Sales prices continue their upward climb in Manhattan's commercial real estate market

A vigorous local economy continues to generate considerable demand for rental housing in the borough of Manhattan. Currently, the vacancy rate in market-rate properties consisting of 40 units and more is in the low-2% range, where it is expected to remain for the next several quarters. Rents have expanded at a substantial pace in the market-rate sector, while owners of rent-controlled properties must comply with guidelines allowing a 3% increase on one-year leases and a 5.75% bump on two-year leases. On the supply side, the inventory of market-rate units is expected to rise more than 2% this year. Permit issuance for future construction remains elevated, though recent revisions to the 421a tax abatement program may force reconsideration of some projects. Meanwhile, the city is proceeding with plans to redevelop the West Side rail yards, where over 4,000 units of multifamily housing may be allowed. Also under consideration is a plan to construct roughly six towers that could house up to 10,000 residents on a site near the U.N. In the investment arena, transaction velocity continues to recede from the extremely elevated levels recorded over the past two years. Tighter lending terms may further constrict deal flow in the months ahead but may also represent a signal for hesitant owners to put their properties on the market. Properties with solid operating histories and assumable financing will tend to move quickly when listed, while other assets may linger on the market a while longer. A factor that may influence some prospective buyers and transactions, however, is the recent closing of a loophole in the Mitchell-Lama affordable housing guidelines that permitted owners to exit the program and raise rents to market rate. In all boroughs, employers are expected to add 52,400 positions this year, a 1.4% gain and up from 46,200 new hires in 2006. Included in the forecast are 36,000 jobs in Manhattan, a 1.5% increase from last year, when employers in the borough created 33,100 new positions. Completions totaling 2,500 market-rate units are forecast for 2007. Last year, 1,120 market-rate units were delivered. Vacancy in the pool of market-rate assets containing 40 units and more is projected to rise 10 basis points this year to 2.2%. The vacancy rate in all of Manhattan's rental properties is expected to end the year at approximately 1%. Asking rents in the market-rate rental sector are expected to rise 5.5% to $3,622 per month this year, while monthly effective rents will advance 5.8% to $3,528 per month. In the rent-stabilized segment, allowable rent increases are 3% on one-year leases and 5.75% on two-year leases. During the most recent 12-month period, transaction velocity has declined 18% and dollar volume has jumped 27%. Comparisons to year earlier periods will be difficult in the near term due to elevated deal volume over the past two years. The median price of properties sold over the past year is $228,300 per unit, a gain of 16% from the preceding 12 months. The increase is attributable to a 20% rise in the median price of properties selling for $20 million and more to $513,700 per unit. Cap rates can vary widely but typically fall between 4.4% and 5.8%. Properties trading at the low end of the range or less are usually purchased in anticipation of future rent deregulation. Transaction velocity will gradually recede from recently recorded levels, but prices will continue to climb. Deals involving properties priced at $20 million and more will push overall prices higher, while values at lower price points will rise at a slightly slower, but steady, rate. Edward Jordan is the regional manager of Marcus & Millichap's Manhattan office.