Manhattan Office Bubble Fizzles Without Big Chinese Buyers

Authored by Wolf Richter via WolfStreet.com,

Sales volume in Q3 plunges 67% from a year ago.

Manhattan, the biggest most expensive trophy market in the US for commercial real estate, used to be particularly appealing to exuberant foreign investors, such as Chinese conglomerates. But in the third quarter, sales volume of large office properties (minimum $5 million and 50,000 sq. ft.) plunged 67% year-over-year to $991 million, the lowest in five years. It was down 90% from the peak in Q1 2015.

“Q3 2017 might signal a return to normalcy for the highly sought-after Manhattan market,” the report by Yardi Systems’ Commercial Café commented.

This chart shows the dollar sales volume of large office properties. The $991 million in Q3 is rounded up to $1 billion:

The number of closed deals plunged 40% to just six transactions, according to Commercial Café. That’d down 71% from the peak in Q1 2015:

The average price per square foot fell 19% year-over-year and is down 32% from the peak in Q1 2016, but is up from Q1 2017 and about flat with Q3 2015.

As this chart shows, the average price per square foot varies based on a number of factors, including seasonality, but with a trend since the peak in Q1 2016 that doesn’t look promising:

The largest deal was the $465-million sale of 375 Hudson, a 19-story, 1 million-square-foot Class A property, acquired by Trinity Real Estate, the real estate arm of Trinity Church (51% stake), Norges Bank (48% stake), and Hines Interests (1% stake).

What’s sorely missing? The big transactions at inflated prices by Chinese buyers, such as the $2.2 billion purchase in May of 245 Park Avenue by the Chinese conglomerate HNA Group that had boosted Q2 sales. The deal was more than twice the size of the six transactions in Q3 combined. At $1,282 per square foot, it was also “among the highest price-per-pound for this type of asset” ever recorded in Manhattan, as it has been described. Those trophy purchases by Chinese conglomerates really moved the needle.

But now the large Chinese conglomerates that had considered the Manhattan office market their trophy hunting grounds were absent.

This absence follows the crackdown by China’s State Council on cross-border transactions. Its guidelines spell out what Chinese companies can and cannot acquire overseas to “promote healthy growth of overseas investment and prevent risks,” as the guidelines said.

Some transactions are still desirable according to the guidelines, with a big emphasis on China’s “Belt and Road Initiative” in Central Asia and on companies that “take the lead to export China’s superior technology and equipment, upgrade the nation’s research and manufacturing ability, and make up the shortage of energy and resources through prudent cooperation in oil, gas and other resources.”

Other overseas investments will be “restricted,” including “real estate,” “hotels,” and “entertainment.”

So here we go. Over the past few years, and building up into a powerful crescendo that culminated just a few months ago, Chinese conglomerates have been buying up whatever they could get their hands on with precariously borrowed money. But now they’re being reined in by Chinese authorities who are worried about the soaring debt levels of those conglomerates and about their acquisitions at inflated prices and about a financial crisis that these debt levels could trigger when they go bad. And trophy markets, such as Manhattan, are among the first to feel the effects.

Mapping The Most (And Least) Valuable States In America

Everyone knows location is the most important part of real estate. You can’t change where your house is (all things being equal). You have to consider school districts, crime rates, commute times—the list goes on and on. It can be much simpler when you’re considering buying a home to compare apples to apples so you can see how the real estate market differs according to location.

So HowMuch.net created a new visualization showing land and housing prices at a glance.

Source: HowMuch.net

The blue dots represent the value of an acre of land, and the red circles indicate the median value of a home. The bigger the blue dot and the larger the red circle, the more expensive it is to become a property owner. Small circles and dots likewise indicate a very low cost of purchasing property. The home values are from the U.S. Census Bureau’s 2015 American Consumer Survey, and the numbers behind the land values come from the Bureau of Economic Analysis.

As HowMuch.net notes, several things stand out in our illustration.

An acre of land is much more valuable in the Northeast compared to any other part of the country. This is partly because the Eastern seaboard is a very densely populated area with several large cities, most notably New York. It is also a historical artifact that Europeans settled New England first and then moved west, meaning that New York and Massachusetts have some of the oldest modern structures anywhere in the U.S. In other words, Eastern cities are a lot older than Midwestern cities, so there isn’t a lot of farmland for suburban expansion anymore. We should also mention that in terms of geographic size, these are some of the smallest states in the country. Matter of fact, the three states where the cost of an acre of land is greater than the median price of a house are all located on the East Coast, and they happen to be some of the smallest states in the Union (Rhode Island, Connecticut, and New Jersey).

