The 2013 New York City Multifamily Market: Elevator Going Down?

Was it a good year in 2013 relative to 2012 in the multifamily sector? The answer really depends on which metrics you look at. All value metrics showed strong gains last year, but volume metrics were mixed. Overall, the number of buildings sold was up, but the dollar volume was down. It was also a year in which the elevator and walk-up asset classes performed noticeably differently, with elevator buildings struggling to keep pace with 2012 and walk-up buildings showing robust gains over the prior year.

I often write about the multifamily market and for good reason. This sector has many more market participants than any other, as there are more apartment buildings in the city than any other type of property. It is an asset class that has always commanded tremendous interest from buyers, notwithstanding the onerous price controls (in the form of rent regulation) that artificially constrain the supply of housing choices for New York residents and those who want to move here. Rent regulation also keeps free market rents artificially high as individuals in the pool of tenants looking for an apartment fiercely compete with each other for the few apartments that are available.

These artificially high rents, caused by rent regulation, have been a major factor in the increases in value that apartment buildings have experienced. Coupled with historically low lending rates, they have led to market conditions in which multifamily property prices continue to soar. Excessive demand for this product type also helped exert upward pressure on values.

In 2013, all four major pricing metrics trended positively. Taking an average of the increases in all geographic submarkets into consideration, the average price paid per unit rose by 18 percent, the average price per square foot rose by 20.4 percent, the average gross rent multiple rose by about 1.45 multiples, and the average cap rate dropped by 62 basis points. This cap rate drop is particularly noteworthy, because while interest rates remain relatively low by historic standards, rates were a bit lower in 2012.

With respect to volume, the number of buildings sold was the only positive metric on a citywide basis. The number of apartment buildings sold increased from 1,332 in 2012 to 1,413 last year, a 6 percent increase. The dollar volume and the total number of units sold both decreased. In 2012, the dollar volume of multifamily sales in the city was $9.8 billion. This total dropped to $7.5 billion in 2013, a 24 percent decrease. Over the same period, the number of apartment units sold in the buildings that traded dropped from 39,205 to 36,517, a 7 percent drop.

While these citywide trends tell the story of the entire multifamily market, the individual asset classes have performed very differently.
The elevator sector took its lumps as the number of buildings sold dropped 15 percent from 292 in 2012 to 249 in 2013. The dollar volume dropped from $7.2 billion to $4.2 billion, a 41 percent decline. The total number of units sold slid 32 percent, from 22,692 to 15,519. The volume dropped because the supply was very low as sellers decided not to place many of these assets on the market. Those properties that were placed on the market were very well received.

The elevator buildings that sold in 2013 experienced an 18.4 percent increase in the price per square foot as average cap rate compression was about .25 percent. The difference between these two numbers can be explained by increases in market rents in these properties.
The walk-up sector performed much better. The number of properties sold increased from 1,040 in 2012 to 1,164 in 2013, a 12 percent increase. The total number of apartment units sold in multifamily buildings rose 27 percent, from 16,523 in 2012 to 20,998 last year. And the dollar volume of sales rose from $2.64 billion to $2.84 billion, a 25 percent increase.

Generally, walk-ups continued their counterintuitive trend of selling for higher prices per square foot than their elevator building counterparts. Smaller unit sizes and higher turnover result in higher rent per square foot in walk-ups than in elevator buildings.

This year, we expect underlying fundamentals to improve as demand for rental units continues to increase and supply is relatively stagnant as most new residential construction is adding condos rather than rentals to the market. Therefore, we expect values for rental apartment buildings to continue to climb even though the supply of properties for sale should increase as these higher prices become very tempting to potential sellers. This is particularly true for those market participants who are concerned that the new power in City Hall is so pro-tenant that a new form of rent regulation might be enacted in which property owners have to pay tenants, as opposed to the reverse.

Either way, 2014 should be a great year for those of us who rely on transaction volume for our livelihood.

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