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Art Market Update: Fall 2021

A woman looking at her phone walking through a art gallery

At Bank of America Art Services, we maintain a sharp focus on the art market and on the collectors, dealers, auction specialists and institutions that make it function. We work closely with many of you across four pillars: art lending, art planning, consignment services and arts endowment management. In this update, you’ll find our views about the art market’s year ahead. Talk to your advisor about how these trends and insights might be relevant to your own collection and plans for the future.

The art market’s new frontier

The art market is back — though you might say it never went away. With year-on-year auction sales at Christie’s, Sotheby’s and Phillips more than doubling to $5.9 billion in the first half of 20211, and non-fungible tokens (NFTs) bursting onto the scene generating $2.5 billion in H1 sales2, we’re entering a new demand-driven growth cycle. Fueled by low interest rates, a robust stock market, ultra-high-net-worth (UHNW) wealth creation, digital sales and a new cohort of collectors, we believe the art market is poised to reach new heights. With positive collector sentiment, the art market is likely to outperform expectations, while NFTs, luxury goods and collectibles are creating new markets for auction houses, given the supply-constrained and niche traditional fine art market.

Macroeconomic outlook

In a previous report, we referred to 2021 as the art market’s “recovery” year and 2022 as its “new frontier.” While the art market’s ecosystem suffered through the pandemic with gallery closures and art fair cancellations, art valuations performed remarkably well. But now, as galleries, art fairs and biennials reopen and auction consignors regain confidence, the pandemic-supply shock may be behind us by 2022. In this new market cycle, or “new frontier,” we expect four macro trends to drive the art market to new heights.

What’s driving the “new frontier”:

  1. Shift from Supply-Driven to Demand-Driven Market
  2. Federal Reserve Policy Pivot
  3. Brave New Digital World
  4. A New Crop of Collectors (finally)

Shift from a supply-driven to a demand-driven market. We believe we’re now in the “pent-up demand cycle” phase of a global economic recovery, as economic growth, stock markets and UHNW disposable income continue to improve. Sentiment-driven markets like art and collectibles are significantly influenced by the wealth effect created by bullish stock markets. Now that the supply of works coming to market has normalized following a sharp drop during the pandemic, continued demand growth is likely to drive art valuations higher throughout 2022.

Top Artists by Auction Outperformance in 2020

Artist Total sales ($) Realized price /Mid-estimate
Emily Mae Smith $ 3,939,487 987%
Ronald Ventura $ 2,628,403 738%
Amy Sherald $ 3,539,000 590%
Loie Hollowell $ 4,564,772 476%
Alfred James Munnings $ 1,064,048 417%
Man Ray $ 7,060,034 417%
Francesco Guardi $ 1,277,500 346%
David Hammons $ 5,712,500 321%
Edward S. Curtis $ 1,636,456 287%
Stik $ 1,222,548 285%
Avery Singer $ 10,876,503 267%
Agnes Martin $ 4,282,527 259%
Yayoi Kusama $ 53,508,569 253%
Bridget Riley $ 5,169,249 236%
Alice Neel $ 5,152,579 231%
Kehinde Wiley $ 2,235,059 230%
Sanyu $ 36,806,757 224%
Helen Frankenthaler $ 5,394,515 194%
Cy Twombly $ 53,803,166 187%
Childe Hassam $ 14,805,550 139%

Source: CollectorIQ

A supply-constrained art market coupled with the macroeconomic environment has led to strong performance at auction and, in many cases, outperformance at auction. These are the top artists who outperformed at auction in 2020.

Federal Reserve (Fed) policy pivot. The art market is highly influenced by interest rates. As rates drop, the opportunity cost of owning art (a non-interest-bearing asset) decreases as does the cost of unlocking capital from art via a line of credit. We expect Fed governors to move incrementally and to communicate well ahead of any major action on tapering or rate adjustments. But a 2022 shift toward a more dovish monetary policy could potentially slow down capital flow into tangible assets like art and collectibles.

