Getting Tighter

By Philip Shea, Associate Editor

After climbing out of a brief lull marked by the Great Recession, New York’s multifamily market is as strong—and crowded—as ever. Vacancy in Manhattan has consistently hovered around one percent, and even with a wave of new supply expected to come online in the next few years, it is unlikely this will translate into breathing room for rents and occupancies.

“New York City has shown tremendous resiliency and has not only rebounded, but we have witnessed steady growth in the rental market and an active and fluid condo market,” says Jeff Blau, CEO of Related Companies, which owns and operates a number of properties in the city.

Yet with such favorable conditions for landlords and investors alike, it is prudent to wonder if such trends will last—or if a plateau may be on the horizon. Blau believes that they will, and lays out the key ingredients for strong performance that are likely to remain constant.

“There are two factors that will drive the increased growth in the New Year—the strong demand and scarcity of inventory we have witnessed for both rental and for-sale product; and the robust institutional interest in placing capital into real estate here in New York,” says Blau.

Peter Von Der Ahe, senior director of Marcus & Millichap’s Institutional Property Advisors based in New York, agrees that a tight market and sky-high rents are to remain in the forecast, and emphasizes that for the Big Apple—a spike in vacancy only amounts to 2.5 to 3 percent. Such was the range seen at the height of the Great Recession, and Von Der Ahe does not expect a new wave of supply to push the numbers anywhere near that.

“In any other markets in the country, this amount of development coming along really impacts the rental market,” says Von Der Ahe. “But if you look at these new developments as a percentage of our total inventory, it’s still not enough to really have a large-scale impact on what we’re doing or on rents.”

Von Der Ahe adds, “There may be some real localized impacts of these developments, but it’s not going to be something that’s going to be felt throughout the market.”

Helen Hwang, executive vice president of New York Capital Markets with Cushman & Wakefield, echoes this point and believes that the wave of new supply—much of which represents some of the last good sites available in Manhattan—is simply indicative of how strong the market continues to be.

“I wouldn’t categorize it as significant,” says Hwang. “I would say there is a meaningful amount of new [product] coming into the market. However, fundamentals are very solid with continued job growth and an influx of professionals, and I think we should continue to see strong absorption.”

One factor that is key to strong performance across all fundamentals is demographics of renters, particularly in Manhattan. Expectations of higher rents and smaller spaces are essentially built into the collective psyche of residents, and Von Der Ahe notes that many are willing to pay even more to go beyond what is standard.

“There is no shortage of renters who are willing to pay for quality here, and that’s really where I think the biggest opportunity is,” says Von Der Ahe. “That’s available to varying degrees no matter what neighborhood you go to. You could do that down in the East Village as much as you could do it in Inwood.”

Indeed, rents are increasing at a steady pace throughout the city—in both different neighborhoods and boroughs. While the focus tends to be on those dedicated to Manhattan, the city’s largest borough by area is seeing comparable performance, and certain submarkets within it are beginning to see high-end properties sprout up to take advantage of growing popularity.

“What is surprising to me is how aggressive the pricing is on the super-luxury end, and how deep the market really is,” says Hwang. “I think as far as growth opportunities in New York City go, what I am personally excited about is Brooklyn. We have already seen a complete transformation of that market into a dynamic area, where we continue to see drastic market fundamental changes with upswings in condo pricing, rental rates and absorption on a monthly basis in some neighborhoods.”

One reason for Brooklyn’s surging popularity—especially in submarkets like Williamsburg and Greenpoint—is an influx of Generation Y renters from across the country who have found their niche in a city that’s always at the cutting edge of new career and service trends.

“These areas are attracting the younger demographics associated with the city’s growing tech and creative industries,” says Blau. “We expect 2013 to be a year of new starts and even greater growth for New York real estate. We currently have several luxury rental developments under construction, as well as a large format retail center in Brooklyn.”

In terms of whether or not these particular demographic trends and renter preferences will be sustained, Von Der Ahe believes that recent shifts in the city’s labor market will likely solidify key fundamentals in the coming years, giving reason for investors to remain optimistic and operate with a minimal level of caution.

“The latest economic reports that we have show that the city is supposed to add another almost 100,000 jobs this year, and what’s really happened over the past number of years is that the city’s economy has diversified,” says Von Der Ahe. “You’ve seen the technology expansions, healthcare expansion, and also, education. Education is such a huge part of our workforce here.”

One of the most exciting and widely discussed new developments for the city overall is the Hudson Yards project located on the west side of Manhattan near Chelsea. This project—with the first building slated for completion in 2015—will ultimately harbor approximately 5,000 apartment units, 1,600 of which will be designated affordable.

The Related Companies and Oxford Group will manage the property, while architects include Kohn Pederson Fox Associates and Skidmore, Owings & Merrill. Ground was broken in December 2012.

“With 80 percent of the first commercial tower already spoken for, the number 7 subway extension nearing completion and the last segment of the High Line underway, the area is poised to transform New York’s skyline and be the future growth corridor for the city,” says Blau.

He adds, “The mixture of parks and open spaces, cultural amenities, vibrant retail and innovative residential uses will ensure it is a place like no other in New York.”

Blau believes that Hudson Yards is just one sign of renewed growth in the Chelsea and West Midtown neighborhoods, and that he is also encouraged by the “renaissance” he sees taking place in Brooklyn, in which Related is currently building a large-format retail center.

Looking at the big picture, New York is a bastion for strong performance not only within the national multifamily market, but on the global stage as well. “Viewed as a safe haven for international capital,” the Big Apple continues to be a safe bet due to its stability as compared to other global markets, according to Blau.

“[It] is really a part of the global marketplace,” adds Von Der Ahe. “And, for a whole host of reasons, multifamily seems to be on the top of investors’ list when they come to the city.”