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Private equity takes lead in Q2 investment sales: Avison Young

But 40 percent of 2013 sales were in residential sector

From left: 650 Madison Avenue, 425 Lexington Avenueand 499 Park Avenue
From left: 650 Madison Avenue, 425 Lexington Avenueand 499 Park Avenue

The Manhattan investment sales market was “a tale of two cities” in the second quarter, with private equity firms stepping into the limelight with big-ticket deals while institutional investors took a backseat, according to a report from commercial brokerage Avison Young provided to The Real Deal.

Private equity was responsible for 36 percent of the capital flow into the office market year-to-date, an increase of 7 percent from 2012 and a 28 percent increase from 2011, the report shows. In contrast, only 19 percent of the capital year-to-date came from institutional investors, a 10 percent decrease from 2012.

“Their threshold for pain is less,” Neil Helman, a member of Avison Young’s capital markets group, said of institutional investors. “Their investment returns are pretty locked into a certain window.”

Private equity, in comparison, has a “lot more latitude,” Helman said, and “a tendency to swing for the fences.”

Though dollar volume of transactions saw a year-over-year increase of 19 percent to $7.3 billion, this was largely due to a handful of major transactions, such as the sales of 499 Park Avenue, 425 Lexington Avenue and 650 Madison Avenue. Excluding these outliers, market volume remained flat and transaction volume slipped by 28 percent, the report shows.

The changing of the guard also affected the type of transactions, Helman said, with Class B property sales stagnating while Class A trophies enjoyed brisk sales, reflecting the preferences of private equity investors.

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For the Class B properties, “refinancing seems to be the best available and most prudent option,” he added.

Looking ahead, Helman pointed to a couple of warning signs, most notably the dramatic spike in the cost of land. Average price per buildable square foot across Manhattan was about $400 in the first half of 2013, roughly the same as the first half of 2012. But land for luxury residential development soared to between $700 and $800 per buildable square foot in some cases – a response to the manic demand for high-end condominiums. More than 40 percent – or over $3.5 billion — of the investment sales in 2013 were in the residential sector, the report shows.

“If land is selling at $800 a foot, then to make sense the condos would have to sell at $2200 to $2300 a foot,” Helman said.

“Developers by nature are extremely optimistic,” he added, but at those prices, “the lenders may start to pull back on that optimism.”

Overall though, Helman was bullish about the market, and pointed to its ever-increasing appeal to foreign investors and sovereign wealth funds.

“New York is where everybody wants to be,” he said, “and that doesn’t seem to be changing anytime soon.”

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