Investment Sales: Finding value in a new regulatory environment - by Justin Conway

The sweeping rent regulation changes enacted in Albany this June are forcing investors to seek new ways to find or create value. The business model has been changed from value-add, future cash flow investments to present cash flow investments, driving prices down to meet higher going-in return requirements. Opportunistic investors know that amid turmoil, there are ways to find increased returns not found during stable or growing periods.

Savvy multifamily investors in New York are looking more closely at the spread between higher cap rates and historically low interest rates for commercial assets. With 7-year multifamily bank rates presently as low as 3.55%, the delta between cap rates and interest rates can be 200-300 BPS. Determining pricing adjustments will take time, though it is clear the market will need to recalibrate to see increased transaction volume. With lower borrowing costs, investors can grow and expand more quickly leading to greater profits.

Investors taking advantage of the current climate are locking in lower rates, longer terms and seeing cap rate expansion starting to occur in the new environment. For example, cap rates for mixed-use buildings in the first half of 2019 in Brooklyn averaged around 5.03%, up 9 BPS from year-end 2018. That said, first half data won’t accurately reflect the present values, which will be for contracts signed post June 14th. 

Despite the changing environment, most investors have decided to hold and see how things play out. In my view, investors should take advantage of record low interest rates, rising cap rates and rezoning driving up prices in many neighborhoods, especially in Brooklyn.

Justin Conway is an associate, investment sales at Besen Partners, New York, N.Y.