New York's Great Bounce Back
- Mar 01, 2012
With average vacancy at 2.4 percent and effective rents expected to increase 7 percent to $3,024 in 2012, it’s no surprise that New York remains one of the country’s most sought-after apartment markets.
“The cost to rent an apartment in Manhattan is unbelievably high, and rents have gathered steam throughout the year and are going up,” says J.D. Parker, vice president-regional manager at Marcus & Millichap. “That is why a lot of smart money has been aggressively buying anything they can get their hands on in terms of apartment product.”
Parker, who currently oversees the firm’s Manhattan, New Haven, Conn. and newly formed White Plains, N.Y. offices, points out that the local economy has played a big role in the market’s strength. New York City has recovered close to two-thirds of the jobs it had lost since the downturn, and a diversifying economy is seeing growth in the education, healthcare, technology and transportation sectors.
In spite of this bounce back, the continued European debt crisis does present some apprehension, according to Parker. With roughly 10 percent of all employees tied to financial services, New York has a job force that is particularly sensitive to the global economy. Furthermore, New York is the top American destination for European tourists, and the city relies heavily on tourism to feed the local economy. This may create a cause for concern if Europe’s recession gets worse and Europeans stop travelling.
But for now, the multifamily market in New York is on fire. With less than 2,700 investment-grade units coming online in 2012, vacancies should continue to drop, “probably ending up somewhere below 2 percent by the end of 2013,” according to Ryan Severino, senior economist at Reis Inc.
Even the submarket with the lowest occupancy, Midtown West, has just 4 percent of its apartments empty—a fact that Severino attributes to supply coming online, rather than a lack of demand. With vacancies so low, it’s no surprise that everyone wants a piece of New York.
“As the fervor for New York has increased, it has really been very conducive to sellers,” Severino adds. “We have seen transaction volume bounce back from the lows of the recession, we have seen pricing on a per-unit basis bounce back, and we have seen cap rates bounce back.”
In 2011, there were 10 residential properties that sold for upwards of $100 million. Sellers that wanted to sell in 2009—but held out until they could attain a better value—were finally able to secure the price they were after. The timing of lease turnovers has also played a role, says Paul Leibowitz, executive vice president of CBRE Group Inc., New York City Investment Properties.
“What fueled buyers’ interest was that many of the leases were signed in 2009 or early 2010, before the rental spike occurred, and a new owner could realize a real pop in top line revenue in 2011 to 2012. This has resulted in cap rates between 4 and 5 percent in 2011 for properties with a 421(a) tax abatement.”
Leibowitz adds that properties without a 421(a) tax abatement have traded in the 3 to 4 percent range. Yet another factor that strengthens the case for investment in newer product in New York is the lack of new supply and an older housing stock.
“Although there are some large scale rental projects in the pipeline, the next five-year period should be below historical averages for new luxury rentals to enter the market,” Leibowitz says. “We would estimate that you could see a sizable increase in rental supply after 2014, though overall, it would not be well above what you would see in any five-year period in Manhattan.”
How quickly large-scale residential projects like the far West Side’s Hudson Yards Redevelopment Project materialize will be a big swing factor in the supply calculation, according to Leibowitz.
Securing a bite of the Big Apple
Four of the 10 transactions topping $100 million in 2011 were acquisitions completed by UDR Inc. In the first weeks of 2012, the REIT announced its additional $630 million joint venture acquisition of Columbus Square with MetLife, bringing its New York apartment ownership to $1.8 billion—all done in a single year.
“Large markets have a lot of benefits, not only for the big city amenities but also the opportunity to invest in scale,” says Harry Alcock, senior vice president, UDR Inc., asset management. “There are a lot of apartments in New York, a lot of expensive apartments, so we had the opportunity to build a significant portfolio.”
In March 2011, the firm announced its first purchase, 10 Hanover Square, a 493-unit, $260.8 million converted office building in Manhattan’s Financial District. In July, the firm bought Rivergate, a 706-unit tower in Murray Hill, and 21 Chelsea, a 210-unit property in Chelsea, for $443 million and $138 million, respectively. The REIT returned to the Financial District in August with the $325 million acquisition of 95 Wall, a 507-unit converted office building. The 710-unit Columbus Square property picked up in January comprises three ‘superblocks’ between 97th and 100th Streets along Columbus Avenue on the Upper West Side. In spite of the geographic spread, all five communities share some common qualities.
