Home values remain strong thanks to 1031 exchange.

Despite the current lending environment, Massey Knakal has witnessed prices for small to mid-sized investment properties hold in Manhattan. Two recent listings that we placed under contract and a recent sale in September suggest that 1031 buyers have helped keep values afloat.

In early August, we were retained to sell a mixed-use elevatored apartment building with upside in the West Village. Since 2005, there have only been eight elevatored apartment buildings that have traded in this neighborhood, so we were confident there would be a long list of interested parties.

We priced the property at $20 million, which represented 20.8 times the rent roll, a 3.4% capitalization rate and $582 psf. We were cautiously optimistic that we would produce pre-credit crunch pricing because opportunities for this type of product are few and far between.

In the month of August, which some consider the slowest time of year, we were able to produce 28 offers, l0 of which were higher than the unsolicited offers that the seller had received prior to our involvement. However, many buyers made it quite clear that it was difficult for them to compete because they could not even secure 50% financing for their purchase. At a 3.4% capitalization rate, this fact may not surprise many, but there was still a sentiment that lenders were quoting 10 to 20% less than they would have a couple months ago.

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Ultimately two parties stepped up at asking price, which led to an over asking price contract being signed. It was a 1031 buyer needing to place his equity who was able to tolerate the low loan to value financing that was available and execute a contract.

In a similar case we had been marketing a mixed-use property in Union Square since late May. We asked $9.75 million for this 24-foot wide walk-up building with fair market tenants and a restaurant at near market rent. The asking price represented $1,324 psf or a 4.5% return.

The one preliminary obstacle was that we were looking for the buyer to assume a loan of $4.15 million, which only provided a loan to value of 42.5% because of a high prepayment penalty. Ultimately the buyer that signed a contract did not mind this low leverage because he was looking to place his equity for a 1031 exchange.

In a third example, we recently closed on 312 Bowery between Houston and Bleecker Streets. The sale price was $22.1 million, which represented a price of $983 psf. This 50-foot wide, elevatored property had been completely renovated and included a vacant retail space and 22 units above.

With the vacant retail and the state of the credit market, it would be difficult to secure a mortgage.

However, the buyer signed a contract in August and closed shortly with virtually all equity, once again in order to place a 1031 exchange.

It is no secret that lenders have become more conservative in their underwriting today. However, in each of the above three transactions the buyer was willing to supply more equity via a 1031 exchange while still paying prices consistent with 2006.

For example, two elevatored buildings traded in the West Village in 2006 for an average of 15.6 times rent roll, or a 3.4% capitalization rate. Our first contract signing mentioned surpassed these averages. For the other two mixed-use properties mentioned, we achieved respective prices per square foot of $1,255 and $983; in 2006 the average mixed-use property sold for was $982 psf over 15 sales.

As for the future of the building sales market, the turnover rate should be closely watched. Year to date, our Manhattan office has signed an average of 15 contracts per month; this represents a strong improvement over last year's average of 10.

Part of this pickup can be attributed to a surge earlier in the year when we signed 21 and 20 contracts, respectively, in February and March. Early in the summer after news of the credit crunch widely spread, we still posted solid months in June and July signing 19 and 17 contracts, respectively.

However, that number dropped to nine in August. It's too early to tell if this was just a result of business being pushed off until the end of the summer, or if buyers on the whole paused to watch pricing.

If turnover does drop considerably, pricing could very well follow. The third quarter of this year should be closely watched.

BY JAMES NELSON, MANAGING DIRECTOR, MASSEY KNAKAL REALTY SERVICES