that the real estate industry relies so heavily on job creation is that if people have lost a job, or fear they may lose a job, they do not move out of Mom and Dad's house; they do not move from a one-bedroom apartment to a two-bedroom; they do not move from a rental unit into a purchased single-family home, a condo or a co-op; and companies that are downsizing do not need more office space, they need less.

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Agents: Robert Knakal

In the first half of 2010 (1H10), the activity in New York City's multifamily market mirrored the overall investment sales market in many respects. This week we will take an in-depth look at the activity we are seeing in the multifamily market.

In the investment sales market, during 1H10, there were approximately $6.5 billion in transaction activity. This figure already surpasses the $6.2 billion of sales experienced in all of 2009. The activity in 1H10 represents a 131 percent increase in the dollar volume of sales on an annualized basis.

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Agents: Robert Knakal

On this edition, series host Ken Fisher talks with Bob Knakal on how the real estate sector of the NYC economy has responded to the recession and signs that the recovery phase is underway.

CityWide is CUNY TV's dynamic talk show for New Yorkers who care deeply about our city. The program is hosted by former City Council member Ken Fisher.

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Agents: Robert Knakal

A couple of weeks ago, my column on this blog entitled “Higher Taxes Mean Sluggish Employment” created a significant number of responses and provided a microcosm of on of the biggest debates going on in Washington today. It is the debate between those who believe that the government should create another round of stimulus, thereby increasing spending to stimulate the economy versus a focus on deficit reduction.

The pending expiration of the Bush tax cuts, which are scheduled to sunset at the end of this year, is prompting heated debate in Washington regarding which of these two strategies, or a combination of each, to implement. If you read the comments made in response to the above mentioned column, you will see what appears to be a debate fit for an episode of Face the Nation rather than a commercial real estate blog.

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Agents: Robert Knakal

Bob Knakal will be speaking to Brian Sullivan on Fox Business Network TODAY from 1:00 -1:30pm. Check it out!

Agents: Robert Knakal

The investment sales market has been steadily improving over the last few quarters, as fundamentals begin to improve and economic recovery, while sluggish, is upon us. With regard to fundamentals, we have seen rent concessions evaporating and occupancy rates improving. The economy is moving in a generally positive direction but is having difficulty finding momentum as employment growth is well below expectation and last week it was reported that consumer spending experienced a decline of 1.2% in May, the first drop since September of 2009. While the investment sales sector appears healthy, the future of the market, however, is uncertain as market indicators are presently difficult to interpret. These conditions beg the question: Are we in another bubble at the bottom of a cycle?

Today, nothing is impacting the investment sales market more than the supply / demand relationship. Real estate markets are always dependant upon the supply  / demand dynamic, however; it appears to be impacting the market more acutely now than we have seen in the past. Presently, there is excessive demand met by a relatively weak supply of available properties for sale.

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Agents: Robert Knakal

We in the investment-sales sector are painfully aware of the anemic sales volume our market experienced in 2009. The number of sales diminished from its peak by 74 percent, and the total dollar volume of sales was off by 91 percent. By any measure, these figures represented record lows for at least 26 years and, perhaps, longer. The perception held by many observers was that this lack of volume was caused by either a lack of demand or a very wide "bid-ask spread," indicating that the level of expectation of buyers and sellers was sufficiently far apart to bring a halt to trading activity.

It has been my opinion, however, that this lack of volume was caused more by supply constraint than a lack of demand or the oft-mentioned bid-ask spread. There were simply not many properties for sale. Normally, the supply of available properties for sale is fed by discretionary sellers. As value began to drop in 2007, these discretionary sellers withdrew from the market. When this happens, distressed sellers usually swoop in to fill the void and add supply to the market. This did not happen in numbers anywhere near what most participants in the market were expecting.

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Agents: Robert Knakal

Commercial real estate markets across the country are overleveraged. It is estimated that for the next several years, approximately $350 billion of commercial debt will mature annually, much of which will have difficulty finding replacement leverage given the reductions in value that we have seen coupled with today’s more conservative loan-to-value ratios being used by lenders. The deleveraging process that our markets must go through will require massive amounts of fresh equity.

Demand drivers are excellent today and, if you are a frequent StreetWise reader, you know that I have illustrated numerous times the acute supply / demand imbalance that exists today with little available product meeting extraordinary demand. High-net-worth domestic investors and families which have driven the markets for the past couple of years have met a resurgence of institutional capital which has come back to the commercial real estate sales market with a vengeance. Additionally, foreign investment is very apparent in today’s market and foreign high-net-worth investors are appearing in numbers not seen since the 1980s.

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Agents: Robert Knakal

The European Central Bank is the central bank for Europe’s single currency, the “euro”. The euro was first used in 1999 at which time there were 11 member nations in the European Union. Today, there are 16 countries which are members.

The credit crisis we have experienced in the U.S. was not isolated. Countries all over the globe have been affected and, most recently, the so-called PIIGS nations have been suffering significantly. Economies in Portugal, Italy, Ireland, Greece and Spain have seen debt to GDP ratios explode and needed austerity measures have already prompted both strikes and riots, most notably, in Greece. All of the uncertainty surrounding many of the EU economies has exerted substantial downward pressure on the euro.

