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According to JLL’s Q3 Market Overview, confidence and pricing swells in Manhattan
NEW YORK, Oct. 20, 2014 – Nearly $30 billion in closed deals. An additional $12 billion under contract. In total, 328 completed sales transactions – a 47 percent increase from the same time last year. The numbers don’t lie and the city is inching toward the historical high in sales transaction dollar volume. Through 2014’s third quarter, Manhattan is on pace to finish the year near 2007’s record high of $48 billion in transaction volume and to exceed 2007’s deal total of 346. But what do these numbers really tell investors about Manhattan’s commercial real estate environment?
“All eyes are on Manhattan right now, with volume and pricing near record highs,” says Jon Caplan, Vice Chairman of JLL’s New York Capital Markets. “There is plenty of capital ready to deploy but the challenge is finding available product as demand far outpaces supply.”
The Multifamily MeccaCompetition is fierce across major submarkets and product types, but investors are particularly bullish on the multifamily sector. According to JLL, the residential vacancy rate is approximately 1.5 percent, due in part to the influx of more than 40,000 residents to Manhattan since 2010. Through the third quarter, there were 100 closed multifamily deals with the average trade totaling $48.6 million.
However, most of Manhattan’s residential development activity is driven by the condominium sector, led by local and foreign investors. Rapidly escalating land prices favour condo development versus residential rentals. For example, the average land price in Midtown South and Downtown is $595 per square foot, nearly double its rate from a mere 24 months ago. And the corresponding average sale prices for new Manhattan condos generally ranges from $2,000 per square foot to in excess of $5,000 per square foot for the ultra-luxury product.
Land Leaps Ahead Lenders have geared themselves to participate in the rapidly growing land sale/residential development arena. The Multifamily story is closely tied to the unprecedented activity in the land market. land sales are prolific—having reached nearly seven million buildable square feet through the third quarter. In order to capitalize on land acquisitions and construction costs, many investors are vetting their financing options.
“We expect banks and other lenders to be increasingly selective with the construction projects they finance, given the unprecedented rise in land and construction prices across the city,” says Peter Nicoletti, head of JLL’s New York financing platform. “Nonetheless, financing for residential construction in New York City remains highly competitive, and favorable for developers.”
Dedicated to DisciplineFormer UCLA Coach John Wooden once said, “Discipline yourself, and others won’t need to.” Lenders are living and breathing that philosophy this cycle. Leverage remains modest, with life companies and commercial banks both averaging approximately 65 percent leverage to value (LTV). CMBS providers will provide leverage up to 75 percent while mezzanine lenders’ are largely cash flow driven and will provide leverage accordingly.
Lenders are requiring meaningful equity in front of a deal and investors seeking higher yields are investing equity in residential development.
Growing Influence of Foreign Capital“A big reason the market is so competitive and prices have climbed is the increasing presence of foreign capital and the scarcity of available product,” says Scott Latham, head of JLL’s New York investment sales business. “Foreign investors are stepping up as joint-venture partners and staking a major claim into multifamily development. They also are acquiring or investing in major office properties.”
In Manhattan alone, foreign investors have closed nearly $7 billion in office transactions, accounting for more than 30 percent of the total activity in the market, through direct and joint-venture equity investment.
Office OutperformsManhattan’s office vacancy rates are at their lowest levels since 2008, and unemployment is at its lowest level (7.3 percent) since the last recession. While media and creative industry tenants continued their migration to Midtown South and Downtown, Midtown Class A asking rents have risen to $77 per square foot and vacancy has dropped.
The sector remains a big draw for the lending community as well. According to Nicoletti, “Lenders are aggressively pursuing stabilized office product, providing both mortgage and mezzanine debt.”
The message is clear: confidence in Manhattan’s real estate market shows no signs of slowing.
“Both domestic and foreign institutional investors are taking a long-term view on real estate investment in Manhattan, and in addition to infusing more equity in the capital stack, particularly for significant office properties,” says Caplan. “Longer-term investment horizons result in fewer opportunities, leading to heightened competition. This contributes to a strong outlook for the Manhattan’s market.”
JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2013 alone, JLL Capital Markets completed $99 billion in investment sale and debt and equity transactions globally. The firm’s Capital Markets team comprises more than 1,300 specialists, operating all over the globe.
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About JLLJLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or 280.0 million square meters, and completed $99.0 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $50.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.
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