PHOTO: SAVERIO TRUGLIA FOR THE WALL STREET JOURNAL
The passing of Sam Zell, a visionary in real estate investing, has reminded us of the importance of seizing opportunities when others are faced with challenges. Throughout the years, Zell made pre-emptive and counterintuitive calls during times of significant difficulties in the real estate market, earning him the nickname “the Grave Dancer.“
The saying “When there is blood in the street, buy property” holds true for various sectors of the market today. Despite variations in performance across sectors, many sectors are experiencing a decline, presenting potential investment opportunities.
Key observations in the current market:
- Downward pressure on rent and high vacancy rates in some sectors.
- Properties with impending loan maturities, require owners to inject fresh capital to retain ownership.
- Pricing per square foot in certain sectors has reached levels comparable to those seen 15 to 20 years ago.
The prevailing sentiment among market participants is that the market may continue to decline further before reaching a turning point, particularly in certain sectors. While many investors are waiting for the market bottom, this strategy carries significant risks. Determining the bottom of a market is typically possible only six to nine months after it has occurred. By that time, values often rise faster than anticipated due to herd mentality.
Reflecting on the last financial crisis, property values hit their lowest point in New York in 2010. Investors who purchased properties in 2009, although experiencing a slight decline in 2010, saw their investments appreciate significantly by 2014 or 2015. Seasoned market participants attest that the best deals they ever made were during times like the current market conditions.
Despite recognizing the remarkably low prices in the market, few investors are taking action and entering the market. This hesitation may be due to uncertainty and the fear of catching a falling knife.
Looking ahead, if given the opportunity to invest $1 billion in Manhattan real estate, I would focus on development sites. Demolishing existing buildings, reducing real estate taxes, and holding these properties until the peak of the next cycle could potentially yield returns of two, three, or even four times the initial capital.
This strategy is based on historical cycles in Manhattan’s real estate market, where the best development sites have consistently sold at prices exceeding the previous peak. For example:
- In 1986 and 1987, top land sites sold for approximately $125 per buildable square foot.
- In 1997 and 1998, the best sites commanded $350 per buildable square foot.
- By 2006 and 2007, values skyrocketed to $750 per buildable square foot.
- In 2015 and 2016, several sites were sold for around $1,100 per buildable square foot.
During the pandemic in 2020, these values dipped to the $300s but recovered to around $500 per buildable square foot in early 2022. With current interest rate increases and construction loan pricing, there is downward pressure on land values once again, creating a compelling opportunity for land acquisition.
The real estate market is currently presenting opportunities for astute investors who are willing to act when others are fearful. While market timing can be challenging, historical cycles and the experiences of long-time investors demonstrate that some of the best deals are made during periods of market uncertainty.
Taking calculated risks and capitalizing on low prices can lead to substantial returns in the future.