Commercial real estate sales market Q1 2023 vs. Q4 2022

In the first quarter of 2023, the commercial real estate market saw a total of 569 transactions (a 5.4% increase vs. Q4 ‘22) with a dollar volume of $6.3 billion (a 6.8% increase vs. Q4 ‘22’s $5.9 billion). While the number of transactions and dollar volume remained relatively stable compared to the previous quarter, there was a significant increase in the average price per square foot. The average price per square foot was $524/sf in Q1 2023, a 27% increase from Q4 2022. The average sales price for commercial properties in NYC in Q1 2023 was $11 million, up 1.8% from Q4 2022. The average cap rate for commercial properties rose to 5.9%, from 5.5% in Q4 2022.

Despite the steady performance of the commercial real estate market, the land/development asset class sector saw a slight decline in the first quarter of 2023. There were 46 transactions with a total dollar volume of $543 million, a 6.1% decrease in transactions and a 14.8% decrease in sales volume compared to Q4 2022. The average sales price for land/development assets was $11.8 million, down 9.2% from $13 million in Q4 2022.

A bright spot in the land/development sector was the borough of Queens. Queens showed resilient quarter over quarter progress with 22 transactions, a 175% increase from Q4 ’22 with a dollar volume of $378 million, a whopping 611% increase from Q4 ’22 and a 157% increase in the average sales price to $17.2 million.

In addition to these market trends, there are several macro factors affecting the overall real estate climate in NYC. The Federal Prime Rate is currently at 8.25%, the highest rate since June 2006. The United States Federal Funds Rate was just raised 0.25% again and is currently at 5.25%, up from 5%, and is expected to continue increasing throughout the summer. (my prediction is 2 more 0.25% increases before a pause). As Fed Chairman Powell said at a press conference after raising rates .25% again: “We have a goal of getting to 2% (inflation). We think it’s going to take some time. We don’t think it will be a smooth process and I think we’re going to need to stay at this for a while.”

There is some good news on the inflation front. The United States Annual Inflation Rate has decreased to 4.98%, down from 6.04% in February. The next reading is on May 10th.

The US 1-Year Treasury Rate is also on the rise, currently at 4.89%. The 10-year is holding steady at 3.38%. Mortgage rates have eased in the past week with the 30-Year Fixed Rate dropping from 6.73% on 5/1 to 6.43% today, 15-Year Fixed Rate at 6.12% on 5/1 to 5.9% today.

Unfortunately for NYC, Governor Hochuls’ ENTIRE housing plan was pushed out of the NYS budget. Which means no agreements on statewide zoning & density changes or tax incentives, like 421a. (including no extension on the grandfathered 421a site moving the deadline from 2026 to 2030 to allow developers time to finish their projects). What does this mean? LESS affordable housing and MORE luxury condo projects. This will translate into continued increased upward pressure on residential rents. Owners and developers will also be forced to look for alternative uses instead of much needed rental housing.

Overall, the NYC real estate market is showing signs of resilience, depending on the asset class. The slight decline in the land/development asset class sector suggests that developers may be facing increased challenges in finding development opportunities that pencil out. Owners, Investors and developers should continue to closely monitor the latest trends and data to make informed decisions.