Brave new digital world. The pandemic crammed a decade’s worth of digital innovation and investment into less than a year. Auction houses, like Sotheby’s, shifted to a digital-first infrastructure. Fairs, like Art Basel and The European Fine Art Fair (TEFAF), launched online viewing rooms. Galleries, like David Zwirner, initiated digital sales platforms powered by virtual reality. And new startups aim to digitize everything from art auctions to secondary dealer sales to art-secured lending to fractional ownership to the art itself. This isn’t the art world’s first wave of startups, but it is the first that attracted top talent, serious capital and, most importantly, early collector adoption. Our initial view was that the art market’s digital shift would be less transformative than in other industries. We now believe that digital viewing rooms, virtual reality and online auctions are more than just a stop-gap measure during the pandemic — they’re here to stay. Near term, this development will lower the cost of doing business for those with scale (for example, auction houses) and raise the cost of doing business for those lacking scale (for example, small to mid-size galleries). Digitization also tends to be margin-compressing, which can benefit collectors. Ultimately, digitization can make the art market more accessible and expand the collector base dramatically. 

A new crop of collectors. If you had asked us four years ago whether a new generation of collectors would soon take the baton from collectors who came of age in the 1980s and 1990s, we would have said no. But during the pandemic, we saw increased engagement from a new batch of collectors — less tethered to the art-historical canon but just as aggressive as their forerunners in their acquisitions. These new collectors tend to fall into four groups: young entrepreneurs, rising hedge fund and private equity professionals, digital/crypto-evangelists, and sports/fashion/entertainment crossovers. This cohort is issue-driven, identity-focused, cross-genre, digitally savvy and looking to redefine the art-historical canon. For them, art is both a capital asset and an extension of their ethos. They want ease-of-use, low transaction costs and instant gratification.

Return of the growth market

The 2020 pandemic art market saw a supply/demand mismatch, with demand greatly outpacing supply. With total auction sales at Christie’s, Sotheby’s and Phillips up nearly 230% year-over-year in the first half of 2021, slightly surpassing 2019 sales, it appears that the supply-constrained market of 2020 is moving toward a new equilibrium and entering into a growth cycle.3 Increased supply and expanding demand are driving the market to new heights. Galleries and auction houses are pursuing different strategies — and facing various challenges—as they each attempt to engage the growing collector base.

The Art Market Poised for Growth

YOY 1H comparison of fine art auction performance

A chart from 2016 to June of 2021 comparing sales of Art in billions overlayed with year over year growth sourced from CollectorIQ

*including summer salesAs of June 30, 2021

Note: Sales values represent auction sales of fine art, including contemporary, modern/impressionist and old masters accross all media; the figures are exclusive of private sales. They are not inclusive of other auction sales, including collectibles, cars and jewellery.

Source: CollectorIQ

Collector sentiment:

Collector sentiment. As consignor confidence rebounded in 2021, the supply of higher-value works coming to auction increased. Meanwhile, collector demand continued to rise, with high-net-worth (HNW) collectors spending 10% more than in 2020, and millennial collectors, on average, spending three times as much as Gen X and boomer collectors.4 Demand for new categories also expanded the market, with traditional collectors pursuing figurative works by emerging identity-driven artists, while nontraditional collectors are also entering the collectibles and NFT markets. The result: Supply is starting to catch up to seemingly ever-expanding demand.

Primary market. With in-person events curtailed, postponed or canceled, the pandemic era presents a particularly challenging environment for galleries, who traditionally relied on a combination of exclusive openings, art fairs and online sale platforms to generate sales. Yet dealers remain optimistic, likely due to a reported 51% increase in sales during the first half of 2021 compared with the first half of 20204 and a gradual return to in-person art fairs and events. The key trends shaping the primary market sector will be consolidation as the larger galleries absorb business from now-defunct small and medium-sized galleries, and diversification as galleries expand their offerings into art advisory (Gagosian) and even auction (Zwirner) as part of a broader differentiation strategy. This, combined with the return of in-person events, international cultural tourism and a reliable art fair ecosystem, will largely determine the growth prospects for the primary market sector. In the immediate term, those who can leverage technology to scale their businesses at low marginal cost and who have access to capital to compete for (and win) larger deals, are more likely to dominate.

