The Full Nelson

THE FLOOD GATES THAT NEVER OPENED

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Late last year, my company made the prediction that the NYC investment sale listing inventory would jump by as much as 30% this year. We felt that after the inventory plunged in 2009 and flat lined in 2010 and 2011, that there would be tremendous pent up demand for owners to sell once again. It hasn't happened, and our listing inventory has remained flat.

Back in the height of the market in 2007, our company had over 750 exclusive listings. Not surprisingly, that number fell to about 500 in 2009, as long term owners didn't want to sell at a discount and recent owners couldn't afford to sell and get out from under. That same year, NYC property sales were in a free fall dropping to only 1,436 sales which was down over 70% from 2007's peak of 5,018.

In 2009, everyone was waiting for the floodgates to open and a wave of distressed assets to hit the market. It never happened as lenders pretended and extended. Ultimately, the delay worked in the banks favor as the market and prices recovered. Many of the loans were restructured or recapped, and many of the loans for broken condo projects or land were sold.

Although a good share of our business in 2009 and 2010 were loan sales, today that business in NYC has tapered off a great deal. Now we are back to selling mostly at the asset level. That is mirrored in the NYC sales volume which has risen drastically from 2009. 2011's dollar volume quadrupled 2009's level, and the number of sales went up by over 30%.

So if the number of sales has increased by 30% from 2009 to 2011, why has our company's listing inventory remained flat? The short answer is that we're selling properties more quickly and having challenges replenishing the inventory.

This year I have already had five sales that came to market and contracted in less than a month. They include 37 West 10th Street, 14 East 11th Street, 22 East 13th Street, 40 Morton Street, and 74 Washington Place. Our typical sales process is being on the market for 6-8 weeks and then going to contract. That means it might be almost three months before a contract is signed.

In 2009 it took much longer. Buyers waited and waited to make decisions in an uncertain market. Contract negotiations dragged on for months as buyers tried to take every advantage as the tables were suddenly turned on sellers who had never faced a buyer friendly market.

The simple fact is that we can not keep enough listing inventory. There is such demand from local and foreign buyers alike that we'd cant keep up with it. When something new comes on line, buyers attack it.

A great example was our sale at 22 East 13th Street. This mixed-use building had a restaurant and five apartments. At a price point of $4,250,000, it was accessible to most buyers. The fact that it has a restaurant with a liquor license and only fair market apartments added to its desirability. We priced the listing at over $1,000/SF, which was above and beyond other comparables. The final sales price still ended up at $575,000 over the asking price. This was after we had dozens of tours and 21 offers after a call for final bids.

If I had a dozen of these smaller mixed-use listings, we could sell them in the same time frame. However, these types of listings are few and far between.

Our biggest response from potential sellers is, "where will I put the money?" With all the stock market volatility, sellers don't want to reinvest their proceeds there. They also can't get an acceptable return in treasuries or CDs. As there is no sufficient product on the market, reinvesting via a 1031 exchange is also tough to do.

Thus, it's going to be rough sledding for a while. To get back to the turnover rate that we experienced in 2005-2007, discretionary sellers will have to return to the market. Long term owners will also have to be convinced that there is an attractive investment alternative rather than keep their money in what they already know, even if it's underperforming.

The reason for our prediction for these long term owners had to do with the Bush tax cuts expiring at the end of this year. Unless amended, the Federal Capital Gains Tax rate will rise from 15% to 20% next year. In addition, under President Obama's health-care act, the new Medicare tax on investments will add another 3.8% in 2013. Obama has also vaguely stated that any tax rate should not be less than 30%.

Whether the Federal Capital Gains rises from 15% to 23.8% or 15% to 30%, it is clear that there will be an enormous additional tax burden for owners who look to sell outright. For example, a seller of a $10,000,000 property may have to pay anywhere between $886,000 to $1,500,000 in taxes unless a 1031 exchange is attained.

Given the magnitude of this additional tax burden, why is there not a mass sell off this year?

James P. Nelson, Partner

James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 200 properties and loans with an aggregate value of over $1.3 billion in the NY Metro Area. He can be reached at jnelson@masseyknakal.com or 212-696-2500 x7710.

To follow James on Twitter, please go to http://twitter.com/JamesNelsonMKRS or LinkedIn at http://www.linkedin.com/in/jamesnelsonmasseyknakal.

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