Apartment Developers Strapping In For Roller Coaster 18 Months
Rate hikes, construction cost rises and soaring inflation are vexing the multifamily development market right now — and extraordinary rent increases aren’t providing much comfort.
“Rents right now, developers are just suppressing an evil laugh, just like, 'muahaha, oh, it's so good,’” Rockrose Development Corp. President Justin Elghanayan said at Bisnow’s Queens and Long Island City State of the Market event last week. “But this is bad for society — it shouldn't be that way. There should be more housing.”
In the short term, landlords across the city are experiencing enormous jumps in rental rates. In June, the average rent in Manhattan hit more than $5K for the first time ever, and prices in the outer boroughs also reached new highs. In Queens, the median net effective rent was $2,973, which is the second-highest level on record. Landlord concessions dropped to their lowest point in six years.
Even amid these gains, which demonstrate a soaring demand for housing, developers and investors in New York City's market-rate multifamily market face a looming set of challenges to meet the dire need for housing.
“We've kind of bought a ticket for a roller coaster, but we don't know if we've bought a ticket for a local fun park or Six Flags, because what's going to happen here over the next 18 months is pretty unpredictable,” said Peter Hills, the head of capital markets at Vorea Group, which just finished construction on an 80K SF mixed-use project in Jackson Square.
“For a generation of investors, we've seen sort of 2%-3% pricing," Hills said. "So, you know, to be able to get your head around making deals work with this new cost of capital, it's gonna take some time to work itself through the system.”
The Federal Reserve has indicated it could raise interest rates by three-quarters of a percentage point this week, after a 0.75% hike in June and a 0.50% hike in May. The new environment is expected to slow investment sales down in the city, and it is leading some major real estate players to pivot their approach as the debt market tightens and banks become extra judicious.
“There's a lot of stress between where the market is today versus where people thought it was when they executed the contract or signed a term sheet,” Meridian Capital Group Senior Managing Director Morris Betesh said during the event. “So that's a very challenging environment.”
Securing financing for multifamily projects is easier compared to other asset classes, Betesh added. But even so, the increasing price of materials is hindering developers' ability to keep to timelines and budget.
“I'm just trying to hold the line and take the pain as it comes,” Elghanayan said.
Andrew Baranello, an executive vice president at general contractor Cauldwell Wingate, chimed in from the audience when a panelist asked him about construction costs: He said they have escalated 20% overall, and glass is up 30%.
“Concrete components are in short supply. In some places in the country they are being rationed,” Baranello said. “And the question on the table … is whether or not this is real or it's being exploited.”
Many of the owners and developers who were able to secure the Affordable New York tax break at their sites before the program expired this summer may face challenges hitting the program's deadlines, the panelists said. To have taxes abated, projects need to be complete by 2026. Rising construction costs and high interest rates could make getting the projects completed on time even more difficult than it already is.
“It's a political landmine,” Bedrock Real Estate Partners Vice President Coleman Skeeter said of the abatement, commonly referred to as 421-a. The tax break ran out in June after the state government didn't extend it or replace it.
Skeeter said his firm was able to make arrangements to work within the program for all its current projects. But long-term, he said he agrees with the industry’s view that housing development is going to freeze up.
“The reality is that, as a developer in New York City, you cannot do it without some sort of tax break, because the tax laws are arcane and just not in favor of rental housing," Skeeter said. "So I don't see how anything but only the most luxury product or condos gets built.”
The political environment — including community pushback against development — is something panelists said is a threat both to the city and to the well-being of renters.
“There's this anti-development view right now,” Elghanayan said. “We're neither good nor bad, we’re an instrument. Society should use us to create housing … It's not that we're like, we're great people or something, it's just we’re this tool. Pick up the tool and get some housing.”
Developers said they have made efforts, and progress, to meaningfully engage with the community to get projects across the line to add to housing supply.
“Silverstein believes in New York City, and we particularly believe in neighborhoods like Astoria,” Silverstein Properties Director of Development Brian Collins said. "We're really hoping that leadership in New York City figures out a way to balance the needs of the existing residents."
His company, along with Kaufman Astoria Studios and Bedrock, is planning to build some 2,800 units as part of its Innovation QNS project, which Collins said is now seeking approval from Queens Borough President Donovan Richards, with a decision due by the end of this month.
“The process has been pushed down to the neighborhood and the community level, and that’s a really good thing — but it really requires the community to come out and express their opinion,” Collins said. “Whether you're in support or not in support of Innovation QNS, please, I strongly support you guys coming out and making your voices heard."
Kaufman Astoria Studio Vice President Tracy Capune added that she wants to see Western Queens return to an environment of community leaders, business leaders and politicians working together to cheer for the neighborhood.
“We got an awful lot done for about 12 years there,” she said. “Hopefully we can get everybody on the same page moving forward.”