The Cracks In New York City's Multifamily Market Are Widening
After six months of upheaval for the New York City housing market, multifamily developers are adjusting to a new economic and cultural reality amid a public health crisis with no clear end date in sight.
Developers with projects under construction discussed ways they plan to design living spaces that are more attractive to potential buyers and renters during this era at Bisnow's daylong Digital Summit on the multifamily market in the Tri-State area.
Meanwhile, some developers on the event's panels said downward pressure on rents as residents exit the city in droves, combined with the effect of new regulations, has prompted them to pause their consideration of new development opportunities in the city altogether.
“Here is the backdrop of where we are in New York City's multifamily world — and if you are standing up, you may want to sit down,” said Meridian Capital Group Senior Executive Managing Director Helen Hwang, kicking off the day’s first panel on the market’s forecast.
“Overall vacancy is at record high in decades," she said. "And that is not even accounting for the collection loss, and that the absorption figure is second-lowest in the country behind LA, and with about two to three months of concession, effective rents are down at least 15% to 25% for many apartments.”
While navigating a new world in the coronavirus pandemic, multifamily real estate players are also still navigating the sweeping rent regulation laws that passed last year that restrict how much work a landlord can perform on a rent-stabilized unit, Hwang said.
“So the question becomes, is the worst over or will it get worse from here?" she said.
Jonathan Miller, CEO and president of real estate appraisal firm Miller Samuel, said the rental market throughout the area has been hit harder than the purchase market over the past six months, and Manhattan is falling behind the suburbs and the city’s outer boroughs on both fronts.
“The opportunity in Manhattan it’s not in sync with the region, and you are seeing that in the rental market [most immediately], simply because the rental market is more responsive to changes in the economy than the purchase market,” he said.
Beginning in June as more real estate-related activities were permitted, the Tri-State suburbs area saw a 25% to 100% year-over-year increase in purchase activity depending on the suburb, Miller said. This is due to the combination of “outbound migration” — from Manhattan to the suburbs — and pent-up demand that was released as the city and its surrounding areas began to open up, he said.
Brooklyn purchase rates shot up, too, to as much as 100% year-over-year in contracts, indicating Manhattanites are leaving for the outer boroughs as well, Miller said.
While the for-sale market seems to be on the upswing compared to the start of the pandemic, the rental market has been hit harder, he said, because the demographics that tend to rent have been hit hardest economically.
As a result, there have been record-shattering vacancy rates and landlord concessions, especially in Manhattan, he said.
“Even though we’re seeing softness in Brooklyn, it’s a fraction of the softness that we’re seeing in Manhattan at the moment,” Miller said of the rental market.
But for some developers, these numbers won’t deter them from investing in New York City multifamily, even if how they are getting projects done and what these projects look like is different.
“We are committed to New York and are also committed to and believe that there are a lot of opportunities in residential," said Melissa Burch, Lendlease’s executive general manager of New York development. "Both of the projects we have underway are condo, and we are really seeing that people are very focused on flexibility within their apartment."
With the design of the developer’s two condominium projects underway, Burch said it has been adding features to cater to the “24-hour apartment phenomenon,” as apartment dwellers tend to want amenities — such as outdoor space, gyms and home offices — inside their apartment buildings.
“Our units are not really getting bigger, they are just getting more versatile and we’re really thinking about space,” she said. “Window sizes, opening, connection to outdoor space is a really big feature in both of our projects that we think will really drive a lot of buyer interest.”
While construction sites on multifamily projects that were underway before the pandemic started have been moving forward, developers on panels throughout the event were pessimistic about new, near-term projects in the city.
“I think what is pretty evident is the next 18 to 24 months, we are not expecting to see a lot of new starts of projects for a multitude of reasons,” she said. “Architectural billings are very far down, suggesting that there are not a lot of projects in the planning and design stage and that we may see very few starts in the coming years."
This is mainly due to the state of the market and to the hardships in securing financing for these projects, she said.
“I certainly don’t see opportunities in New York City right now,” Douglaston Development founder and Chairman Jeff Levine said. “With today’s rents plugged into the equations, even low cost of construction and low cost of land, you really can’t pencil these deals out.”
“We never really felt the full effect of the rent law changes from last year through the rent-stabilized market so that market was down going into the COVID period, so that has remained without very many trades,” he said. “We’re value-add investors, so it’s really hard to do value-add when you can’t put capital in to raise rent.”
The market may have to get worse before it gets better, Balestra said.
“I think the real estate industry has been vilified a little bit and the deck has been stacked against us recently,” he said. “I don’t know what it is going to take to turn that around, it may have to get pretty ugly to do so.”
“In order to reinvest in those buildings there has gotta be incentives to do so,” Balestra said. “We can’t make those investments, our capital partners won’t make those investments unless you get a return on them or there are massive subsidies and we don’t have a budget for subsidies.”