It is no secret that Manhattan’s investment sales market has cooled off from 2015’s record-breaking activity, as there are articles published on the topic every day. Documented and theoretical factors posited by investors and analysts have focused on, among other things, a changing political climate, rising interest rates, revisions to rent regulation, increased office development and previous uncertainty over the future of the 421-a tax abatement. While investors are well aware of the recent downturn in the retail market, the growing inventory of office space projected to come online due to Hudson Yards, and the proposed Midtown East rezoning, a great deal of interest remains focused on the state of the multifamily market and future development.
According to recent data from Ariel Property Advisors, multifamily properties in Manhattan experienced a tepid first quarter, with just 27 transactions comprised of 32 buildings, totaling $512.63 million in gross consideration, representing declines of 16%, 29%, and 69%, respectively, versus the same quarter a year earlier. In April, Manhattan multifamily property sales registered less than $100 million in dollar volume for a second straight month. One observation is that contrary to previous years, the multifamily market in 2017 is seeing a palpable pullback in institutional demand for large-scale trophy properties. For example, transactions last year included State Property Group’s purchase of 320-423 East 54th St. for $390 million and the sale of the 894-unit Kips Bay Court complex to Blackstone Group for $620 million.
Price per s/f, however, remained stable at $966. Such data shows that while there is a lack of product on the market, investors are willing to pay top dollar for quality assets that offer opportunities for either added-value or higher cap rates. The largest multifamily trade to date this year is A.D. Real Estate Investors’ purchase of a 67-unit elevator building located at 12 East 30th St. in Kips Bay for $52 million, equating to $1,087 per s/f and $776,119 per unit. Moreover, there is still demand for assets in areas that have been exhibiting a stronger multifamily market, such as with the acquisition of an 11-unit walk-up building located at 601 Hudson St. in Greenwich Village for $12.75 million, representing $1,335 per s/f and $1.159 million per unit.
As seen with the multifamily asset class, transactions for development sites in Manhattan continued the trend from last year with a slow first quarter, with dollar volume decreasing to $420.17 million, a remarkable 78% drop from the same quarter a year earlier, according to Ariel Property Advisors. Transaction volume has also fallen sharply, with only 15 closed transactions registered in the first three months of the year, down 31% from the same period in 2016. However, as seen with multifamily acquisitions, investors continued to display confidence in pricing, with the average price per buildable square foot in the first quarter at $650, up 6% from the same quarter in 2016 and 4% from the previous quarter. Notable development transactions this year include the sale of residential sites located at 531-539 Avenue of the Americas for $53 million, equating to $875 per buildable s/f, and 310-314 East 86th St. for $42 million, translating to $747 per buildable s/f.
Here, the decrease in transactions can likely be attributed to various factors. For instance, transactions have been constrained by higher borrowing costs. After raising short-term interest rates for only the fourth time in a decade in June, the Federal Reserve is expected to tighten monetary policy further as long as economic conditions continue to improve. Historically low interest rates, as well as easy access to capital, were a boon for Manhattan sales in recent years.
Banks have dramatically pulled back on lending, due primarily to concerns of overleverage and government regulation. Moreover, lenders have been reluctant to lend on riskier condominium projects that are without a viable rental income fallback alternative; new hotels or large-scale office projects built on speculation. While alternative lenders, both individual and institutional, have been actively stepping in to fill the void left by banks, financing activity pales in comparison to previous years.
Developers are also being more cautious by favoring low-risk endeavors that are not dependent on high-end luxury condo sellouts or building in neighborhoods that are requiring excessive rental concessions (residential and office). Accordingly, developers have exhibited a desire to focus on the residential-heavy neighborhood of the Upper East Side and commercial-heavy area of Midtown East as they account for 12% and 13%, respectively, of the sales registered since the beginning of 2016.
On a positive note, developers have regained the ability to qualify for tax abatements since New York State lawmakers recently revived the 421-a with a new program called “Affordable New York” as part of the state’s $163 billion budget. Affordable New York is encouraging news for the Manhattan development market, and should help offset increasing construction costs.
Manhattan multifamily and development sales have undoubtedly slowed over the past year, but demand for well-priced, high-quality locations has not. With the local and national economy expected to improve further, domestic and international investors will likely continue to spend capital in Manhattan as it remains a safe-haven that has historically been one of the best bets around.
Howard Raber is a director – investment sales at Ariel Property Advisors, New York, N.Y.