Where Opportunities Shine in NYC: Shimon Shkury Weighs In

December 11, 2024

Executive Insights Featured Finance & Investment New York More Northeast

Ariel Property Advisors' founder talks about what will drive investment in the new year.

Multifamily transaction volume in New York City declined 16 percent in Q3 compared to the previous quarter, according to a recent Ariel Property Advisors report.

“The report also noted the growing trend of real estate-owned properties, note sales and deeds in lieu of foreclosure, indicating financial institutions are actively seeking ways to manage their distressed assets,” President & Founder Shimon Shkury told Multi-Housing News.

Known for its resilience and dynamic nature, New York City’s multifamily market continues to be shaped by high demand, supply shortages, record-setting free-market rents and regulatory pressures. So where can investors and brokers find opportunity? Shkury shared with MHN his best guess for 2025.

READ ALSO: Optimism Remains High in NYC

What are the top trends you’re currently seeing in the New York City multifamily investment market?

Shkury: The increase in mortgage maturities throughout 2024 has been a critical driver for multifamily sales, and we expect this trend to continue in the coming years as additional mortgages backed by multifamily properties mature. The second quarter saw one of its strongest recent periods as the dollar volume of sales totaled over $2.8 billion, representing a 108 percent increase over the previous three months and the best quarter since Q2 2023.

The rent-stabilized apartment segment, which accounted for approximately 50 percent of both dollar and transaction volume in the third quarter, is in a clear transition because of two main factors: the Housing Stability and Tenant Protection Act of 2019, which de-valued rent-stabilized buildings, and interest-rate growth. Rent-stabilized multifamily buildings are now trading at a historically low basis, and private clients are becoming slightly more aggressive in their underwriting for these assets because they see lower interest rates on the horizon and the potential for regulatory changes.

Besides interest rate cuts, what else do you anticipate will drive investment activity in 2025 and beyond?

Shkury: First, the substantial amount of mortgage maturities taking place will remain a key driver of investment sales for the foreseeable future. Approximately $900 billion will mature in 2024 nationwide, which in many cases has meant cash-in refinance recapitalizations or forced selling for investors. There is $4.7 trillion in outstanding debt across the country that will be maturing in the next few years, so we will continue to see that pressure affecting multifamily transaction activity.

Second, New York State’s FY 2025 Budget included a housing policy with clear guidelines for New York City. Investors now understand the kind of tax abatements they can get for new multifamily development and office-to-residential conversions as well as the possibility of higher FAR caps. Also, Mayor Adams’ City of Yes program will provide a roadmap for rezonings and other development policies throughout the city. This is great news for future residential development in New York City where the housing vacancy rate is 1.4 percent, and the city is facing a shortage of more than 500,000 residential units.

Finally, there is now an abundance of capital which will also drive the market. Billions of dollars have sat on the sidelines, and we are now seeing movement with money pouring in from institutions, international buyers, private clients and other investors. We expect capital flows into the multifamily market to continue in the coming years, which bodes well for the long-term health of the sector.

At your latest Coffee and Cap Rates event, you expressed optimism about the free market multifamily sector in NYC. What factors make this sector particularly attractive?

Shkury: There is renewed optimism about the free market multifamily asset class, particularly as seen in the sector’s recent increase in institutional buyers. Over the last year, there were several large free market properties purchased by institutional investors such as Carlyle Group and Gotham Organization acquiring 200 West 67th St. for $265 million, which is a notable example of where pricing was in Manhattan in the first half of 2024.

The building faced the expiration of roughly $194 million in mortgage loans maturing in November while also dealing with the burn-off from the 421-a tax exemption that saw taxes rise from $1.1 million to $6.6 million.

Also, Farallon Capital Management picked up 85 East End Ave. for $75 million. The property traded for about the same amount in 2005, $75.2 million. Additionally, syndicators and private money buyers are continuing to invest in the free market sector, and are targeting smaller, tax-class protected buildings throughout the city. International buyers with overseas family offices have purchased free-market buildings in various Manhattan neighborhoods over the past year.

