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Record Rents Are Drawing Investors Back To NYC Apartment Buildings

Capital has found its way back into New York's multifamily market, particularly in market-rate buildings as rents hit all-time highs, marking a strategy shift for many investors and the beginnings of change in the city’s housing ownership landscape.

New York City

New York City saw $4.7B of multifamily sales in the second quarter, up 80% from Q1 and up 270% from Q2 2021, according to Ariel Property Advisors data, which covers all boroughs except Staten Island and buildings with 10 units or more.

Three-quarters of that $4.7B was spent on free-market buildings, up from 67% the quarter before. A handful of huge deals have drawn the spotlight, but multifamily players say investors up and down the market have a strong preference for nonstabilized stock.

“The regulations, in conjunction with rising expenses and interest rates, have made the rent-stabilized asset class tougher to pen in today's market,” Ariel founding partner Victor Sozio told Bisnow. “Investors are attracted to the idea that they can ride the market and not have to worry about annual increases … It's just a lot simpler to present a business plan.”

There certainly have been no shortage of pricey deals to indicate buyers’ interest in this type of asset class. This year, Blackstone paid $930M for the luxury rental at 8 Spruce St. in the Financial District, and JDS Development Group and Baupost Group sold the American Copper Buildings for $850M to Black Spruce Management.

A pandemic-era city record was hit in June when Black Spruce and Orbach Affordable Housing Solutions agreed to buy six of the residential buildings that were developed by the late Sheldon Solow. The deal was for 1,700 units, just 15% of which are rent-stabilized, and came to $1.75B

Sozio said a strong desire to operate free of regulation is driving the interest in these types of assets, as well as attempts to benefit from unprecedented rent hikes. The average rent in Manhattan hit $5,113 per month in July, a previously unheard-of price.

While there is an expectation that rent growth will eventually begin to taper off, there is faith in the predictability of housing, he said, particularly as would-be homebuyers are prevented from investing in their own places because of rate hikes.

“In a world that is so hard to speculate, going forward, what the next few years are going to bring, [buyers can have] a little bit more comfort and confidence in the assumptions that they're making on those types of deals,” he said.

8 Spruce St., developed by Forest City Ratner

The state's 2019 rent reforms diminished owners' ability to move regulated units from regulated into the free market, and critics of the measures claimed it will ultimately make the city more expensive, not less. While the real estate industry feared a "good cause eviction" rule would cap rent increases on all housing and lessen free-market assets' appeal, the proposal didn't make it through the state legislative session.

While that was a relief for the industry and gave some more confidence to buy, Sozio said there are no guarantees the proposal is gone for good. 

“I think they should at least be on the radar for investors,” he said. “I'm not saying that it should necessarily prevent deals from happening. But I do think it's something to keep an eye on.”

Bob Knakal, JLL's chairman of New York investment sales, said most buyers are seeking assets with at least 75% to 80% free-market units because of escalating rents. Buyers who want rent-stabilized stock are in the minority, but they are still in the market, operating on the assumption that the “political pendulum” will swing back, he said.

“[They see the] low price per square foot and are thinking to themselves, ‘How do I not buy this building for less than what the land alone is worth?’” Knakal said.

But while investment in the city's rental market has picked up from the depths of the pandemic, the type of buyer has shifted, he said.

“Old school New York City capital is moving out, and new capital is coming in,” he said. "That new capital is not as emotionally invested as the old capital was."

186 Pinehurst

B6 Investment Sales Associate Alix Curtin too expects there will be more long-term, family owners who elect to sell in the medium term. Her team specializes in northern Manhattan, where many of the buildings are prewar properties that have been owned for generations.

“These next few years are going to be super busy for us,” she said. “We're already feeling the business of owners coming to us asking for valuations and seeing what their plan should be.”

Right now, she is marketing a 66-unit multifamily building in Hudson Heights at 186 Pinehurst Ave. that is mostly rent-stabilized and is asking for $15M.

She said investors are still interested in regulated buildings that are fully leased and likely to stay rented in the long term, she is getting more interest in apartment buildings that have fewer than six units, and are therefore unstabilized. Curtin is also marketing a three-unit, free-market multifamily building near Yeshiva University with an asking price of $1.2M.

Buildings of that size typically have a designation that means real estate tax jumps of no more than 8% per annum. These kinds of assets have garnered the attention of private equity giants like the Carlyle Group, which has reportedly spent a half-billion dollars snapping up small properties in the residential areas of Brooklyn.

“We're definitely going to see a lot of trading between generational families who have owned these prewar assets for many years to professional real estate people who can come in and are well-aware of what's going on in the city,” Curtin said.