The Manhattan apartment market remains among the healthiest in the nation

By most measures, the Manhattan apartment market remains strong, with vacancy at large, market-rate properties running less than 3% and rents climbing at a healthy pace. A more challenging environment for rental housing looms in the months ahead, however, as lingering problems in the financial markets may lead to even deeper job cuts. No one knows for certain how Wall St.'s problems will affect demand for rental housing. For now, it is likely that housing demand will be supported by staffing increases in other employment sectors, although growth will not be as strong as in the past couple of years. As a result, vacancy will rise slightly in the quarters ahead, and rent growth will not be quite as substantial as in 2007, when asking rents advanced more than 8%. In fact, consistent rent growth over the past three years has stimulated interest in development of rental properties in the borough. Multifamily permit issuance has been elevated recently, and the strong performance of rental properties may encourage a greater number of builders to produce rentals instead of condos. For investors, things have been quiet thus far in 2008. There is still a liquid market for top properties, with such assets trading at or very near list prices and at gross rent multipliers in the low- to mid-teens. Some lesser-quality properties, though, are selling at slight discounts, with GRMs of approximately 10. Interest in properties on the West Side remains high, as buyers aim to get ahead of future redevelopment in areas such as the West Side rail yards. Like property owners, investors are monitoring employment on Wall St. and attempting to gauge the size of pay bonuses likely to be rewarded early next year. Hefty bonuses like those paid out in the last two years elevate prices of for-sale residences and lift values for all properties in the city. Employment: Across the entire city, employers are expected to create 5,000 jobs this year, a 0.1% gain but a decline from 44,600 positions in 2007. In Manhattan, total employment is forecast to expand 0.1% with the addition of 3,000 new workers. Due to turmoil in the financial markets, though, the potential for a substantial decrease in citywide employment exists. Construction: Builders are expected to deliver 1,900 units in large, market-rate complexes this year, up from 1,800 units in 2007. Multifamily permit issuance will fall off to about 4,000 units in 2008 as developers purchase fewer project sites and wait for signs of improvement in the mortgage market. Vacancy: Completions of large, market-rate properties this year will increase supply at a faster pace than projected demand growth, leading to a 60 basis point rise in the vacancy rate to a still-tight 2%. Rents: Asking rents in large, market-rate apartments are forecast to rise 4.4% to $3,882 per month, while effective rents 4.4% as well to $3,786 per month. By law, rents on rent-stabilized units can increase 3% on one-year leases and 5.75% on commitments of two year leases. Sales Trends Transaction velocity has declined 11% during the past 12 months. The slowdown is attributable to tougher underwriting standards for acquisition loans. Well-capitalized private buyers, though, remain active. The median price has risen 14% to $242,100 per unit during the past year. The rate of price appreciation appears to be moderating, as the median price reached a high of $246,000 per unit in the third quarter of 2007. Cap rates in Manhattan vary from the mid-4% range to 5.8% and are inching higher. Outlook: Leveraged buyers will remain subdued in the months ahead as conditions in the credit markets stabilize. Well-capitalized private buyers are expected to stay active, however, as will institutions and foreign investors. Capital Markets The Fed has become aggressive in its efforts to prevent an extended economic downturn. In addition to rate cuts, the Fed has taken measures to stabilize credit markets and restore liquidity. Lenders are increasingly cautious, resulting in lower loan-to-values (LTVs) and higher debt-service coverage ratios (DSCRs). On average, LTVs are at 65% to 70%, compared with 75% to 80% in mid-2007, while DSCRs are 1.2x or greater, versus 1.1x prior to the credit crunch. Portfolio lenders today are generally pricing multifamily loans at 235 to 265 basis points over the 10-year treasury. Apartment investors have the advantage of using Fannie Mae and Freddie Mac, which have increased originations and are pricing loans at 220 to 250 basis points over the 10-year treasury. Conduit lenders are largely out of the market at this point, with spreads at 400-plus basis points over the 10-year treasury. The stock market remains volatile, leading investors to seek safety in U.S. Treasury securities. As a result, the yield on the 10-year treasury has declined 170 basis points since last summer to 3.6%. Edward Jordan is the regional manager of the Manhattan, N.Y. and New Haven, Conn. offices of Marcus & Millichap Real Estate Investment Services.