Secondary market. With the return of the live auction format and the seasonal auction calendar, alongside hybrid virtual sales, online-only sales and new digital models, the “Big Three” auction houses now provide collectors with more buying options than ever. However, each house is pursuing a different strategy to capture a piece of the growing market. Christie’s remains devoted to its traditional high-touch service model, which aligns to its focus on attracting single-owner collections and estates. It also continues to create market-defining moments like the $69.3 million Beeple NFT sale earlier this year.5 Sotheby’s, by contrast, is investing heavily in digital and automation, maintaining its focus on iconic fine art sales, including the Macklowe collection, while pursuing a diversification strategy that spans fine art, luxury and financial services. Taken private in 2019 by art collector and French/Israeli telecom mogul Patrick Drahi, Sotheby’s is highly leveraged following a bond issue earlier this year, so the search for higher margins and scalable models (including a bet on the NFT market) is on. Phillips is pursuing an aggressive talent acquisition strategy, having hired a number of senior rainmakers from Christie’s and Sotheby’s, as well as recently launching an internal art advisory group. Another heavy area of investment is real estate: Phillips recently unveiled its new, white cube style gallery space on Park Avenue, designed to help it compete for and exhibit large single-owner collections and estates.

The rise of NFTs

Since the $69.3 million Beeple sale at Christie’s, which set the art world abuzz, NFTs have become more embedded in the traditional art world. Both Sotheby’s and Phillips have entered the space, NFT index funds have launched, and galleries like Pace are developing new ways to sell and display NFTs. However, it’s still early days for the market, and there’s ongoing debate on a variety of topics, including whether NFTs will cannibalize the fine art market, whether established art world players will continue selling NFTs and accepting cryptocurrency, and whether NFTs will yield value over time.

Top 10 Artists by Price Growth

Artist Median 15-year CAGR.*
Yayoi Kusama 22.18%
Zao Wou-ki 17.22%
Jean-Michel Basquiat 16.74%
Yoshitomo Nara 16.28%
George Condo 16.20%
Joan Mitchell 14.86%
Chu Teh-Chun 14.42%
Keith Haring 12.22%
Gerhard Richter 11.84%
Yves Klein 11.67%

* Compound annual growth rate (CAGR) provides a constant rate of return on an investment over a particular time period, in this case between 2005 and 2020.

Individual artists’ compound annual returns are created from works sold at the world’s three leading auction houses (Christie’s, Sotheby’s and Phillips) between 2005 and 2020, and which were previously purchased at any of the world’s auction houses since 1970. Artbnk has approximately 48,000 repeat sale pairs that meet our criteria with a sample interval of half a year. Artbnk includes any work that has sold at these three auction houses from any collecting category. Artbnk does not include prints or photographs. It excludes works that have achieved a compound annual return (CAR) of over 100%, since they make up less than ½ of 1% of the database and can have returns in the thousands of percent, which can dramatically bias the results.

So who is actually participating in the NFT market?

For the moment, the more traditional collector base is not invested heavily in NFTs. Some traditional collectors have purchased NFTs for fun, simply to watch what happens next. However, the real buyer base largely comprises the “digital natives” who have been investors in cryptocurrency for years.

