The multi-family apartment building market in New York City is viewed as a leading indicator of the marketplace in general. It has historically received the highest level of demand from buyers and is, without question, the sector that lenders view most favorably. This is because rent regulation keeps rents in most New York City buildings at artificially low levels, limiting cash flow downside. This is why rent-regulated buildings are viewed to be as safe as Treasury bonds while, in some cases, providing junk bond type yields over time.
How has this market been performing recently? Let’s take a look at the statistics with regard to both volume and value.
Over the past two years, we have seen significant increases in the sale of multi-family properties: In 2009, there were $1.25 billion sale transactions in New York City, consisting of 433 buildings with a total 9,839 apartment units. These sales included both elevator and walk-up properties. Unlike anywhere else in the country, buildings with or without elevators are two very distinct types of assets that are tracked separately and perform differently.
Sales volume rose to $2.33 billion in 2010, an 86 percent increase. If we annualize the activity thus far in 2011, activity in the multi-family is expected to be $2.36 billion, up just slightly from 2010 figures. Since 2009, the dollar volume of multi-family properties has represented 31 percent of all property sales citywide.
We believe that first quarter activity was muted by a tremendous 4Q10 which “stole” some activity that normally would have occurred in 1Q11. (Lenders wanting to clean up balance sheets by year’s end, and discretionary sellers who were trying to beat an expected increase in capital gains rates created the frantic year-end activity.) Therefore, we expect 2011 total volume to exceed 2010 volume by 30 percent to 40 percent.
Clearly, in the multi-family sector, there has been a trend toward larger transactions as the average price of an apartment building in New York has gone from $2.9 million in 2009 to $4.3 million in 2010, a 48 percent increase. Thus far in 2011, the average price has risen to about $4.7 million.
In 2009 there were 433 multi-family buildings sold. This figure increased by 25 percent to 543 in 2010. Thus far in 2011, there has been a disappointing 127 buildings sold which, if annualized, would produce a reduction of 6 percent below last year’s totals. With dollar volume increasing the way it did, this reduction in the number of buildings sold reinforces that more expensive properties are being sold. Since 2009, the number of multi-family buildings sold has represented 17 percent of all properties sold citywide.
The number of total units in the buildings that have sold has increased from 9,839 in 2009 to 16,208 in 2010, a 65 percent increase. Similar to the number of properties sold, the number of units transferred in 1Q11 was 3,681 which, if annualized would result in 14,724 units sold, nearly 10 percent below 2010 totals.
If we disaggregate the two main food groups within the multi-family sector, we see a significant difference in the performance of elevator and walk-up properties.
In the elevator sector, we saw just $600 million of sale transactions in 2009 which increased to $1.54 billion in 2010, a 157 percent increase. Thus far in 1Q11, we have seen about $331 million in sales which, if annualized, would represent about a 14 percent reduction from 2010 totals.
In the elevator sector, 87 buildings were sold in 2009 versus 126 sold in 2010, an increase of 45 percent. In 1Q11 there have been 26 sales which, if annualized, would produce 104 sales this year, a 17 percent reduction from 2010 totals.
In 2009, the properties sold contained 4,801 apartment units. This figure increased to 8,848 in 2010, a whopping 84 percent increase. In 1Q11, there were 1,833 units sold which, if annualized would produce a 2011 total about 17 percent below 2010 levels.
The average price per square foot of elevator properties sold in 2009 was $165. In 2010, this average increased by 6 percent to $175. In 1Q11, the average has been $227 per square foot.
The average price per unit in 2009 was $164,000. In 2010, this average decreased to $132,000. This average exploded to about $273,000 per unit in 1Q11, primarily due to some remarkable sales in the Manhattan submarket.
Capitalization rates, while varying widely submarket to submarket, averaged 6.19 percent in 2009 and expanded to a 6.4 percent average in 2010, an increase of 21 basis points. This is consistent with our theory that value bottomed in 2010 (not 2009 as many casual and not-so-casual observers of the market believe) and is now poised to correct. Thus far in 2011, in the elevator sector, cap rates have averaged 5.53 percent, a compression of 87 basis points from 2010 averages. We expect this trend to continue, particularly in Manhattan where condo conversion underwritings are beginning to take place again (more on this below).
On the gross rent multiple front, which also vary greatly submarket to submarket, the average GRM in 2009 was 9.83 citywide which decreased to 9 in 2010, a decrease of nearly a full multiple. Thus far in 1Q11, the average GRM has been 10.9 citywide, representing an increase of nearly two multiples from the 2010 average. It is clear that values are rising in this sector aided by a significant supply/demand imbalance and an interest rate environment which is at or near historic lows.
In the walk-up sector, we saw activity in 2009 hit $653 million in sales volume with 346 buildings selling containing a total of 5,038 apartment units. The $653 million in sales volume increased to $788 million in 2010, a 21 percent increase. In 1Q11, there were $260 million in sales which, if annualized, would show a total volume in excess of $1 billion, representing a 32 percent increase over 2010 totals.
In terms of number of units sold, there were 5,038 units sold in 2009 which increased to 7,360 in 2010, a 46 percent increase over the 2009 total. Thus far in 1Q11, there have been 1,848 units sold which, if annualized, will be approximately the same number of units sold that we saw in 2010.
