As the second largest city economy in the world, New York City continually retains its reputation as one of the most desirable locations for long-term real estate capital appreciation both nationally and globally. In turn, the NYC multi-housing market has been characterized by increasing rent growth and decreasing vacancies as the influx of supply in 2018 gets quickly absorbed. In the next 24 months, NYC will see a dramatic reduction in the new supply of rentals, with current projections for 2019/2020 slating 12,000 units to come online, which is a substantial decrease from the 20,680 units that were delivered in 2018. Of the 20,680 units delivered in 2018, Queens and Brooklyn accounted for more than 50 %. Despite these deliveries, effective rent grew in 2018 by 2.9% in Manhattan, 2.2% in Brooklyn and 3% in Queens.
Total multifamily sales volume in Manhattan for 2018 was $6.8 billion, an 83% increase from 2017’s total transaction volume of $3.7 billion. With 181 total transactions, properties that traded for more than $50 million made up 65 % of the volume in 2018 across 22 trades. Similarly, Brooklyn sales hit a record volume of $2.8 billion, 32.5% above the prior peak in 2015. Transaction volume nearly tripled in Queens from $0.5 billion in 2017 to $1.5 billion in 2018.
Notable recent NYC transactions include the sale of the Corner, which represented the highest per unit sale in Manhattan in 2018. The property was sold to Centurion Real Estate for $227,250,000 ($1,159,439/unit, $1,466/RSF) in December at a 3.61% cap on abated NOI. The buyer plans to convert the 196 rental units into condos. Another noteworthy transaction is the sale of the Archstone Chelsea to Equity Residential from Greystar. The 266-unit property sold for $240,000,000 ($900,000/unit, $1,200/RSF) at a 4.4% cap on abated NOI and includes 62 rent stabilized apartments.
Investors have become more conservative in their underwriting, pending the looming June 2019 vote surrounding the four-year cycle of approving and updating the state’s rent stabilization laws. Owners of rent stabilized properties are potentially going to be in a predicament, including the likely inability to improve their assets, stifling of rent growth and growing operating expense budgets. The topic has been a political hot button among state and city officials in regard to its potential impact to change existing rent stabilization laws. Some major topics of reform include eliminating preferential rents, eliminating vacancy decontrol, eliminating MCI, using a neighborhood medium income rather than an average medium income and repealing the Urstadt law (which prevents the city from enacting rent laws more restrictive than those of the state. Some politicians are proposing that the rent laws be repealed/replaced upon renewal in 2019 (they expire every four years). Overall, we have seen many investors take a “wait and see” approach and, in the meantime, pivot toward more fair market investment opportunities.
Although a big blow to New York City’s job market, Amazon’s announcement to no longer move its second headquarters to Long Island City may not have as big of an impact on the real estate market as people initially thought. A 2017 study found that the neighborhood welcomed more new apartments (many of those market-rate rentals and condos) since 2010 than any other neighborhood in the county. Notable developments include 5Pointz Apartments, a 1,115-unit multifamily development being developed by G&M Realty. The project delivered in early 2019 and spans two towers, which, together, make up the largest new additions to Long Island City. Additionally, Skyline Tower, which plans to deliver in the third quarter of 2020, will add 802 condominium units to the Long Island City market. The project is being developed by United Construction & Development Group.
One important observation the past few months was the immediate effect the reversal of the L-train shutdown had on Williamsburg rents, which increased vacancy by 1.49% in the neighborhood. Before the reversal was announced, Williamsburg was the only neighborhood in the city to see a decline in rental demand, with a one % drop since October 2017. As we approach a busier cycle in the rental market, it will be interesting to see how this sudden change of plans continues to influence the greater Brooklyn rental market.
Formerly with the San Diego office for nearly five years, Rob Hinckley is a managing director in HFF’s New York City office. He has extensive experience in commercial real estate, including sales, equity placement and debt and is primarily responsible for originating, marketing and placing transactions throughout the United States with a primary focus on the New York Metro area. Mr. Hinckley’s major focus is on multi-housing, development, industrial, office and mixed-use properties. During his tenure at HFF, he has participated in the completion of more than $5 billion in real estate transactions.
Mr. Hinckley has previous real estate experience in both single-family development and private equity placement where he performed underwriting and research. He has worked for Goodman Properties in Tucson, Arizona, Trans West Housing in San Diego, California, and KeyBank Private Equity Group in Carlsbad, California.
Originally published in Northeast Real Estate Business Magazine.