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A Tale of NYC’s Multi-Family Market

The first quarter of 2022 for the multifamily market in New York saw robust growth with $ 2.87 billion closed, well above the five-year quarterly average of $ 1.90 billion, according to research from Ariel Property Advisors. This sum includes Black Spruce’s purchase of $ 837 million of The American Copper Buildings, which accounted for 29% of New York City’s total dollar volume. But The American Copper, for example, was a result of last year’s healthy contract activity and is a lame indicator. As a result, we expect activity to fall to the 5-year quarterly average of approx. $ 2 billion going forward. In addition, there was a strong price increase throughout the city, ranging from about 10-20% year over year depending on the district.

Inflation is macro-influencer when it comes to the multi-family market nationwide and in New York City. Interest rates on multi-family loans rose from 75 to 125 basis points in the first quarter and have begun to affect transaction activity and pricing. But the downside is that inflation has put upward pressure on housing rents. According to Douglas Elliman, rents in Manhattan reached a new high in February due to high demand and the steep rise in inflation with average rents of $ 3,700 and $ 80.66 per square foot, a 24% increase in rents in New York City the following year – year. Therefore, we expect that predominantly free market and luxury homes in New York City will remain attractive year-round, as rents and prices balance each other.

Manhattan’s momentum continues

Manhattan generally offers a unique investor opportunity, as many assets are predominantly free markets and have the highest rents. The Manhattan market accounted for more than half of all first-quarter closures, totaling $ 1.5 billion in dollar volume across 49 buildings, representing 52.4% of total dollar value and 25.3% of total building volume in New York City. In addition, the average price per square feet for single-family homes in Manhattan by 8% from $ 668 to $ 720, while the ceiling dropped from 4.67% to 4.4%.

But the 10-year average Manhattan Multifamily $ / SF chart below shows that $ 720 / sf is still at the lower end of the spectrum and well below replacement costs. The relatively low basis for Manhattan’s multi-family pricing combined with an upward trend in rents and relatively less regulation will most likely encourage investors to invest heavily in this neighborhood during this year, even with rising prices.

High demand for Brooklyn assets

Brooklyn experienced significant growth over the past year, increasing 113% in transaction volume with 34 completions in Q1 2022 compared to 16 in Q1 2021. As interest in Brooklyn continues for residents and businesses, the price per share square meters also increased steadily from 371 USD / sf to $ 405 / sf over the last year. But like Manhattan, we believe that buildings with free market units will continue to perform well in the future. An example is the $ 180 million acquisition of The Vitagraph Building in Brooklyn, which contributed 28% of the total dollar value of the borough during the 1st quarter of 2022. Located at 1277 E 14th St in the Midwood neighborhood of Brooklyn, it includes eight multi-storey building 302 units near Marine Park, Prospect Park and Zoo, as well as the Botanical Garden. Properties that are able to provide this kind of facilities, namely access to outdoor and green areas, public transport and nearby businesses, should see an increased demand going forward, especially in the affordable sector as investors are looking for stable asset types.

For notable transactions in the first quarter, see page 5 of Ariel Property Advisors’ 1st Quarter 2022 Multifamily Quarter in Review.

Rent-stabilized Multifamily: Clarity and vulnerability

Last year, the market provided increased clarity on how investors approached this segment under the Housing Stability and Tenant Protection Act of 2019 (HSTPA). However, the high inflation and low interest rate environment also contributed to the recent attractiveness of this segment as a stable, cash-flowing asset. The 2021 transaction momentum continued throughout the first quarter, and a notable transaction was the Queens Village multi-family portfolio sold by Cunningham Associates to A&E Real Estate Holdings for $ 130 million. Nevertheless, interest rates will play a major role for this segment of multi-family in the future. As a result, we expect price adjustments specifically for rent-stabilized apartment buildings to compensate for the increase in debt costs without major legislative changes in Albany or real rent increases approved by the Rent Guidelines Board, which sets rents each year in June.

The future depends on building class: Free market, rent stabilized or affordable

Overall, the city experienced a 384% year-on-year increase in units sold since Q1 2021, a sign of renewed investment in residential infrastructure throughout the city. In addition, the average monthly transaction volume doubled in the last year from 23 to 44 closures across the five boroughs. Investment in multi-family properties comes at a time when New York City has seen its most competitive rental market since 2020, with a 2% vacancy rate when residents return to the city. The multi-family market is divided into three sub-segments: free market, rent-stabilized and affordable. All indications are that investor demand is robust for all that is free market like an inflation hedge and a relatively low cost base, while we expect rising interest rates to negatively affect the pricing of rent-stabilized assets. Affordable housing, which has performed well over the past few years, is sensitive to interest rates but has other compelling long-term features (ie subsidies, property tax benefits, guaranteed rents in some cases) that will keep this segment strong.

For more information on the multifamily market in New York, please see Ariel Property Advisors’ 1Q 2022 Multifamily Quarter in review.

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