The average price per square foot in the walk-up sector was $218 in 2009 which increased to $220 in 2010, a one percent increase. Thus far in 2011, the average has been $241 per square foot reflecting an increase of 10 percent over 2010 levels.
The average price per unit sold in 2009 was approximately $176,000. This decreased to $153,000 in 2010, a 13 percent reduction. In 1Q11, the average price has rebounded to $176,000, a 15 percent increase over 2010 levels and back to where it was in 2009.
With regard to capitalization rates, in 2009 the average cap on a walk-up building citywide was 6.66 percent. This grew to 7.05 percent in 2010, a 39 basis point increase. Thus far in 2011, the average cap on a walk-up building has compressed to 6.7 percent, a decrease of 35 basis points from 2010 levels.
With regard to gross rent multiples, the average in 2009 was 9.83 which dropped to 9.08 in 2010, a decrease of three-quarters of a multiple. Thus far in 2011, the average GRM has surprisingly dropped to 8.6 reflecting nearly a half multiple reduction from 2010 levels. We believe this drop is due to the composition of properties sold relative to location, not necessarily reflecting a value shift.
While demand remains very high for multi-family properties in New York City and the availability of financing is very strong, there are several things to keep an eye on as rent regulation comes up for renewal on June 15th of this year.
Legislators are busy trying to craft an agreement that would include addressing several key housing issues in addition to the existing rent regulation laws. These include the expiration of 421-a tax benefits and the uncertainty caused by the recent Roberts decision regarding the deregulation of units in buildings receiving J-51 tax benefits.
Most observers of the multi-family market believe that rent regulation will be renewed on essentially the same terms presently in place. While Governor Andrew Cuomo has called for a “strengthening of the rent laws,” he has provided no specifics on what strengthening actually means.
The New York State Assembly (with the overwhelming support of the City Council) has passed several bills which would, among other things, increase the levels for high-rent deregulation from $2,000 per month to $3,000 per month and would increase the level that a regulated tenant would have to earn for high-income or “luxury” deregulation from $175,000 annually to $300,000 annually.
No matter how you view it, it is comical to think that the same policy makers within the City Council and State Assembly who believe that the “millionaire’s tax” on anyone making over $200,000 per year should remain in effect are the same people who need to be protected by rent regulation which is, effectively, a form of public assistance.
As I have stated in many articles I have written about rent regulation, it is a horrible system that inefficiently misallocates our housing stock. Most elected officials refer to rent regulation as an “affordable housing program” and it so obviously nothing of the sort. It simply hands a taxpayer funded subsidy to people who happen to be in the right place at the right time. There is no means testing involved and no one knows how much people who are receiving rent subsidies are actually earning or what their economic availability actually is.
At a time when elected officials are scouring budgets for government waste, fraud and abuse, it is a joke that the subsidies continue to get handed out without any qualifications necessary to receive the benefits. There is no way to make rational sense of such a system. Why not hand out welfare checks to anyone whose last name begins with “W”? That would make about as much sense.
As I have written in this column previously, reinstituting of the 421-a tax benefit program, in one form or another, is necessary to continue to have our much-needed new housing stock delivered to market. There has been a substantial decline in the creation of affordable units due to the elimination of this program. While the headlines of articles containing misguided perspectives may refer to wealthy ballplayers or captains of industry that are receiving these benefits, the articles always fail to mention that at some point the recipients of these temporary benefits will be paying the full amount of taxes. In many cases, these new developments would not have proceeded in the absence of the 421-a program.
Additionally, thousands of units of affordable housing units have been created in neighborhoods in desperate need of such housing based upon the demand for the certificates which are created when these buildings are developed. Reinstating the 421-a benefits program, in one form or another, is critical.
The other item which is likely to get rolled into the rent regulation extension negotiation is a solution to the J-51 issues. The Roberts decision, essentially, said that even though 13 years of standard operating procedure ratified by two governmental agencies had been in effect, they were incorrect in their interpretation of the rules.
The Department of Housing and Community Renewal ratified the decontrolling of units in buildings receiving J-51 benefits and the department of Housing Preservation and Development, which enforced the J-51 program, agreed that it was correct to deregulate units in buildings receiving J-51 benefits. The court’s decision in the Roberts case stated that deregulating units in buildings receiving these tax benefits was not legal.
The decision disastrously, however, did not give any other direction in terms of how to deal with these units. That question will likely be settled by years of litigation and several other courts, or a legislative solution is required to remove this uncertainty. The most reasonable and equitable solution would appear to be allowing the owners who received these benefits to pay them back to the city and continue to rent the decontrolled units to the tenants who signed up for, and are able to pay, the new free market rents.
Doing this would allow the city to recoup a significant sum of money at a time when this resource is desperately needed. It would also eliminate a senseless, random windfall for tenants who do not need it.
As we can see, the multi-family market is one which is highly dependent upon legislation and regulation. Generally, market dynamics are looking very positive in terms of volume and value. Both have been trending in the right direction. Let’s hope that policy makers don’t throw a wrench into the system with legislation that could have significantly negative implications for the market.
rknakal@masseyknakal.com
Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more then 1,125 properties, having a market value in excess of $7 billion.
