MARKET SNAPSHOT: New York Experiences Decline in Transaction Volume; New Capital Comes to Market

New York—New York experienced a decline in transaction volume in May, according to Ariel Property Advisors’ Multifamily Month in Review report for May 2011.

Throughout May, 19 transactions took place throughout the city, which totaled $144.263 million, less than half of the number and dollar volume of trades that occurred the previous month.

Transactions in New York are more about size than location, Shimon Shkury, president of Ariel Property Advisors, tells MHN. “There are some operators exclusively below 96 St., but most of the operators as long as the deal is big enough, will work throughout the five boroughs.”

The $20 million-and-up investor “uses mostly institutional money from either a value-add bucket of equity or core money that requires less of a return but less of a risk,” he notes. Meanwhile, the $20 million-and-under investor is mostly the private client market.

At the same time, Shkury has seen new capital in the market, some of which is coming from abroad and is either funneled through direct investment or through local partnerships.

For some of the larger, core assets, “we have seen investors place equity on a more aggressive way,” Shkury tells MHN. “[They are] mostly pension funds and institutions that work with pension funds with core returns, which means they can be okay with relatively low cap rates today, as long as they believe there is rental growth over a period of seven to 10 years.

“These are different than the value-add player, who needs to show mid-teen returns within five to seven years, which is more applicable to areas in the boroughs or areas below 96th St. where apartments need a lot more rehab,” he adds.

Monthly rents in Manhattan increased 1 percent from April, and, as Shkury adds, all rental reports indicate that rents have increased 12 percent year-over-year. Additionally, Shkury points out, concessions are down, so effective rent increase is higher than this 12 percent.

“The one other thing that’s unique about New York City is the rent guidelines and rent regulations; they have changed somewhat in the past few months,” Shkury notes, adding that he doesn’t anticipate any short-term impact in terms of investors pricing buildings; however, “I do think longer-term institutions might consider these changes that are not necessarily favorable to landlords to be meaningful.”

While expenses have increased slightly, it is not enough of an increase to really erode NOIs, Shkury tells MHN.

Meanwhile, Manhattan vacancy (for free-market apartments below 96th St.) fell to 0.69 percent, a 25-bp decline from April. This is the fifth con¬secutive monthly decline in vacancy rate.

Development opportunities in New York exist in certain locations, including Midtown West in Midtown, which has seen a tremendous amount of development growth as of late. In Upper Manhattan, some smaller developments may take place, while the Bronx’s development will mostly be comprised of affordable housing. And in Brooklyn, Shkury believes that development will continue in Greenpoint and in Williamsburg.

“The biggest hurdle for new development today is construction loans,” says Shkury. “It’s difficult to get them unless you have the balance sheet, and if you do get them, the loan-to-cost is 40 percent to 60 percent.”

As for New York’s future, property taxes and rent regulation laws could prove challenging to the multi-housing marketplace.

But as for the overall economy, even if there is another dip, ”the real estate market won’t be as adversely affected as it was before,” predicts Michael Tortorici, vice president, Ariel Property Advisors.
“One threat that is seemingly on the horizon over the year is that there might be an uptick in layoffs on Wall Street,” he adds. “Bank profits for the first half of the year weren’t as chipper as they were last year.”

Even still, the latest numbers from the Bureau of Labor Statistics (May 2011) report New York’s unemployment rate at 7.9 percent.

“If unemployment goes up a little bit, there’s still enough upward pressure here to keep things at a relatively stable rate, rather than another large drop,” notes Tortorici.