Much has been written and talked about with regard to the significant drop in activity in the New York City investment sales market. Looking at the numbers reinforces the perspective that many market participants have with respect to the muted volume levels we are experiencing.
While sales volumes have been disappointing, values have been performing well, with the exception of the land and hotel markets where we are seeing values drop. The product type that appears to be doing the best is the multifamily market, and that will be our focus today. Sales volume in the multifamily sector are also off significantly, but value remains elevated.
Before drilling down on the multifamily market, we will take a quick look at the broader sales market for some relative perspective.
This year, the sales market is on pace for $32.9 billion of volume this year, down 43 percent from the $57.8 billion of sales that we had in 2016. This pace would result in a 57 percent drop from the cyclical peak year of 2015. The number of properties sold is on pace for 3,756 sales—a total that would be 14 percent below 2016’s 4,376 sales. This pace would also put our market 32 percent below the cyclical peak year of 5,534 in 2014.
On a market-wide basis, the average price per square foot thus far in 2017 has reached a new all-time record of $570, 7 percent above last year’s average. It is notable to mention that the increase in average price per square foot in the outer boroughs was 7 percent ($407 vs. $380) and in the Manhattan submarket, the appreciation rate is just 2 percent ($1,483 vs. $1,449).
It’s not surprising that land and hotels are slipping in value, as those two product type sectors are always the first to shift when the market is correcting. Multifamily assets are almost always the last to shift, and current market conditions support this historical trend.
Through the first half of 2017, the multifamily market is on pace for $7.12 billion worth of apartment building sales (this includes both elevator and walk-up properties). This is on pace to be 47 percent below last year’s $13.45 billion (this would be 62 percent below 2015’s total if the StuyTown deal was included). The number of properties sold is on pace for 1,336, 11 percent below last year’s 1,508 sales. This total is 32 percent below the cyclical peak in 2014, in which 1957 properties were sold.
With regard to values, on a citywide basis, the average price per square foot has achieved a new all-time record thus far in 2017 at $455 per square foot. This is 10 percent above the 2016 average of $413 per square foot. Capitalization rates in this sector are up slightly at a 4.49 percent average. This is up 19 basis points from the 4.3 percent average observed in 2016 (this is the smallest average capitalization rate increase among all major property types). The average gross rent multiple has dropped to 16.54 times, versus the 2016 average multiple of 16.73.
If we look at the individual sectors for elevator properties versus walk-ups, we see that walk-ups have not been as negatively impacted with respect to volume as the elevator sector has. Most notably, the appreciation rate in walk-up buildings has hit a new all-time record average of $447 per square foot, a 14 percent increase over last year. Simultaneously, the elevator sector has experienced a 3 percent drop in average values to a $500 per square foot average, down from $517 last year.
So the question is, Will values continue to rise in the sector? Several owners are reporting slight increases in market rents in the residential sector. This would stop an almost two-year trend of downward pressure being exerted on residential rentals. If rents are actually increasing, this could bode very well for the future of multifamily property values and would likely lead to increased supply of properties coming on the market for sale as owners look to take advantage of those additional increases in values. This would be a much-needed shot in the arm for the anemic sales volumes that we have seen of late.