Today And Tomorrow: A Tale Of NYC’s Multifamily Market

The first quarter of 2022 for the New York City multifamily market experienced 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. That sum includes Black Spruce’s $837 million purchase 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 lagging indicator. As a result, we expect activity to decrease to the 5-year quarterly average of approximately $2 billion moving forward. Additionally, there was strong pricing metric growth across the city, ranging from around 10-20% year over year depending on the borough.

Inflation is the macro influencer when it comes to the multifamily market nationwide and in New York City. Multifamily mortgage rates climbed anywhere from 75 to 125 basis points in the first quarter and have started to affect transaction activity and pricing. But the flip side is that inflation has put upward pressure on residential 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 a median rental price of $3,700 and $80.66 per square foot, a 24% increase in rent across New York City year-over-year. Consequently, we expect predominantly free-market and luxury residential rental buildings in New York City to remain attractive throughout the year as rents and rates balance each other.

Manhattan’s Momentum Continues

Manhattan in general presents a unique investor opportunity as many assets are predominantly free-market and command the highest rents. The Manhattan market accounted for over half of all closings in Q1, totaling $1.5 billion in dollar volume across 49 buildings which represented 52.4% of the total dollar value and 25.3% of the total building volume in New York City. In addition, the average cost per square foot of multifamily buildings in Manhattan rose 8% from $668 to $720, while cap rates decreased from 4.67% to 4.4%.

But the 10-year average Manhattan Multifamily $/SF chart below shows that $720/sf is still on the lower end of the spectrum and well below replacement costs. The relative low basis of Manhattan’s multifamily pricing coupled with an upward trend in rents and relatively less regulation, will most likely encourage investors to invest heavily in this borough throughout this year, even with rising rates.

Demand High for Brooklyn Assets

Brooklyn saw substantial growth over the last year, rising 113% in transaction volume with 34 closings in Q1 2022 compared to 16 in Q1 2021. As the interest in Brooklyn continues for residents and businesses, the cost per square foot has also steadily risen from $371/sf to $405/sf over the last year. But, similarly to Manhattan, we believe that buildings with free-market units will continue to do well moving forward. One example is the $180 million purchase of The Vitagraph Building in Brooklyn, which contributed to 28% of the total dollar value in the borough during Q1 2022. Located at 1277 E 14th St in the Midwood neighborhood in Brooklyn, the eight-story building includes 302 units near Marine Park, Prospect Park and Zoo, as well as the Botanical Gardens. Properties that are able to provide these kinds of amenities, namely access to outdoor and green spaces, public transportation and nearby businesses should see increased demand going forward, especially in the affordable sector as investors look for stable asset types.

For notable first quarter transactions, please refer to page 5 of Ariel Property Advisors’ 1Q 2022 Multifamily Quarter in Review.

Rent-stabilized Multifamily: Clarity and Vulnerability

Last year, the market provided increased clarity on how investors approached this segment post-Housing Stability and Tenant Protection Act of 2019 (HSTPA). However, the high inflationary and the low interest rate environment also contributed to the recent attractiveness in this segment as a stable, cash-flowing asset. The transaction momentum from 2021 continued throughout the first quarter and one notable transaction was the Queens Village multifamily portfolio sold by Cunningham Associates to A&E Real Estate Holdings for $130 million. Still, interest rates are going to play a major role for this segment of multifamily moving forward. As a result, we anticipate price adjustments specifically for rent-stabilized multifamily to compensate for the increase in the cost of debt absent any major law changes in Albany or true rent increases approved by the Rent Guidelines Board, which sets rents every year in June.

Future Depends on Building Class: Free Market, Rent Stabilized or Affordable

Overall, the city saw a year-over-year increase of 384% in units sold since Q1 2021, a sign of renewed investment in housing infrastructure across the city. Moreover, the average monthly transaction volume doubled in the last year from 23 to 44 closings across the five boroughs. Investment in multifamily properties is coming at a time when New York City has seen its most competitive rental market since 2020, with a 2% vacancy rate as residents return to the city. The multifamily market is divided into three subsegments: free-market, rent-stabilized and affordable. All signs show that investor demand is robust for everything free market as an inflation hedge and a relative low-cost basis, while we expect rising interest rates to negatively affect pricing for rent stabilized assets. Affordable housing, which has performed well in the past few years, is sensitive to interest rates but has other compelling long-term features (i.e., subsidies, property tax benefits, guaranteed rents in some cases) that will keep this segment strong.

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