FULL EFFECT OF RISING INTEREST RATES EXPECTED IN NEW YEAR
Despite continuing economic headwinds, the New York City multifamily sector posted surprisingly impressive results during the third quarter, according to Ariel Property Advisors’ Q3 Multifamily Quarter in Review report. Multifamily commercial real estate sales rose 37 percent during the quarter on a year-over-year basis, to $3.57 billion, with free market buildings accounting for 89 percent of the dollar volume.
Multifamily sales totaled 128 transactions across 212 buildings, a year-over-year increase of 41 percent and 7 percent, respectively. Third quarter sales were 71 percent higher than the five-year quarterly average of $2.085 billion.
Compared to the second quarter of 2022, however, third quarter sales dollar volume declined by 17 percent, transaction volume by 20 percent and building volume by 11 percent. Transactions such as 8 Spruce Street, which sold for $930 million, inflated the previous quarter along with other large transactions that closed. The second quarter had nine transactions close for $100+ million whereas the third quarter only totaled five sales of $100+ million.
INVESTORS FOCUS ON QUALITY AND (REGULATION) FREEDOM
Most of the transactions that took place during the third quarter were free market deals, underscoring the negative impact of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) on rent stabilized assets. The law has significantly stymied investment in rent-stabilized buildings, with strict limitations on the ability of owners to recoup their costs in renovating older, often long-neglected apartments that most need the upgrades.
Manhattan (below 96 Street) and Brooklyn together accounted for about 89 percent of the quarterly sales volumes, with free market buildings in Brooklyn’s Fort Greene section and Manhattan’s Financial District and Upper West Side posting the largest deals of the quarter. Total sales volume in Brooklyn was $1.046 billion, with Manhattan below 96th St. accounting for $2.139 billion.
MARKET UNCERTAINTY WILL AFFECT TRANSACTION VOLUME
When annualized, the $3.57 billion in third quarter volume represents approximately $14 billion in multifamily transactions, still very robust. However, these numbers are lagging indicators. Contract signings that took place 60-90 days prior to closing counted on a lower interest rate environment. Therefore, we expect the full effect of rising interest rates to sink in next year.
Debt maturities, specifically in the rent-stabilized segment, will play a major role moving forward. Up until now, regulations have affected values. With the end of the accommodating interest rate environment, cash flow will be affected. As a result, cash-in refinances might encourage the sale of assets and the recapitalization of rent stabilized apartment buildings.
Consequently, rescue capital will be added to the already in-place high net worth and family office clientele looking for rent-stabilized assets at a relatively low basis.
IMPROVING LOCAL INDICATORS OFFER OPPORTUNITIES
The macro indicators are in contrast with the local improving fundamentals in New York City. Office occupancies are on the rise, there is a significant uptick in public transportation ridership and tourism and hotel occupancy are on the rise
Mayor Eric Adams’ “City of Yes” zoning rule changes will positively affect development, as will his initiative to sell $1.4 billion in municipal bonds to encourage (in part) affordable housing.
FOR A DEEPER DIVE
For more information about the multifamily market, please refer to Ariel Property Advisors’ Q3 Multifamily Quarter in Review New York City 2022 report available HERE.