I have always admired the big guys in the commercial real estate market of NY. Massey Knakal are tru pros.....Here is what Bob Knakal is saying about todays market.......
The Sky Is Not Falling
We met up with Bob, to take the pulse of New York City commercial real estate and to figure out what's going right amid the reported slowdown. Despite the headlines that have been rocking the nation for the past year, not all sectors of real estate are in a death spiral. In particular, New York City commercial real estate sales transactions below $100 million remain relatively robust considering the lack of credit supply.
According to Bob, sales volume of New York City commercial property below $100 million is off by only 21% versus 2007, which was a stellar year for that market segment. Compare this to the approximately 60% drop in volume for the commercial market as a whole, a number which is skewed by a dry-up in very large transactions.
Further, prices in the sub $100m segment have held relatively stable and are off only 13% versus 2007. This contrasts strongly with Bob's experience in the early 1990s.
“We sold buildings in the late '80s when the market was at its peak for twelve to fourteen times the rent, and in the early '90s we sold those very same buildings—on behalf of the lenders who foreclosed on them—for three to four times the rent. That dynamic is not going to happen now.”
Prices are unlikely to fall significantly further due to the large amount of money held by equity investors currently waiting on the sidelines. However, some bloodletting will clearly be necessary to kick start a new investment cycle.
“There are billions of dollars in equity waiting for a buying opportunity. These investors are all sitting on the fence watching what's happening. And at what point does one of them jump in? Is it a 10% reduction in price? 20%? 25%? The minute one of them jumps in, the others will take notice and react. It will probably create a domino effect.”
While the lending environment has shifted dramatically in the wake of the sub-prime and mortgage-backed security crises, lending has not dried up completely. In fact, portfolio lenders—who by definition do not resell their loans but rather keep their loans in their own portfolio—have stepped into the credit supply vacuum and are now the primary providers of credit for commercial transactions below $30 million, albeit at lower loan-to-value ratios of 50-60% compared to 65-80% eighteen months ago.
“I believe that today is the best lending environment that lenders have seen in the last 40 years. 18 months ago, the spreads were 25 to 50 basis points. Today the spreads are 250 to 300 basis points. Every dollar bankers are lending is nearly ten times as profitable, and there is less risk associated with each deal, because the loan-to-value ratios are down.”
Despite the rise in fuel prices, the multi-family market in particular remains robust. Multi-family income properties continue to be both easier to finance and more attractive to buyers than industrial, office, or retail property. The trick, though, is that lenders are now more cautious about their investments. No longer do lenders look purely at the investment itself to determine risk; now they also scrutinize buyers more closely.
“Buyers without good track records are finding it much more challenging to get financing today. The banks are able to be very selective about the loans they're making. They're looking for borrowers with strong track records. Relationships and track record are very important, in addition to the fundamentals of the building.”
Now has never been a better time to sell. While your property is most certainly going to be worth more at some point in the next 10 years, it is very likely to be worth less before it is worth more. In Bob's words, we're still in the “3rd inning” of the current down cycle and it could be “couple of years at least” before the market recovers completely. If you need to liquidate in the next few years, now appears to be the time to do it. In fact, December 31st could turn out to be a harsh deadline for sellers who fail to close before the end of the year.
“Tax rates are probably as low as they will ever be. We have a number of clients who believe that the federal capital gains rates will go up next year, retroactive to January 1. These clients want to sell and have the closing by the end of the year, especially those who are putting the proceeds in the bank.”