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Agents: Robert Knakal

As we have discussed in several previous StreetWise columns, the distressed asset pipeline, which has been clogged for nearly two years, is beginning to loosen up. Lenders and special servicers are faced with thousands of distressed assets on their balance sheets and in their portfolios, yet until recently, only a small number of these assets have made their way to the market.

Everything that has happened from a regulatory perspective has provided these entities with the ability to avoid having to make decisions relative to these distressed assets. These regulatory changes have included changes in the FASB market-to-market accounting rules, modifications to REMIC guidelines and bank regulators letting banks hold notes on their books at par even though they know the collateral is worth substantially less.

The Federal Reserve’s highly accommodative monetary policy is allowing for the recapitalization of the banking industry which is relieving pressure on lenders to deal with distressed assets quickly.

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Agents: Robert Knakal

Welcome back old friend! Yes, we have seen a re-emergence of the blessed 1031 tax-deferred exchange in recent weeks, and what a welcome sight it is.

The opportunity to protect hard earned equity in the sale of an investment has been available to investors since 1921. However, this part of the tax code was so complex that only a small segment of the investment community took advantage of this mechanism.

In 1990, the Omnibus Budget Act provided more widespread access to a broader set of investors as this option was clarified and simplified. Section 1031 exchanges are often mischaracterized as “tax free” when they are actually “tax deferred”.

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Agents: Robert Knakal


In recent weeks, Streetwise has looked at the divergence of opinions and perspectives present in the marketplace. There is significant optimism and pessimism present at the same time so the question becomes, Can market conditions actually be positive and negative at the same time? I believe the answer is yes but it is dependent upon individual circumstances.

There are many indicators in the market which lead us to be optimistic. Unemployment, the metric which most profoundly impacts the fundamentals of real estate, appears to have bottomed and we are starting to see job growth. Inflation appears to be in check and even the most bearish economists don’t see inflation as a short-term problem. Interest rates, while edging up, have not caused any significant increase in borrowing rates. When the Fed ceased its asset buying program at the end of March, we saw upward pressure on interest rates, particularly at the long end of the curve as the 10-year T-bill, which had consistently hovered around 3.5%, rose to over 4% for a brief period. Last Friday it closed at 3.625%, a surprising result after the Fed announced 10 days ago that it would begin a program to sell a trillion dollars worth of assets over time.

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Agents: Robert Knakal

Normally, the content in StreetWise is very macro in nature as I try to make the topics of interest and germane to a national audience. This week, I will divert from this practice to share with you what we are seeing in the New York City building sales market and, perhaps, those of you operating in other markets across the country can chime in with what you are seeing in your markets.

In the first quarter of 2010 (1Q10), we did not see the increase in sales activity that we had anticipated based upon the positive psychology many participants in the market are exhibiting. In terms of dollar volume of sales citywide, there were $2.03 billion of closed transactions, a 0.7% reduction from the $2.05 billion transacted in 1Q09. Interestingly, we saw better results in Manhattan than in the outer boroughs where activity levels continue to drop from the remarkably low 2009 levels.

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Agents: Robert Knakal

This week, we conclude our discussion of the divergent perspectives of the optimists and the pessimists.

11) Cap Rates: Going into this down-cycle, it was expected that cap rates would rise significantly as significant levels of distress were evident in the marketplace. Cap rates had risen anywhere from a low on some product types of 50 to 75 basis points, up to as much as 250 to 300 basis points on others. It appears that, given the constrained supply of available assets and the significant demand chasing those assets, there is presently downward pressure on cap rates as they have not risen nearly as much as had been expected. Is this a temporary phenomenon or does this mark the beginning of a recovery? As usual, it depends upon your perspective.

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Part 1
Part 2
Part 3

Agents: Robert Knakal

For the past two weeks, we have taken a close look at several factors which impact commercial real estate values and how optimist’s (the Bulls) perspectives differ from those of pessimists (the Bears). We continue this discussion here.

Click here for part one and part two.

Agents: Robert Knakal

Last week, we began discussing the divergence of perspectives among many participants in the marketplace, some of whom are viewing the future very optimistically and some of whom remain pessimistic. The bulls believe the market has bottomed and a real, sustainable, recovery is upon us. The bears believe that present market conditions represent the eye of the storm and that we are in for even rougher times ahead as we get further into 2010, 2011 and 2012. This week we will continue to look at factors which are affecting the marketplace and how the bulls and the bears are interpreting them.

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Agents: Robert Knakal

As we have progressed through the recent recession and entered recovery mode, I have observed an interesting change in participant’s perspectives on where we are headed from here. Up until a couple of months ago, it seemed like there was consensus within the commercial real estate sector regarding the direction of things to come. We felt the effects of high unemployment and a degrading of our fundamentals. From late 2007 through the beginning of 2009, we knew things were going to be difficult with transparent downward pressure on rental rates and property values. The health and direction of these metrics have always been, and remain, linked to aspects of the broader economy.

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Agents: Robert Knakal

Do you remember college? Do you remember Economics 101? In Econ 101, we studied Adam Smith's famous Paradox of Diamonds and Water. Even though life cannot exist without water and can easily exist without diamonds, diamonds are pound for pound vastly more valuable than water. While marginal-utility theory of value resolves this paradox, scarcity of goods is what causes humans to attribute value. If we had an unending abundance of both water and diamonds, we probably wouldn't value either very much.

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Agents: Robert Knakal

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