As New York City investment property sales slow, Bronx multifamily assets continue to attract demand - by Gold and Baruch

June 20, 2017 - New York City

 

David Baruch,
Ariel Property Advisors

 

As the New York City investment property market continues to cool off, echoing 2016’s trend, there is still plenty of heat in The Bronx. Real estate investors in the borough have enjoyed enviable returns and prices are poised to appreciate further, particularly in the South Bronx, where multifamily assets offer value relative to other areas of the city.

The NYC multifamily market slowed in the first quarter of this year, with dollar volume dropping 60% year-over-year to $1.6 billion, its lowest level in four years as large institutional-level transactions all but vanished, according to Ariel Property Advisors’ “Multifamily Quarter in Review.” Transaction volume, however, remained on pace with the previous quarter. 

NYC property pricing was mixed in the first quarter, with the average price per s/f leaping 10% in The Bronx, while those in Manhattan and Brooklyn softened. The Bronx’s first quarter price gains came on the heels of banner appreciation in 2016, where new buyers and limited supply caused the average price per s/f to jump 15% versus 2015.  

Investors, both institutional and private, remain enticed by The Bronx’s relative affordability compared with other sub-markets and the perception that there is room for rent growth, with price per square foot the lowest in the city. Multifamily properties have been their primary target for investment, accounting for 71% of first quarter dollar volume in The Bronx.   

The Bronx registered 33 multifamily transactions totaling $275 million in gross consideration in the first quarter, according to Ariel Property Advisors data. That represents a nearly 27% increase in transactions and a 40% jump in dollar volume quarter-over-quarter despite year-over-year declines of 33% and 52%, respectively. 

The decline in transaction volume in the first quarter versus the same quarter in 2016 can be attributed to a large gap between seller’s expectations and buyer’s inability to be aggressive because of a more challenging lending environment. Banks have dramatically pulled back on lending due to concerns about overleverage and more stringent government regulation.

South Bronx Popularity Surges

The Bronx has undergone a historic and dramatic transformation in recent years, with the borough blossoming into a popular hub for both residential and commercial activity. This metamorphosis has bolstered the region’s economy. Indeed, the unemployment rate stood at 5.70% in March, above the national average, but an astounding 30% lower than where it was a year earlier, according to NYS data. 

Investors searching for yield have turned to The Bronx, which offers high capitalization rates relative to other areas of the city. Bronx cap rates in the first quarter were the highest in NYC, at 4.99%. That is significantly more than Northern Manhattan and Queens, which had the lowest cap rates, at 3.74% and 3.85%, respectively. 

Investors have rabidly been snatching up real estate in neighborhoods they deem as having the most upside potential, with the South Bronx neighborhoods of Mott Haven, Port Morris, Morrisania, Melrose, Foxhurst, West Farms and Claremont Village among the most popular locations. 

In fact, the South Bronx snared 43% and 45% of the entire borough’s transaction and dollar volume, respectively, for multifamily in the first quarter. South Bronx dollar volume was led by the $78.14 million transaction of 2862-2864 Park Ave., a 520-unit, mixed-use Mitchell-Llama building, purchased by MDG Design & Construction along with the Housing Partnership.

Mott Haven has become a huge hub for development activity, which is abundantly evident along 138th St., where cranes and construction equipment are ubiquitous. Tahoe Development has planted its flag in the area, with a 47-unit condo development at 225 East 138th St.. The developer projects a $25.3 million sellout, according to filings with the New York State Attorney General’s office, which averages to about $540,000 per unit.  

At 255 East 138th St., on the corner of 3rd Ave., Lettire Constuction Cooperation is developing an eight-story mixed-use building that will have 96 mixed-income apartments ranging in size from studios to three-bedrooms. In addition, Tres Puentes plans to undergo two supportive housing developments in the area, one at 275 East 138th St. and another at 2550 Third Ave. on a lot bordered by East 139th St. and Alexander Ave. 

Looking ahead, while the overall outlook for NYC real estate is more uncertain than it has been in recent years, The Bronx remains positive as it continues to be one of the most affordable areas of the city. With colossal infrastructure projects underway in the region, and the upcoming rezoning along Jerome Ave., The Bronx should continue to draw investment, all but guaranteeing near and long-term price growth in the borough.  

Jason Gold is a director - investment sales and David Baruch is a senior analyst at Ariel Property Advisors, New York, N.Y.

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