There are a few reasons why NFTs appeal to crypto-holders:

  1. NFTs as a status symbol. Many collectors purchase trophy works, and digital natives believe that NFTs are their equivalent. These digital tokens are status symbols, whether the cache is displayed through their NFT wallet or on a monitor featuring the digital display.
  2. Portfolio diversification. Storing the majority of one’s assets in cryptocurrency is the digital equivalent of holding onto cash. NFTs offer a way to diversify an investor’s stake in Bitcoin or Ether. Since the beginning of 2021, over 100,000 wallets hold more than $1 million of Bitcoin value.6 It’s logical that some of these investors seek to diversify their crypto.
  3. Counterculture. “Hold on for dear life” (HODL) is a saying meant to encourage fellow crypto holders to ride through market volatility instead of selling in a downward turn. This mentality of holding on through a “crypto winter,” or bear market, has banded digital natives together. That camaraderie, coupled with the ethos of living a purely digital existence, has created a distinct culture, one that prizes digital assets such as NFTs over physical assets.

The NFT market is likely to be volatile over the course of the next several years. In fact, we’re already seeing some initial excitement from the first wave of NFT auctions wear off. Metapurse’s B20 token, which allows users to purchase fractional shares of NFTs, saw a price plunge from $29.78 at the time of the Beeple auction to $6.22 over the course of one month in March 2021.7 While the hype for NFTs themselves will likely fluctuate, we expect the technology behind them and the widespread acceptance of cryptocurrency to have a long-lasting effect on the art world.

Art lending

Since the beginning of the pandemic, we’ve seen a rise in art lending due to a number of factors, including historically low interest rates, stable art valuations, and the significant tax consequences of selling art.

With interest rates likely to remain low for the foreseeable future, art loans continue to be an attractive, low-cost source of capital for collectors who want to monetize their collections. Moreover, the art collateral is appraised on an annual basis — less frequently than other collateral types — making art loans a way to mitigate margin call risk in times of market volatility. This could help collectors sidestep volatile markets and capital gains taxes, all while keeping the art on the walls of their homes.

A growing number of collectors have decided that an art loan makes sense, and the use cases vary widely. Some will use art loans as part of a wealth-building strategy or to generate liquidity to pay estate taxes, or carry out strategic gifting at a favorite philanthropic institution. Using the art loan as a way to participate in the art market has also become increasingly popular, whether using the loan to finance future art acquisitions or third-party guarantees at auction. With the broad use cases, low cost of capital and loan stability, we’re seeing many collectors utilize art lending, including new participants who have previously been cautious and skeptical.

Tax/planning issues

In recent months, the Biden administration has proposed significant changes to income, estate and gift taxes, both to raise revenue for its spending plans and to reduce income and wealth disparity. In particular, the administration has proposed to:

  • Restore the top ordinary income tax rate of 39.6% (from 37%)
  • Reduce the lower threshold for the 39.6% tax bracket
  • Raise the capital gains rate for those with over $1 million in income to 39.6%
  • Limit the benefit of certain itemized deductions for high income taxpayers
  • Introduce the concept of a “deemed sale” for gifts during life, assets passing at death and certain other distributions, which would cause the realization of capital gains tax upon such transfers rather than allowing basis to carry over, as has been the tax regime for more than 100 years

If implemented, the increase in the capital gains rate, the “deemed sale” concept and the limitation on charitable deductions may change the efficiency of certain planning techniques currently available to UHNW individuals, which includes most art collectors.

Beyond legislative proposals, the administration has indicated that it may seek to curtail certain tax-planning techniques through administrative actions, for example, eliminating valuation discounting for passive investment vehicles such as family limited partnerships.

Just as significant as what is enacted is when it’s enacted. As of the date hereof, the administration has proposed that certain of these changes be made retroactively, meaning it would be too late to “plan around.” However, the later in the calendar year any of this is enacted, the less likely it is that retroactivity will come into play.

Finally, it’s important to remember that, as draconian as some of this may seem, everything is still in proposal form, and final legislative or administrative action will face intense debate.

2021 has married the unprecedented change of 2020 with a robust financial market, low interest rates and a return to the art market infrastructure, giving us, we believe, an art market poised for growth. Bank of America Art Services looks forward to helping you navigate the market as the art ecosystem enters this dynamic new frontier.

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