Report: NYC Apartment Vacancy, Rents Improve; New Rent Regs Change Investment Landscape
Real Estate In-Depth | August 19, 2019
NEW YORK—Commercial real estate brokerage firm Marcus & Millichap recently released its latest report on the New York City multifamily market, which predicts strong demand will keep apartment vacancy in Manhattan below 2%.
The report stated that New York City apartments continue to benefit from some of the strongest demand dynamics in the country. Job growth above the national pace is supporting the formation of new households, with substantial homeownership costs emphasizing multifamily living. The result is a cycle-low vacancy rate under 2%, below that of any other major U.S. metro.
Marcus & Millichap in its report stated, “Minimal availability, in turn, bolsters rent growth, with the fastest pace of appreciation among contemporary Class A units. New York’s unique position as a corner- stone of global economic activity will continue to keep the fundamental trends positive even as the supply pipeline expands from last year.”
Annual completions for 2019 will be the second highest of the past two decades, next to the delivery of nearly 40,000 units in 2017, the brokerage firm reported. Compared with the size of the metro’s current inventory, however, the magnitude of supply growth is an insubstantial 1.3%.
“While more than 6,000 new apartments will open in Manhattan this year, development is focused on the periphery of the core with more units underway in Brooklyn and Queens. In Brooklyn, the construction pipeline is largest in Bushwick, Williamsburg and Flatbush, while in Queens developers are most active in the northwestern part of the borough,” the report noted. “An increased number of finalizations will also occur in Westchester County, particularly around New Rochelle and Yonkers.”
Marcus & Millichap in its report stated the recent changes to regulations of rent stabilized apartments enacted by state government, “have dramatically altered the multifamily landscape in New York. Buildings with a plurality of these units now face lower rent growth prospects, impacting cash flows and valuations. The investment market is currently undergoing a transition period, with the long- term impact of the legislation still unknown.”
Trading activity for rent-stabilized buildings has slowed as both buyers and sellers work to understand the full implications of recent legislation, the report noted.
Marcus & Millichap predicts that sales prices are likely to fall to reflect less rent growth potential, with a corresponding increase in cap rates. Properties with a mixed-use component may draw more demand. Market-rate assets will likely see greater investor interest, possibly compressing first-year yields by a minor degree, the brokerage added.
Citywide, transaction velocity fell approximately 6% over the past year, although dollar volume rose to more than $14.8 billion as trading activity increased in Manhattan. More than $8.4 billion worth of activity took place in Manhattan, with Queens and Brooklyn receiving $2.2 billion and $2.4 billion, respectively.
The heightened sales velocity in Manhattan was led by more trans-actions in Harlem and the Upper East Side. Trading activity also rose in Bushwick, aided by initial returns in the low-5% zone. Institutional investors targeted Brooklyn more frequently, increasing the number of Class A deals.
The following are prevailing industry trends culled from the Marcus & Millichap report.
2.0% increase in total employment Y-O-Y
• The education and health services and professional and business services sectors created the vast majority of new jobs, adding 63,000 and 13,000 positions, respectively.
• Over the past year, New York City employers created 90,600 jobs, a moderate slowdown from the previous yearlong period when 91,300 positions were added.
• 4,800 units completed Y-O-Y
• Over the past year ending in June, 4,800 units were delivered, increasing the pace of development from the previous yearlong period when 4,100 apartments were completed. Lower Manhattan received over a third of the new supply.
• Completions will be led this year by Two and Three Waterline Square, where 900 apartments are set to come online as part of a five-acre development.
• 60 basis point decrease in vacancy Y-O-Y
• Net absorption reached nearly 8,500 units over the past year, trimming vacancy 60 basis points to 1.8%. Last year, vacancy fell 40 basis points.
• All Manhattan submarkets registered declines in vacancy, except for Harlem where rental demand did not keep up with new supply. Midtown recorded the biggest decrease, falling 220 basis points to 1.9% in June.
• 3.9% increase in the average effective rent Y-O-Y
• The average effective rent climbed to $3,729 per month in the first quarter, accelerating from the same period last year when the average rent climbed 2.3%.
• Rent growth in Midtown South far outpaced the borough average, advancing 5.3% to $4,363 per month as new high-end rentals boosted prices.
• Deal Flow Ticks Higher Amid Class C Property Demand; Harlem, Upper East Side Draw Interest
• Transaction velocity rose above 5%, fueled by rising demand for Class C assets with cap rates marginally above the borough average. Prices reached above $680,000 per door.
• The average cap rate remains in the low 4% range, extending slightly higher in Harlem, where the greatest number of trades closed. Buyers seeking stronger capital appreciation deployed capital on the Upper East Side.
Outlook: The fallout from recent rent regulation will be the primary market concern for the foreseeable future.