Ariel Property Advisors
Ariel Property Advisors
East Harlem has undeniably been one of Northern Manhattan’s hottest real estate markets due primarily to its relative affordability and upside potential. While the historic neighborhood’s popularity with developers has waned in 2018, it is positioned to rebound sharply in the years ahead as investors fully digest the wide-ranging impact of recent rezoning and government-designated status as an “Economic Opportunity Zone.”
East Harlem is in the midst of a major revival, partly the result of NYC mayor Bill de Blasio’s ongoing campaign for affordability. Late last year, city council approved the East Harlem rezoning plan, an initiative that should spur a sharp increase in the development of affordable housing in the coming years. The principal objective of the rezoning is to increase the housing stock to accommodate a growing population, but also to prevent the displacement of long-term residents.
The neighborhood has one of the largest concentrations of rent regulated housing in NYC, with 75% of the residences controlled by a government agency versus just one-third across the city, according to a report from NYC’s Department of Housing Preservation & Development. The stock of affordable housing has benefitted many of its long-term inhabitants for decades, but population growth has put downward pressure on supply. East Harlem’s population increased by 14% from 2010 to 2016, reaching an estimated 134,300 residents.
Between 2002 and 2014, prior to the rezoning announcement, the median gross rent in East Harlem increased by approximately 40%, while rents increased only 24% citywide. More than half of East Harlem’s households are considered “rent burdened,” meaning they spend more than a third of their income on rent, according to the report. Mayor de Blasio’s administration sought to ensure that longstanding residents weren’t priced out of their own neighborhood, and rezoning was their top solution.
The 57-square-block East Harlem rezoning permits the construction of buildings of up to 32-stories high in some areas. The rezoning – which modifies the area from 104th St. to 112th St., and 115th St. to 124th St., along Second, Third, and Lexington Aves – includes an imposed height restriction of between 75 ft. and 325 ft. It also grants some owners significant gains in air rights, which in many cases will lead to more valuable real estate.
Nevertheless, many developers have hit the pause button at this stage as they take time to fully understand the logistics of developing new projects under the Mandatory Inclusionary Housing (MIH) rules. While MIH will boost the affordable housing stock, it will also affect cash flows since 20% to 25% of the residential floor area must be allocated to households earning 40% to 60% of Area Median Income (AMI).
Overall, Northern Manhattan’s development market softened in 2018. From January through September, the sub-market saw 22 transactions, down 15% from the same period in 2017, according to Ariel Property Advisors’ investment research division. During the same period, East Harlem’s 5 development site transactions were equal to Central Harlem’s, but above Hamilton Heights’ three sales.
In the interim, the city has stepped in and is taking on the role of a developer. Notable projects include a 100% affordable Sandero Verde (680 units), 125th St. MEC Center (760 units) and Lexington Gardens II (400 units).
A new catalyst for developing in East Harlem is the formation of “Economic Opportunity Zones,” which were created through a provision in the federal government’s Tax Cuts and Jobs Act (TCJA) of 2017. This program, which aims to encourage long-term investment in low-income communities throughout the US, should have a significant impact on East Harlem.
Put simply, the program allows investors to roll their capital gains from real estate and, importantly, other sources of capital—including unrealized gains from stocks—into a Qualified Opportunity Fund (QOF). Depending on how long an investor keeps their investment in the Opportunity Zone (OZ), they can receive an increase to the basis on the capital gain that is initially deferred and, if they meet certain timing requirements, can potentially receive tax-free treatment on the additional gains earned from the fund.
In East Harlem, the largest Opportunity Zone tract is situated north of East 119th St. between Park Ave. and the Harlem River. One smaller tract of properties is between Third and First Aves. from East 109th to East 115th St. Another area includes Mt. Sinai Hospital between Fifth and Park Aves. from East 98th St. to East 106th St., which could yield some major new projects.
Combined with East Harlem’s rezoning, multiple large-scale public-private developments in the pipeline and the ensuing arrival of the New York Proton Center, these Opportunity Zones should bolster substantial investment in the neighborhood.
For a developer, the time appears ripe. Thus far in 2018, East Harlem sites encumbered by MIH, currently fetch sub-$200 per buildable s/f, well-below Central Harlem’s $312 per buildable s/f.
A good example of a recently rezoned property is 2031-2033 3rd Ave. The asking price on the rare mixed-use development site, which is being marketed by Ariel Property Advisors, is $8.5 million or about $193 per buildable s/f. Similarly, 2154 3rd Ave. is currently on the market for $4.295 million or about $186 per buildable s/f.
Looking ahead, the impact of the city’s rezoning and the government’s Opportunity Zone program on East Harlem cannot be overstated. Developers will likely take advantage of the current circumstances and opt to break ground and through increased supply, rent burdens should abate for long-term residents. Ultimately, these initiatives are overwhelmingly positive and should spark a wave of activity in one of Northern Manhattan’s most desirable neighborhoods.
Marko Agbaba is a director – investment sales, and Drew Chartash is an analyst – investment research, at Ariel Property Advisors, New York, N.Y.
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