Median home values (the red circles) are a different and more complicated story. California has the most expensive houses by far ($449,100). Oregon and Washington boast similarly high housing valuations as well ($264,100 and $284,000, respectively). It is also expensive to buy a home on the East Coast with six out of the top ten states with the most expensive median home values.

But there’s a noticeable dip in both housing and land prices in southern and midwestern states. Prices slowly rise the further you move from east to west. This highlights unique economic developments over the last several years, including the boom in oil exploration in North Dakota and the growth of Western cities thanks to young people,like Denver. Snowbirds also tend to move to Florida and Arizona after they retire, which also pushes up housing prices in those places.

Top 5 Most Expensive States to Buy a Home 

1. California - Value per acre: $39,092; Median Home Value: $449,100


2. Massachusetts - Value per acre: $102,214;  Median Home Value: $352,100


3. New Jersey - Value per acre: $196,410; Median Home Value: $322,600


4. Maryland - Value per acre: $75,429; Median Home Value: $299,800


5. New York - Value per acre: 41,314; Median Home Value: $293,500

Top 5 Cheapest States to Buy a Home

1. West Virginia - Value per acre: $10,537; Median Home Value: $112,100


2. Mississippi - Value per acre: $5,565; Median Home Value: 112,700


3. Arkansas - Value per acre: $6,739; Median Home Value: $120,700


4. Oklahoma - Value per acre: $7,364; Median Home Value: $126,800


5. Kentucky - Value per acre: $7,209; Median Home Value: $130,000

All this shows that the laws of supply and demand are alive and well in the real estate market. You can easily find cheap acres of land where they are plentiful and un-useful (sorry, Nevada), but owning property is a lot more expensive in smaller places crowded with lots of people. As always, location, location, location.

San Fran Home Sales Crash To Lowest Level Since 2008 As Pricing Reset Gets Underway

We have frequently written over the past couple of quarters about the bubbly San Francisco housing market that looks set for another epic reversal as home prices have reached staggering new highs just as employment levels seem to be rolling over.  With home prices now implying that only 10-20% of residents can afford the "median" priced home, it"s certainly not difficult to understand why demand may be waning.     

According to HousingWire and a new report from PropertyRadar, home sales in the Bay Area are finally starting to rollover with Q3 YTD volumes down 10.3% YoY, reflecting the fewest number of homes sold over that same time period since 2008.  Perhaps even more staggering is that distressed property sales fell 35.7% YoY so far in 2016, to the lowest level since 2001, as "low-priced" inventory dried up and buyers have found it financially impossible to move up to higher price tiers.

Conversely, non-distressed property sales fell 7.1% on a year-over-year basis. But it should be noted that as a percentage of total sales, distressed property sales accounted for only 7.9% of total sales, compared to 11.1% in 2015 and a high of 56.3% in 2009.

“The 35.7% decline in distressed property sales drove the overall decline in Bay Area sales to its lowest level since 2001,” said Madeline Schnapp, director of Economic Research for PropertyRadar.

“For several years now, the affordability of distressed properties contributed significantly to overall sales,” Schnapp added. “Distressed property inventory has declined to the point it’s now a drag on overall sales. Bay Area sales will likely remain relatively flat until new, attractively priced, inventory arrives on the scene.”

According to PropertyRadar’s data, the number of homes sold priced from $0 to $500,000 fell by nearly 27% from 2015 to 2016. Homes priced from $500,000 to $750,000 fell by just shy of 9%.

Homes priced from $750,000 to $1 million fell by just 3.6%, while homes priced above $1 million actually rose, albeit by only 0.4%.

“The outsized decline in distressed property sales combined with the rapid increase in prices and the lack of buyers that qualify for higher priced homes is reflected in the 26.7% decline in the sales of lower priced homes,” Schnapp said. “Income growth in the Bay Area has not kept up with rapidly rising home prices shutting out a significant percentage of would-be buyers.”

Of course, none of this should be terribly surprising in light of the fact that median San Francisco home prices have surged 86% over the past 4 years to a mere $1.4mm. 

As Paragon Real Estate points out, the only question left to answer now isn"t whether San Fran real estate will crash, but rather just how deep the crash will be.