Market Report: Modest Improvement

With economic headwinds easing in Manhattan, a rebound in hiring will lead to modest vacancy improvement this year, but overall apartment operations will remain soft. Sizable profits at Wall Street firms and surging bonus payments at the close of last year likely signal a near-term turnaround in sector hiring. Furthermore, spending from these bonus payouts should begin trickling into local service industries and the for-sale residential market this year.

While spending is expected to increase, other drivers will be needed to bolster household formation and renter demand. Prohibitive for-sale prices minimized vacancy increases during the downturn, and average rates in the Midtown West area and Upper East and Upper West Sides remain resoundingly healthy in the 2 percent range.

Trends have been more extreme in Downtown and Upper Manhattan, however, where renewal efforts and previously robust rent gains dissipated quickly, though current vacancy rates are below 5 percent. Rental rates, the most significant indicator of weak demand, have retreated across the borough. Asking rent cuts have been sharpest on the Upper West Side but remain the highest in the market. Nevertheless, nearly full occupancy will allow owners in the submarket to rescind concessions as the year progresses.

A strain on the economy softened the apartment sector in 2009, but a rebound is expected in the upcoming quarters. New York City employers eliminated 48,700 jobs, or 1.3 percent of payrolls, in the 12 months ending in the first quarter. During the previous year, 79,600 workers were let go.

White-collar sectors have been hit hard by economic headwinds in all five boroughs, with professional and business services and financial activities employers shedding an estimated 26,800 jobs in the past year. Alternatively, hiring remains healthy in the education and health services sector, which added 22,900 workers during the same period.

Although Wall Street payrolls have decreased by 6.6 percent year-over-year, growing profitability and bonuses at these firms eventually will translate into greater discretionary spending and economic growth in other industries. In 2009, bonuses at investment banks increased 17 percent to $20.3 billion, while overall compensation rates at Goldman Sachs, Morgan Stanley and JPMorgan Chase surged 31 percent.

While the Manhattan unemployment rate continues to rise, the increase has slowed in recent months. Unemployment pushed up 260 basis points annually to an estimated 8.2 percent at the end of the first quarter, but the rise has slowed to just 60 basis points during the past six months. Citywide unemployment of 9.2 percent is up 290 basis points from a year ago.

Permitting activity, an indicator of future supply growth, has declined sharply due to economic stresses. In the most recent 12-month period, the number of multifamily permits issued in Manhattan plummeted 92 percent, to 785 units. In the preceding year, permit issuance increased 2 percent. The Manhattan for-sale market continues to reel from job losses and slow household formation. The median condominium price has fallen 11 percent in the last year to $995,000 per unit. Velocity has decreased 28 percent overall; however, re-sales have increased 54 percent year-over-year, and sales of new condos have receded 44 percent.

Repositioning stalled projects

Mayor Michael Bloomberg recently announced revisions to the New Housing Marketplace Plan, which was designed to add another 67,000 affordable housing units to the city by 2014. Under the new plans, and supported by an additional $1 billion in funding, the program will focus primarily on converting multifamily space to affordable housing, a process that may include repositioning troubled or stalled projects throughout the city.

Lenders continue to reclaim large, notable Manhattan properties. The 303-unit Rector Square condo conversion, for instance, recently entered into foreclosure when the developer defaulted on a $165 million mortgage. The developer also relinquished the 95-unit Park Columbus earlier this year and was part of the partnership that defaulted on the 597-unit Sheffield 57 in 2009.

During the 12 months ending in the first quarter, developers brought online 2,125 units at large, market-rate properties; roughly 960 rentals were completed in the prior year. Builders have nearly 4,100 units under construction in Manhattan, with 2,600 units expected to be delivered after 2010. Construction efforts are heightened in the Midtown West submarket, where 1,850 units are under way.

The 900-unit Beekman Tower is the largest project under construction in the borough. Despite a two-month work stoppage last year, all 76 stories of the tower are expected to open in late 2010. Roughly 1,500 units are planned, though tight economic and debt market conditions may delay or prevent some projects from breaking ground. One of the largest developments under consideration is the Hudson Mews, which would add 640 market-rate units and 160 affordable housing units.

Vacancy at large, market-rate buildings ended the first quarter at an estimated 3.4 percent, unchanged from six months earlier but 30 basis points below the average rate in the first quarter of 2009. During the three-year stretch preceding the recession, vacancy averaged 2.5 percent. Asking rents fell 6.1 percent annually to $3,392 per month in the first quarter, while effective rents retreated 7.3 percent to $3,228 per month. During the previous 12 months, asking and effective rents receded 3.6 percent and 4.9 percent, respectively.

Through the first quarter, annual deal flow remained steady compared to the previous year. Although stabilizing activity signals greater investor confidence, dollar volume eased 50 percent during the period, reflecting falling prices and fewer buyers with cash sufficient for larger purchases.

Over the past year, velocity has slowed the most in the Midtown South area, where owners remain reluctant to market their properties due to steep price declines. Alternately, sales have increased on the Upper West Side as a result of modest price cuts. Many buyers continue to target assets with eight or fewer units; these properties currently trade for between $500,000 per unit and $600,000 per unit. Larger investors, meanwhile, have focused on assets containing between 10 and 30 units and priced in the $200,000 per unit range.

As apartment market fundamentals begin to improve, so will investment sales velocity in New York City, although it will remain well below the record levels recorded during 2004 through 2006. Price declines will support activity going forward, while the anticipated relaxing of lending standards will buttress sales over the extended outlook.

J.D. Parker is regional manager of the Manhattan, Brooklyn and New Haven offices of Marcus & Millichap Real Estate Services.