Multifamily Sales Surprisingly Sluggish

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Through the first three quarters of 2013, the activity level in New York City’s building sales market has been lagging behind levels seen in 2012. The multifamily apartment building market has been following suit as volume is also well behind 2012 levels.

SEE ALSO: Ariel Property Advisors’ Shimon Shkury on the Struggling NYC Investment Sales Market

For some perspective, we will look at the broader sales market and then address dynamics currently seen in the multifamily sector.

In the first nine months of 2013, there has been approximately $22.7 billion in property sales activity, which, if annualized, would yield about $30.2 billion for the year. This total falls about 25 percent below the $41 billion of sales volume in 2012.

With respect to the total number of buildings sold, through the first three quarters of this year, there have been 2,438 properties sold citywide, which, if annualized, would yield about 3,251 properties sold for the year. This total is approximately 20 percent below the 4,066 properties that were sold in 2012.

These results are not surprising given the impact capital gains tax policy had on volumes last year.

If we look at the apartment building sales sector, we see that it is also following the trend seen in the broader market. Apartment buildings remain the most highly sought after product type in the city. They have little downside risk (particularly if not over-leveraged) and are the easiest to finance. As a result, cap rates on apartment buildings are by far the lowest of any product type in the city.

Notwithstanding the strength of this segment, a constrained supply of available properties has this year’s totals coming up well short of last year’s levels. Through the first three quarters of 2013, there have been 870 apartment buildings sold, which, if annualized, would yield 1,161 for the year. Remaining on this pace will result in a total about 13 percent lower than the 1,331 apartment buildings sold last year.

With regard to the total number of residential units sold through the first three quarters of the year (contained within the buildings traded), there have been 22,875 units sold. This, if annualized, will total about 30,500 units for the year, which would be about 22 percent lower than last year’s 39,205 units sold.

The biggest reduction in volume occurs in the dollar volume of sales, where we are on pace for about $5.6 billion in total multifamily activity this year, which would be down a whopping 43 percent from the $9.8 billion seen in 2012. A huge factor in the tremendous drop in dollar volume is the increasing percentage of activity that is taking place outside of core Manhattan. Given this trend, it is not surprising to see that a 13 percent reduction in the number of buildings sold is yielding a disproportionate 43 percent reduction in the dollar volume of sales.

Within the multifamily sector, there are two distinct asset classes in New York City, walk-up buildings and elevator properties. In the walk-up sector, the number of buildings sold is on pace to be down just 5 percent, on pace for 991 sales this year versus 1,045 last year. However, within this sector, the number of units sold is on pace for 19,293, which would be a 17 percent increase over last year’s total. The dollar volume is also on pace to rise 5 percent over last year’s total, with about $2.8 billion projected to sell this year versus last year’s $2.6 billion.

The elevator building sector is telling a completely different story. Annualizing the first three quarter data, New York City is on pace for 171 elevator property sales this year, down 40 percent from 286 sold last year. In terms of number of units sold, we are on pace for 11,213 units trading, which would be down more than 50 percent from the 22,682 last year. And the dollar volume is taking the biggest hit, as we are on pace for about $2.8 billion this year versus last year’s $7.3 billion, a jaw-dropping 61 percent drop.

It is clear from these statistics that the elevator sector has seen a significant supply constraint leading to volume that is paling in comparison to last year. (Unrealistically high prices on many “for sale” properties are also adding to this condition, but that is another topic for another column). Unfortunately, for buyers of multifamily properties, the low supply has led to intense competition for those assets that are on the market, driving values up significantly. Cap rate compression has been seen across the board in all submarkets for both elevator and walk-up properties, and gross rent multiples are increasing significantly.

We are also seeing significant increases in the prices paid per square foot, with averages in the Manhattan submarket reaching $700 per square foot, an all-time record.