The Big Apple is Tasty

New York City multifamily assets saw aggressively higher prices throughout all submarkets and pricing metrics in 2013 as demand, driven by rising rents and low interest rates, continued to outpace supply. Average capitalization rates dropped while gross rent multiples, prices per square foot, and prices per unit rose.

Multifamily is bullish on any location near a subway stop as residents explore new areas

By Keith Loria, Contributing Editor 

New York City multifamily assets saw aggressively higher prices throughout all submarkets and pricing metrics in 2013 as demand, driven by rising rents and low interest rates, continued to outpace supply. Average capitalization rates dropped while gross rent multiples, prices per square foot, and prices per unit rose.

The number of multifamily buildings sold in all of New York City jumped 19 percent to 1,230, and the dollar volume of those trades increased 4 percent to $8.87 billion in 2013 compared to 2012, according to Ariel Property Advisors’ Multifamily Year in Review: New York City. Multifamily transaction volume citywide fell a modest 3 percent year-over-year to 675.

“We believe that low interest rates, solid rents, and the continued perception of New York City as a safe haven for investors will result in the multifamily market maintaining its strength in 2014,” says Shimon Shkury, president of Ariel Property Advisors. “Between vast amounts of vacant building stock renovated back in the 1990s and in recent real estate cycles, vacant rehab opportunities are few and far between, especially in prime areas of New York City.”

Keith Rosenthal, Phoenix Realty Group’s president, believes that new NYC Mayor Bill de Blasio’s plans for affordable and subsidized housing will have some impact on market-rate housing, and that’s hanging over the market in early 2014.

“No one knows what the specifics of his goals are, which are to preserve 200,000 units of affordable housing and produce another 90,000 new units,” he says. “The market absorbed some big rent increases for a couple of years, and we believe they will moderate a little bit. Things can only grow so fast until they run out of steam and need to catch their breath, and we see the market as catching its breath after a couple of years of huge increases.

“That being said, there is no area of New York that isn’t trending. It’s just a question of what’s super hot, what’s hot, and what’s doing ok.”

David Schechtman, an investment sales broker with Eastern Consolidated, says cap rate compression continues on a monthly basis; pricing has increased anywhere from 2 to 5 percent monthly for the past four years; and there is no multifamily retail deal that companies aren’t happy to be involved with these days.

“I think Brooklyn and Queens should both be called ‘Kings County’ at this time,” he says. “I have incredible infinity for Queens right now and don’t discount Eastern Brooklyn—especially Pennsylvania and Erskine Avenues and the Brooklyn/Queens border south.”

Glenn Tolchin, executive vice president within JLL’s capital markets New York
office, sees numerous macro-economic trends that are shaping New York’s multifamily market in 2014.

“Specifically, more people are moving to New York City than moving out for the first time in over 60 years, and the population is at an all-time high,” he says. “You have a transportation network that is extremely efficient and also the highest level of ridership in a very long time. You have record-low crime, record-high tourism and a private job sector that is also thriving.”

The industry is bullish on any location near a subway stop as rising rents and condo prices are pushing residents to explore new areas they may not normally have considered.

“Anywhere with transportation into Manhattan is the secret sauce. That is the key to unlocking upside,” Tolchin says. “In each cycle, you see the ebb and flow of demand to and from Manhattan. Each cycle seems to validate the previous cycle as you get further from Manhattan.”

That means recent rises in areas such as Harlem, Downtown Brooklyn, Williamsburg, Long Island City, and Astoria. For 2014, Shkury expects investors and developers pushing the boundaries into Crown Heights, Bushwick, Bed Stuy, Jackson Heights, Elmhurst, and Washington Heights.

Submarket breakdown

Manhattan: The one area that showed fewer transactions in 2013 than 2012 was Manhattan below 96th Street, with transactions declining 28 percent to 144, building volume dipping 14 percent to 252, and the dollar volume of those trades falling 28 percent to $3.897 billion.

“Limited inventory and continued low interest rates, however, led to major pricing gains in Manhattan in 2013,” Shkury says. “The average capitalization rate dropped 45 basis points from 2012 levels to 4.36 percent, while the average price per square foot came in at $648 and the average gross rent multiple hit 15.6.”

Northern Manhattan: Dollar volume for Northern Manhattan jumped 103 percent to $1.6 billion, more than any other submarket except for Manhattan below 96th Street. Overall, there were 116 transactions comprised of 312 buildings in Northern Manhattan, a 62 percent year-over-year increase in the number of buildings sold and the highest level in the city.

Average capitalization rates dropped more than 100 basis points to 5.04 percent and gross rent multiples broke 11 times. The average price per square foot rose 28 percent to $217 and the average price per unit increased 29 percent to $180,404.

Phoenix Realty is very intrigued by all that’s happening in Northern Manhattan in the Manhattan Valley area around Columbia University and the Upper West Side, which Rosenthal calls a much-improving area and a place strategic investors can be strong value players.

Queens: With 70 transactions comprised of 133 buildings totaling $1.088 billion in gross consideration, Queens shattered sales statistics achieved in the previous two years.

“Many investors who previously searched for opportunities in Long Island City and Astoria turned their attention to properties in Elmhurst, Jackson Heights and Flushing,” Shkury says. “This is reminiscent of the early migration of investors into Brooklyn neighborhoods before their real estate booms.”

Continuing to make noise is the further development of Willets Point, with everything North of Citi Field looking strong.

