New York—Robert Knakal, chairman of Massey Knakal Realty, said the New York City commercial property investment sales market is currently red hot, but warned that sustained periods of low interest rates typically lead to real estate bubbles.
“Things are phenomenal now if you are in the sales business,” said Knakal during his keynote at the New York City Real Estate Career Expo held this week at the New York City Bar Association.
Knakal said that the state of the New York City land market is currently “unprecedented.” Land prices in New York City have increased by 20 to 25 percent in the past three months and have even exceeded levels achieved at the peak of the market in 2007. He said that the Upper West Side is registering prices of $600 per square foot, compared to $400 in 2007. And in Tribeca, land prices are $1,000 per square foot, up from $500 per square foot at the last market peak. “Land prices are on fire,” he said.
By dollar volume, the New York City investment sales volume in 2012 was $40 billion, compared to $63 billion at the market peak in 2007. Knakal noted that more buildings sold last year than at any time in New York City’s history. The relatively high sales level achieved in 2012 was driven in part by the increase in the capital gains tax rate, said Knakal. He expects the number of buildings sold this year to decrease by 20 to 25 percent, but the dollar volume of sales to nevertheless increase. “If you are a sales broker, you are feeling pretty good.”
Knakal said that price per square foot of New York commercial properties has increased by 13 percent in 2012, and by 15 to 20 percent in the first three months of this year alone.
The drivers of the investment sales market are the low interest rates, the “same pool of capital fighting over” a limited pool of real estate, and relatively small yields in other investment vehicles resulting from a mediocre economy. Knakal emphasized that values are increasing not because of underlying fundamentals but above all because money is cheap as a result of low-interest rates maintained by the Fed.
“The government is artificially manipulating interest rates.” The leasing market, he added, is not as hot as the investment sales market.
“Things right now look great, but are we in another period of asset bubbles? History tells us that sustained periods of low interest rates create asset bubbles.” And he said that in the past few real estate cycles, a spike in land prices has always preceded a downturn in the market. The sky-high prices in land, he said, “makes us nervous.”
Knakal noted that if interest rates eventually rise because of traction in the economy, that will not pose as much of a threat to the real estate market than if interest rates rise as a consequence of the high level of government debt.