Ariel Property Advisors’ Shimon Shkury Sheds Light On NYC’s Multifamily Market

Shimon Shkury, President and Founder of Ariel Property Advisors, one of New York City’s leading investment real estate services and advisory companies, shares his valuable insight about New York City’s multifamily property market, what has been driving activity, where he sees opportunities, and his forecast for 2019.

How did the multifamily market perform in 2018?

The New York City multifamily market in 2018 performed much better than 2017, with dollar, transaction and property volume recording gains on an annual basis. Dollar volume leaped to a two-year high due to a sharp increase in large, institutional sales. In fact, 2018 witnessed a dramatic reemergence in big-ticket sales, with NYC seeing 14 transactions exceeding $100 million versus 6 such sales in 2017.

Overall, the City saw $11.1 billion in multifamily sales take place across 473 transactions and 896 buildings. When compared to 2017, dollar volume soared 55%, while transaction and building volume rose 5% and 16%, respectively, according to our company’s newly released report: “Multifamily Year In Review.” To view, click on: http://arielpa.com/report/report-MFYIR-2018

Dollar volume for multifamily assets encompassed 27% of NYC’s entire investment sales market in 2018, up from 2017’s 23% market share, but slightly below 2016’s 30% composition. Over the past three years, multifamily properties’ portion of the City’s overall transaction volume has held steady, comprising between 17% and 20%.

In terms of pricing, The Bronx fared extremely well versus other sub-markets, with the average price per square foot piercing $200 per square foot for the first time, increasing 9% to $213 per square foot. In contrast, multifamily buildings in Manhattan below 96^th Street saw the average price per square foot in 2018 fall below $900 for the first time since 2013, dropping 7% year-over-year to $891 per square foot. In Northern Manhattan, Queens and Brooklyn, pricing metrics mostly held steady.

What do you anticipate being the main market drivers in 2019?

Several factors will affect the multifamily market in 2019: the rental market, borrowing rates and potential rent regulation changes.

A flat rental market is the first of a few drivers that investors will watch closely during 2019, with upcoming supply being the root cause. Approximately 65,000 new units are projected to hit the market from 2019 through 2021. That’s in addition to the 60,000 new units that were added in 2017 and 2018 combined. Therefore, rent concessions will likely remain elevated in the coming years, with its net effect translating into lower rent.

Based on a Douglas Elliman December 2018 report, the median monthly rent for an apartment in Manhattan was $3,300, essentially flat from a year earlier. Median rents in Brooklyn and Queens barely budged as well, with both boroughs rising a modest 1%, reaching $2,738 and $2,774, respectively.

Rising interest rates affected pricing in 2018, and while rates have dipped since the beginning of the year, expectations are that mortgage rates are headed higher in 2019. Additionally, opportunity costs today differ from previous years. For example, returns on risk-free, three-month Treasury bills offer around 2.4%, 90 basis points higher than a year ago and 190 basis points more than 2017. Put simply, today’s environment offers more risk-free opportunities for investment.

At the same time, potential changes to rent regulation should also influence the market. The New York State Senate’s flip to Democratic control last year presents some regulatory challenges for multifamily assets. In recent months, many multifamily investors have been on the sidelines with uncertainty looming around this year’s June expiration of New York’s current rent regulation laws. As a result, we anticipate lower transaction volume for rent regulated buildings during the first half of 2019. When clarity emerges around mid-year, investors will become more confident in how they can underwrite rent regulated assets and this should ignite an increase in sales activity.

Where are the opportunities today?

Reforms made to rent regulation laws will present a true opportunity for investors , particularly in certain sub-segments of the multifamily market, which include: 1) Free market buildings or buildings with the majority of free market units 2) Relatively new construction rental buildings with a tax abatement 3) Project-based Section-8 assets and 4) Smaller (10 units and under) multifamily buildings.

First, multifamily properties where most of the units are free market will see an uptick in demand due to the potential inability to easily turnover rent stabilized units. Free market units do not have rent restrictions, so the opportunity for rent growth could potentially be unlimited.

At the same time, buildings constructed over the past five years that offer substantial tax benefits will draw investors who need to deploy capital and need a safe, stable return. Investors have become increasingly interested in newly-built rental assets that benefit from 421-a, especially when the abatement is locked in for at least 10 years.

Meanwhile, typical multifamily investors will show an increased appetite for affordable housing, specifically project-based Section-8 buildings with mark-up-to-market contracts, as these assets essentially act like free-market buildings with minimal risk in the rents.

Lastly, smaller multifamily buildings, or those that are 10 units or less, while challenging from a scale perspective, should benefit substantially as their property tax increases are capped. This should especially bolster demand in up-and-coming neighborhoods, such as Bushwick and Ridgewood. Interestingly, Bushwick, Ridgewood, Crown Heights, Bedford-Stuyvesant and Williamsburg were the top 5 neighborhoods for small 6-9 unit multifamily properties in 2019, comprising 25% of NYC’s transaction volume.

What is your advice for clients who own multifamily assets in 2019?

First and foremost, understand your asset valuations. We cater to our clients by providing unparalleled up-to-date information on values. A few of the key questions we ask our clients include: What return are you willing to accept for your specific asset? What kind of capital are you looking for? What is your investment horizon? Our timely micro and macro data allow investors to make fully informed decisions. Since our Investment Sales Division is fully integrated with the debt and equity side of the market, we provide a holistic approach to investment decision-making.

Ariel Property Advisors conducted close to 900 asset evaluations valued at $11.5 billion in 2018, a stark testament to our value-added services. These asset evaluations provide us with a tremendous amount of in-house proprietary information about rents and what is happening in the market, from a broad borough level down to the street level.

Are you a believer in the multifamily asset class?

Absolutely. The housing supply constraint is here to stay as evident by the growth in private and public investments. The liquidity of the multifamily asset class is extremely attractive and in high demand in any market, from both a lender perspective and equity capital demand. Lenders have shown a strong willingness to finance multifamily properties, due largely to the assets’ relatively stable income stream.

While we expect 2019 to be bumpy in terms of transaction volume and pricing, we believe this juncture also presents a wealth of opportunities for multifamily investors. Strong fundamentals firmly favor owning real estate in New York City and demand for well-priced, high quality assets has not waned. Ariel Property Advisors’ professional staff is ready to work hard to advise and deliver for our clients in 2019 and for many years to come.