“We find this very interesting and a development trend that will be increasing in the years to come,” Rosenthal says. “Projects like this are going to be such an engine for growth in Queens. In some ways, they have their own Central Park in Flushing-Meadows, and it’s a nicer version of Wrigleyville in Chicago.”

Tolchin sees many positives of the Queens market, starting with its strong transportation. Other pros include its affordability, accessibility to Manhattan and the positive job growth as well as abundance of retail.

Brooklyn: This borough’s 189 transactions comprised of 269 buildings kept Brooklyn on par with the number of transactions and portfolios that change hands in 2012, but the dollar volume of the trades rose 18 percent to $1.2 billion.

“Prices gained significantly year-over-year, as the borough wide average cap rate dropped 91 basis points to 5.75 percent and the average price per square foot increased 22 percent to $233 per square foot,” Tolchin says. “Crown Heights was the most transactional sub-market with 28 transactions totaling 45 buildings.”

Rosenthal adds that Williamsburg is no secret to anyone, and it’s so hot that the rents there are higher than Manhattan rents in some cases, certainly outpacing on a percentage basis, with maybe the only exception in Manhattan being Greenwich Village and SOHO.

Also in Brooklyn, Schechtman believes Belt Parkway and its surrounding environs are wildly underrated, and that Kings Plaza will continue to be an incredible epicenter of activity.

The Bronx: With 156 sales comprised of 264 buildings totaling $1.075 billion in consideration, The Bronx saw increases of 17 percent, 26 percent, and 11 percent from 2012 levels.

“Strong increases were seen in pricing as the average price per square foot hit $112 and the average price per unit rose above $105,000,” Shkury says. “Investors last year paid more to buy in the Bronx with the average price per square foot topping $112 and the average price per unit reaching $105,000. This is a long way from prices seen during the recession that were as low as $70 per square foot and $70,000 per unit.”

Big times ahead

Manhattan’s Hudson Yards has been the talk of the town lately as numerous major leases have been signed, and development plans are advancing. Shkury notes many important moves are being made.

Rosenthal sees the entire West Side being nicely filled in from Battery Park City all the way up and feels it’s great for the city.

“So much is going on in the periphery of the Hudson Yards itself. I think it’s just part of the trend of New York City going from a city that was inwardly looking onto Fifth Ave., to a city that is now chasing a new development goal along the coast of the Hudson River on the West Side,” Rosenthal says. “The whole area is going crazy, and you might not be able to see it yet, but work is going on behind the scenes in terms of getting zoning and getting things together.”

In January, Time Warner announced that it expected to acquire more than one million square feet of the available commercial space in 30 Hudson Yards at 10th Ave., and 33rd St. Time Warner has plans to move in at the end of 2018.

Meanwhile, Related Companies broke ground on the South Tower at 10th Ave., and 30th St., in December 2012. L’Oréal USA and SAP have leased more than 500,000 square feet of space in the South Tower, in which Coach Inc., has purchased 740,000 square feet for its global corporate headquarters.

In downtown and Hudson Yards, Tolchin says residential conversion is breaking through new pricing hurdles.

“The downtown renaissance has really come into fruition more than ever,” he says. “A great deal of the housing stock there is conversion of office properties.”

Getting to know Coney Island

As the market improves and the economy picks up, Ariel Property Advisors expects developers to pay more attention to Coney Island, which will result in more public/private partnerships for residential and community development.

For years, Joe Sitt’s real-estate company, Thor Equities, has spent more than $100 million buying up a huge swath of Coney Island from multiple owners with what industry insiders say will amount to numerous retail and multifamily properties near the famous Boardwalk.

“I would push all of my chips in with Mr. Sitt,” Schechtman says. “For decades, our New York City seashores and ocean ways have been undervalued. In every city in the country, waterfront land is at a premium. Eventually, we will recognize that the land Joe owns in Coney Island was wildly under-valued for decades.”

Just this past December, the YMCA of Greater New York opened a 44,000-square-foot facility at Surf Avenue and 29th Street in Coney Island, next to a new 195-unit affordable housing complex.

Space issues in Queens?

Despite more multifamily developments taking rise each year in Long Island City, there is still plenty of land that can be rezoned from manufacturing to residential, to enable new development.

Shkury adds that how Mayor de Blasio’s administration approaches industrial areas near subway lines in Queens will be a key factor to the continued growth of the area.

As far as Queens goes, Ariel Property Advisors is keeping a close eye on Elmhurst and Jackson Heights, which Shkury says is still under the radar despite the housing stock being good and the neighborhoods offering convenient transportation to Manhattan.

Tolchin spent time in February refreshing his perspective of Long Island City, and still can identify clear future development sites.

“Certainly the waterfront area, which was a planned development, is in progress,”
he says, “but there are other sites—industrial and office—which can be improved and redeveloped.”

Multifamily is hot

Looking ahead, developers are forecasting increased sell-out prices for condominium products, making it very difficult and trumping for-rent product. This is driving developers to look more to the outer boroughs, where rental demand is extremely high.

“New York and its quality of life is very desirable, especially among the younger demographic,” Tolchin says. “That’s why all reports are saying the same things: You have surging sales volumes, rapid absorption rates, declining inventories, steadily increasing prices, and as a result, multifamily is hot.”

A critical mass of young people are finding areas outside of Manhattan to be fun and lively places to live, and it’s no longer the case that young professionals and those right out of college need to live in the heart of the city.

“I think places like Willets Point and Hudson Yards create gas in the tank that goes so far beyond improving the city’s economy than the project itself,” Rosenthal says. “There is a lot to be excited about.”

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