About That Third Quarter
Dan Duray Nov. 18, 2010, 10:57 a.m.
One of the market segments we always pay close attention to in New York City is the multifamily building sales market. Rent-regulated properties are always in high demand, as they possess the greatest amount of upside given the artificially low rents that regulation creates. Given their limited downside, these properties are always the easiest upon which to obtain financing. Additionally, there are more multifamily properties in New York City than any other product type. For these reasons, this sector is always an important indicator of the broader market.
Notwithstanding its relative strength, even this segment proved it was not immune to the disappointing results seen in the third quarter of 2010 (3Q10) in New York City’s building sales market. Clearly, the multifamily market in 2Q10 performed much better than it did in 2009. In 2009, there were 435 multifamily properties sold. In 1-3Q10, there were 391 sales in this segment. On an annualized basis, this is a 20 percent increase over 2009 levels. Unfortunately, after 2Q10 this number was running at approximately 40 percent on an annualized basis.
In 2009, all multifamily buildings sold contained a total of 9,888 apartments. In 1-3Q10, we have already surpassed that number, with 10,951 units sold. On an annualized basis, this increase reflects a 48 percent jump in units sold. After 2Q10, the number of units sold in 2010 was on pace for a 76 percent annualized increase over 2009 levels.
We have seen a similar shift in the dollar volume of sales. In 2009, multifamily property sales volume was approximately $1.26 billion. In the first three quarters of 2010, we have greatly exceeded that total, with more than $1.9 billion in sales volume. On an annualized basis, we are on pace to more than double the dollar volume of sales, which is currently projected at 101 percent over last year’s totals. After 2Q10, we were on pace for a 151 percent increase in the dollar volume of sales.
LOOKING AT THESE three metrics, and how their relative levels have changed in just three months, we see how impactful the slowdown in 3Q10 has been market projections. This has been the case for both the walk-up sector and the elevator sector, although the walk-up sector’s projections has been more adversely affected by third-quarter results.
In the walk-up sector, there were 348 sales in all of 2009, compared with 295 sales in 1-3Q10. These numbers reflect an annualized increase projected at 13 percent today, versus what was projected to be a 37 percent increase at the end of the first half of the year. In 2009, the walk-up buildings that sold contained a total of 5,022 apartments. In 1-3Q10, there were 4,187 units sold, leading to a projected increase of 11 percent on an annualized basis. At the end of the first half of 2010, the number of units sold was on pace for a projected 32 percent increase.
The biggest impact third-quarter results had on the walk-up market projections was in the dollar volume of sales. The 2010 sales volume has been approximately $550 million, representing a 15 percent increase on an annualized basis over the 2009 total. This projection is down from a 71 percent projection at the end of the first half of the year.
The elevator sector has held up much better. In 2009, there were 87 elevator buildings sold, versus 95 in 1-3Q10. These figures project an annualized 46 percent increase in the number of buildings sold as opposed to what was a 49 percent projection at the end of the first half of the year. Last year, the elevator buildings sold contained a total of 4,866 units. Through the first three quarters of 2010, there were 6,839 units sold, reflecting a projected annualized increase of 87 percent.
A quarter ago, this projection was 121 percent. Through the first three quarters of this year, we have already more than doubled the dollar volume of sales in the elevator sector with $1.36 billion in sales volume, versus just $627 million in all of 2009. Here, we are on pace for a 189 percent annualized increase. This projection was 233 percent last quarter.
As these numbers clearly show, the deviations in the elevator numbers are far less than observed in the walk-up sector.
THESE VOLUME NUMBERS are clearly disappointing, particularly given the fact that volume trends had significant momentum going into 3Q10, and this momentum evaporated with the lackluster quarterly results. On the value side, since hitting bottom in 2009, values have been volatile from submarket to submarket.
To fully understand value in the multifamily sector, we look at four main metrics. They are capitalization rate, gross rent multiple, price per square foot and price per unit. If we examine each of these metrics and compare 2010 results to 2009, on a submarket-by-submarket basis, we see no clear trends, with pluses and minuses sporadically across the board. The tables nearby show the volatile nature of the pricing metrics presently within the sector.
As the multifamily sector is having difficulty finding its footing, there are several uncertainties adding to its opaque future.
Recent court decisions have overturned long-standing market rules. These include the Roberts decision in which the state Division of Housing and Community Renewal’s authority over the implementation of deregulating units in properties receiving J-51 tax benefits was upended. Notwithstanding nearly 15 years of HPD ratifying the decisions made by DHCR, the court ruled in the tenants’ favor. In another startling decision, the court held that the DHCR improperly added low rent supplements to extraordinarily low regulated rents. Given the complexities of New York’s rent-regulation system, it is important for property owners to have a source of authority that can be relied upon. Obtaining opinion letters from DHCR was the one resource owners felt they could rely upon, until now.
Additionally, the fate of which party will possess the majority in the State Senate is still up in the air. Within the first couple of days after the election, it was being reported that Republicans had 31 seats and Democrats had 28 seats, with three races too close to call. This would have assured Republicans of at least a split in the Senate. Several days later, one of the races was reversed, leaving the current tally at 30 Republican seats and 29 Democratic seats. It appears that Republican candidates have a slight edge in two of the three races that are still too close to call. To the extent Republicans take the majority in the Senate, it would provide some assurances to multifamily owners that no radical changes to rent regulation will occur, as 12 bills passed by the New York State Assembly are sitting in the Senate’s in-box and regulation comes up for renewal in 2011.
The attorney general-elect, Eric Schneiderman, has, as one of his main objectives, pledged to crack down hard on tenant harassment. I certainly would never condone an owner harassing a tenant. Often, however, taking a tenant to court is the only way to find out if they are indeed rent-regulated tenants playing by the rules. Given that tenants rarely volunteer information indicating that their rent-regulated apartment is not their primary residence, that they are illegally subletting their apartment or that their annual income surpasses the threshold for high-income deregulation, an owner’s only option is generally to commence litigation to determine the truth.
If politicians truly wish to stop much of the nonsense that occurs in the rent-regulated-housing market, all they have to do is simply create a system of means-testing to determine if tenants qualify for rent regulation. This rent-regulation subsidy is, essentially, a welfare program and should be administered as such. Advocates take the position that means-testing would be too cumbersome to implement. This is a ridiculous position. Any tenant receiving Section 8 benefits must prove that they qualify. Any tenant wishing to occupy the 20 percent component of an 80/20 building must prove that they qualify. A New York State income tax return could easily be the basis for such qualification. If tenants had to qualify for their rent-regulated status on an annual basis, the number of cases in landlord-tenant court would diminish significantly.
Notwithstanding the uncertainties and difficulties dealing with rent-regulated properties, they remain at the top of many investors’ wish lists. Whether this remains the case into the future will be dependent upon public policy as much as economics. Next year could be an interesting one for this sector, and we look forward to watching things unfold.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.