Deals for a piece of New York’s iconic skyline are drying up.

About $14 billion of commercial real estate changed hands in the biggest U.S. property  market in the first three months of the year, the lowest tally since the third quarter of 2014, data from Cushman & Wakefield Inc. show. Sales of office towers, hotels, stores and other buildings are forecast to drop as much as 30 percent this year in Manhattan and the surrounding boroughs after a record $75.5 billion of deals in 2015, according to the brokerage.  Evidence is piling up that six years of record-shattering price growth for U.S. commercial real estate is hitting a wall. Buyers and sellers in Manhattan, a magnet for property investors from around the world, are sitting out deals as the slump in oil prices, China’s slowing economy, an uptick in borrowing costs and a volatile stock market give landlords pause.

“When you’ve had a pretty steady ascent for several years, it’s logical that investors look over their shoulders for a reason or a sign that the music might stop,” said Doug Harmon, a senior managing director at Eastdil Secured LLC, a real estate investment bank and brokerage owned by Wells Fargo & Co. “In January, it felt like a game of musical chairs.  Even the most sophisticated investors weren’t sure if the music had just skipped or stopped, and others were scrambling for a chair to sit in.”

Nationwide, commercial real estate values fell in February, marking the second consecutive month of declines following a six-year streak of uninterrupted increases, according to an index by Moody’s Investors Service and Real Capital Analytics Inc. The decreases are small -- less than 1 percent each -- but mark a changing tide for property owners who’ve ridden a wave of double-digit returns since 2010.

“The market is cyclical,” said Robert Knakal, chairman of New York investment sales at Cushman, which tracks commercial-property transactions in all of the city’s boroughs except Staten Island. “It can’t keep going up.”

Prices for centrally located office buildings in big cities -- one of the segments that jumped the most since the financial crisis -- now have the biggest declines. They have slumped 5.2 percent since December after surging 56 percent past the record set during the last decade’s boom, according to Moody’s and Real Capital.

‘Manhattan Reverberates’

New York accounts for about 40 percent of major-market office deals tracked by the index, according to Jim Costello, a senior vice president at Real Capital. A slowdown in Manhattan is driving the slump in U.S. office pricing, he said.

“Anything that happens in Manhattan reverberates,” Costello said.

Building sales in New York are being stymied in part by the breakdown of the market for commercial-mortgage bonds. Wall Street firms are pulling back from writing new property loans to be sold as securities after demand for the debt dried up at the end of 2015.

The CMBS-market slowdown is pushing up borrowing costs, making it harder to finance transactions. That is especially true for deals too big for banks and insurance companies to underwrite on their own, according to Costello.

“That type of debt is important for very large transactions,” he said. “Manhattan is an expensive place. Every deal is hundreds of millions of dollars.”

Securitized Debt

The biggest office deal of 2015 was financed in the bond market. SL Green Realty Corp.’s $2.29 billion acquisition of 11 Madison Avenue, the 2.3 million-square-foot (213,700-square-meter) tower overlooking Madison Square Park in the Flatiron district, was funded with about $1 billion of debt. Deutsche Bank AG, Morgan Stanley and Wells Fargo sliced the mortgage into securities and sold the bonds to investors in September, according to data compiled by Bloomberg.

Deals are still getting done, albeit not at the blistering pace of the past two years. Earlier this month, Shorenstein Properties LLC sold a 614,000-square-foot office building at 850 Third Ave. in Midtown to a partnership of MHP Real Estate Services and Chinese conglomerate HNA Group Co.

While returns on property investments are moderating, the U.S. property cycle hasn’t peaked yet, said Jon Gray, head of the real estate group at Blackstone Group LP, the world’s largest private equity property investor and the top buyer of buildings in Manhattan last year.

“We recognize there’s been a moderation in growth and value, but the good news is the real estate investment world is still a very big place,” Gray said Wednesday in an interview at a conference sponsored by New York University’s Schack Institute of Real Estate. “The fundamentals are still pretty good and we’re still managing to find opportunities.”

Haven Sought

A wave of cash from foreign investors seeking a haven has been a powerful force behind the surge in Manhattan property values and isn’t likely to abate, according to Real Capital’s Costello. The relative stability of the U.S. will continue to be a draw even as some of the biggest buyers in recent years struggle with economic uncertainty at home and the repercussions of low oil prices, he said.

Cushman is currently working with 32 Chinese buyers that don’t yet own real estate in Manhattan and are looking for New York property, Knakal said.

New Realities

It may take several months for property owners to come to terms with the market’s new realities, Knakal said. When bids in come lower than expected, many landlords simply refuse to sell, he said.

“Sellers aren’t capitulating,” Knakal said. “Volume drops before pricing drops.”
Eastdil’s Harmon said there are several large deals in the works. In 2015, Harmon shepherded such blockbuster transactions as the record $5.45 billion sale of Stuyvesant Town-Peter Cooper Village to Blackstone and the $2 billion purchase of the Waldorf Astoria hotel by Beijing-based Anbang Insurance Group Co. While it may take a little longer to get deals done than it did a year ago, values for the best properties in Manhattan haven’t taken much of a hit, he said.

“Pricing is slightly off the peak in certain circumstances,” he said. “But those prices are still sensational.”