“The location is the first test that has to be passed,” Alcock says. “All of the properties that we have acquired have been in very good residential areas within Manhattan. After that, we look at the quality of improvements, the opportunity that exists within the property. Columbus Square, for example, is just coming out of its initial lease up so we are going to benefit significantly by having a stabilized property going forward and introducing our own technology and management platform.”
Alcock says that UDR is predicting first-year cap rates for all its New York assets (aside from Rivergate) in the 4.5 to 5.25 percent range. Rivergate is a 26-year-old property that, while maintaining a high occupancy, was a bit under-rented when it came to price. UDR has already begun a redevelopment campaign and expects to raise the current 4 percent cap rate up to between 5.5 and 6 percent within three years.
95 Wall and 10 Hanover Square are two shining examples of the residential renaissance of the Financial District, which has seen its population double in the last ten years. Over 56,000 people now call the neighborhood home.
“We kind of have concrete evidence to show that this is becoming a viable residential location,” Alcock says.
10 Hanover Square, for example, saw new and renewal rents increase more than 10 percent since the acquisition. The asset is 98 percent leased and concessions have been eliminated. It is a similar story at the 97 percent occupied 95 Wall, where new leases and renewals are up 9 percent.
When looking at New York as a whole, Alcock adds that UDR expects the city “to be a terrific place to own and operate apartments” on a long-term basis. When asked about future plans for UDR in the New York area, Alcock says that the REIT will be focused on Manhattan in the short term, but added that the New Jersey Hudson River communities, Brooklyn, Westchester County and certain Connecticut submarkets all “have some of the characteristics we would look to for new investment activity.”
The Financial district is by no means the only emerging market in New York. The far West Side of Manhattan between 23rd and 40th Streets was rezoned in 2005 to allow for commercial and residential development and is quickly becoming a hotbed of activity. Hudson Yards, a proposed mixed-use development by The Related Companies that is part of the city’s Hudson Yards Redevelopment Project, is poised to bring over 12.7 million square feet of office, retail and residential space in 16 towers built over the West Side rail yard. While the exact details are not yet finalized, the neighborhood-changing plan has already attracted owners to the area.
One such company is New York-based TF Cornerstone, a firm that is constantly on the lookout for emerging neighborhoods where other developers might not find value—a tactic that is especially important in New York, where land is extremely expensive and not easy to come by.
“You have to have a willingness to take a chance on a neighborhood that has good fundamentals or a good location within the scheme of New York,” says Scott Walsh, director of market research at TF Cornerstone.
In 2010, the company opened 505W37, an 835-unit dual-tower project located on 10th Avenue and 37th Street, an area that TF Cornerstone calls Manhattan’s ‘next urban frontier.’ While the firm is keeping an eye out for additional far West Side opportunities, it is currently making big steps towards reinventing a neighborhood directly across town—and across the East River—in Queens.
East Coast is a massive, master-planned waterfront development located at the former Pepsi Co. bottling site in Long Island City, Queens. The first of six towers, 4615 Center Blvd., opens its 367 units for leasing this month. It is the first luxury caliber asset to enter the Queens market in several years and will benefit greatly from its close proximity to Midtown Manhattan, riverside location and views of the skyline.
“Long Island City has a very urban lifestyle, but there isn’t noise—it has a great quality of life,” Walsh says. “Within a four-minute commute there is an incredible amount of office space.”
While Walsh cannot divulge specifics for the future of TF Cornerstone, he does believe that Brooklyn is a major frontier for apartments. The borough has good subway coverage and under-utilized waterfront parcels like Brooklyn Navy Yard—an area just south of Williamsburg, the trendy neighborhood that has seen its fair share of recent residential development. Brooklyn, which would be the fifth largest city in the country with its population of 2.5 million, has seen some big changes and has more coming its way.
“I feel like the deal in Brooklyn is just continued strength,” says Marcus & Millichap’s Parker. “Seven to 10 years ago people were talking about Brooklyn like it’s the next big thing that’s coming. And it is coming, and it’s here.”
Parker says that the borough’s big story for 2012 is the revitalization of the inner section of Atlantic and Flatbush Avenues where Barclay Center, the new home of the New Jersey Nets, is scheduled to open in September. The project has already had a positive impact on neighborhood apartment and retail rents. Downtown Brooklyn is also in the midst of a significant revitalization. The borough’s tallest building is now the Brooklyner, a 491-unit rental completed by the Clarrett Group in 2010.
“Companies realize that it is a vibrant community,” Parker says. “So I think we are going to see more of the same, which is renewed growth. Property prices will rise steadily. It is a great apartment market, great mixed-use market and I expect velocity and deal flow to increase in 2012.”