What is attractive to these investors is the continued increase in rents in free market buildings, due in large part to the city’s housing shortage. For example, we’ve seen a 26 percent growth in free-market building rents in the past five years, but what’s interesting is the basis went down almost a third lower for these properties during the same period because of higher interest rates. So, for example, 200 West 67th St., which sold for $678 per square foot, would have previously traded for closer to $1,000. For all these reasons, the sector has generated strong interest from investors over the last year, and we expect investment demand to continue.

What are the key regulatory challenges multifamily investors face in New York City?

Shkury: The main regulatory challenge continues to be HSTPA, which removed incentives to renovate vacant units in rent-stabilized buildings, and invest in capital improvements in these properties. Despite the difficulties, sophisticated buyers with a long-term horizon are buying rent-stabilized assets today. They see opportunity in price declines and believe that the dramatic changes to the rent-stabilized market brought about by the HSTPA regulations are unsustainable.

Tell us more about the recently approved City of Yes initiative. Can you elaborate on its potential impact on NYC’s investment landscape?

Shkury: The City of Yes for Housing Opportunity is a potentially monumental reform for New York City that will facilitate more housing. The New York City Planning Commission voted in September to approve the City of Yes, which is designed to rezone all areas of the city to create 109,000 new homes over the next 15 years.

Specifically, the City of Yes proposes to relegalize housing above businesses on commercial streets in low-density areas and relegalize modest, three- to five-story apartment buildings where they fit best—on large lots on wide streets or corners within a half mile of public transit. It also intends to end parking mandates for new housing, allow accessory dwelling units like backyard cottages, garage conversions, and basement apartments, and make it easier for residential, faith-based or other campuses with underused space to add housing on their sites. It will also make it easier to convert vacant offices and other non-residential buildings to housing.

Are there specific NYC neighborhoods or areas that are of particular interest to investors?

Shkury: In the third quarter we saw increased multifamily sales activity in Manhattan below 96^th Street and in Northern Manhattan. Manhattan’s multifamily dollar volume in the third quarter rose to $1.27 billion, a 40 percent jump from the second quarter and a 21 percent increase from last year. Free-market buildings dominated the market, accounting for 57 percent of the dollar volume and 83 percent of the transactions. The $370 million trade at 20 Exchange Place was the most significant sale in Manhattan.

Northern Manhattan’s dollar volume rose to $244 million, which is a 40 percent increase quarter-over-quarter and a 99 percent increase year-over-year. Predominantly rent-stabilized buildings accounted for 56 percent of the dollar volume and 80 percent of the transactions. On the other hand, buildings with regulatory agreements accounted for 44 percent of the dollar volume and 20 percent of the transactions. Significant sales included a 164,460-square-foot building at 107-145 W 135th St., which sold for $64 million, and the 311,577-square-foot Sentinel Hamilton and Washington Heights Multifamily Portfolio, which traded for $55.8 million.

Last year, we saw tremendous activity in the affordable housing sector citywide. Affordable housing accounted for approximately 43 percent of New York City’s $3.91 billion in multifamily sales in the second quarter of 2023. That quarter, we saw major mission-driven investors including Nuveen, The Vistria Group, Tredway and Asland Capital Partners in association with Goldman Sachs make sizable affordable housing acquisitions across the boroughs, which contributed to the significant boost in dollar volume.

In addition to preserving and producing affordable housing, investments in this asset class are attractive because they offer access to dedicated capital, value creation opportunities, property tax incentives, agency financing and scale, all of which have contributed to their substantial growth.

Lastly, for those looking to invest in NYC’s multifamily market over the long term, what are the most important factors for building a sustainable, resilient portfolio?

Shkury: There are many factors to consider when building a successful long-term investment portfolio, but the bottom line is New York’s multifamily market remains resilient heading into next year and beyond. It’s an excellent time to consider investing in the sector: The demand for housing continues to outstrip supply, free market rents remain high and multifamily pricing is attractive.

Lawmakers have adopted or proposed new and positive housing policies and, finally, an abundance of capital will be available to move the New York City multifamily market forward. Eager investors who may have been sitting on the sidelines the last few years are jumping back into the asset class as the demand for quality multifamily assets remains strong.