Partying Like It’s 2015: Multifamily Housing In New York City
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Multifamily investment sales in New York City grew substantially during 2022, with over 506 transactions valued at $13.2 billion for buildings with 10 or more units, according to data from our 2022 New York City Multifamily Year in Review report. For all multifamily buildings (10+ units, buildings with 6-9 units and small buildings) dollar volume totaled $16.2 billion.
It was a fairly incredible year considering the economic and regulatory challenges the segment faced, with 2022 joining 2015 and 2016 as perhaps the best three years ever for New York City multifamily real estate.
NYC Multifamily Sales Volume 2022 vs. 2021
Brooklyn and Manhattan Heat Up with the Bronx Surging Forward
A key takeaway from Ariel’s 2022 multifamily report was the continued strength of the sector within New York City’s submarkets. For example, Brooklyn saw $3.78 billion in multifamily sales, the highest volume on record. The Bronx enjoyed a resurgence in 2022 with $1.1 billion in multifamily sales from 89 transactions, the borough’s best year in both categories since 2018.
Meanwhile, Manhattan buildings with 10 or more units saw a record level of transactions, 137, with $7.21 billion in dollar volume, a whopping 154 percent spike from 2021 and the second highest volume ever. Queens saw 71 transactions totaling $700.2 million.
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Northern Manhattan, an area highly impacted by the Housing Stability and Tenant Protection Act (HSTPA) in 2019, seems to be finding its footing again with 48 trades in 2022, the most since 2018. About 59 percent of the trades in Northern Manhattan were below $5 million, however, resulting in a relatively low total dollar volume of $435.1 million, far below pre-HSTPA volumes that averaged closer to $1 billion per year.
The Big Drivers: Free-Market Multifamily Sales Outpace Rent-Stabilized Sales
Free-market multifamily assets or those with a 421a tax exemption attracted the attention of both institutional and international investors and represented 76 percent of the total multifamily dollar volume in 2022.
Free-market buildings attracted capital for three main reasons:
- Rent growth has been consistent and robust
- They offer an inflation hedge narrative for institutional capital
- Low supply of housing, which is expected to put pressure on rents in the city
When we view the breadth of capital that invested in free market assets last year we see the names of investors including A&E, RXR, Stonehenge, Avanath, Pontegadea, Blackstone, KKR, Stockbridge, The Carlyle Group, Black Spruce Management and Meadow Partners. Some of these names are long-term New York City investors, but several are new to the city or to the multifamily asset class.
Not all Multifamily Was Created Equal: Investors Shift Away from Rent Stabilized
Major institutional capital pivoted drastically from rent stabilized assets when compared to 2015. In 2015, investors acquired $6 billion in rent stabilized housing, not including Blackstone’s purchase of StuyTown for $5.5 billion. In contrast, in 2022, investments in rent stabilized buildings only totaled $3 billion, a substantially lower number as a result of HSTPA.
HSTPA eliminated the ability to adequately increase rents in vacant rent stabilized units, among other restrictions, resulting in three major consequences:
- A substantial reduction in institutional investment
- Landlords drastically reducing their investment in vacant rent stabilized units
- 42,000 rent stabilized units being kept vacant, according to CHIP, which is approximately 4.2% of the total rent stabilized unit count in the city
These factors are especially concerning for multifamily owners that bought prior to the 2019 regulatory changes and is an issue that has had unintended consequences for tenants as well, given the age and deteriorating condition of many of the buildings.
“There are a growing number of owners that have become fatigued with operating multifamily properties in New York City,” my partner Victor Sozio observed. “Whether it is politics, struggling with collections, the rising costs of insurance and capital, or other factors, many are more motivated to sell even though they realize it might not be the best time to do so.”
Last year long-term private capital, families, family offices, high net worth and overseas capital invested in $3 billion of rent stabilized buildings for two main reasons:
- Valuation for rent-stabilized buildings came down drastically and presents a re-set in basis many have not seen in decades
- The housing policy and its consequences are unsustainable long term, therefore, there are expectations that HSTPA will need to change
Capital Abundance: Changing and Growing Pool of Investors
Although institutional investors have clearly changed their perspective on the multifamily sector, they did not reduce their investment but just shifted the type of multifamily they are investing in. While free-market presents the flexibility and value institutional capital is looking for, affordable assets encumbered by government (HUD) contracts such as Project-base Section 8 attracted institutional interest as well.
“The pool of capital and operators has expanded significantly over the past decade, and when you talk about the affordable asset class, many Project Based Section 8 properties were built or rehabbed with long-term affordability in mind,” Sozio said. “This type of asset attracts a lot of mission-driven capital, some of this nonprofit capital and other for-profit entities willing to accept lower returns to improve this space.”
Transaction Drivers: Mortgage Maturities/Resets, Insurance Costs, Collections
As I wrote previously in NYC’s Perfect Storm: Rent Stabilized Opportunities in the Face of Mortgage Resets and Maturities, mortgage maturities are expected to rise substantially this year and will affect mostly multifamily rent-stabilized properties purchased before HSTPA. However, lending institutions have been much more disciplined since the financial crisis and many rent-stabilized assets still have a healthy sliver of equity. Therefore we believe this will lead to more sales rather than just distress.
In addition to the continuing impact of HSTPA and uncertainty about the strength of the economy, multifamily owners face a pair of additional mounting obstacles. The first is the significant hikes in the cost of insurance throughout the city, as less carriers are willing to take on these policies. Where insurance cost averages were about $500 per unit just a few years ago, they now can exceed $2,000 per unit, particularly in un-sprinklered elevator buildings. The spike in insurance rates has led some groups to explore captive insurance, or self-insured policies.
The other worrisome issue facing owners is the inability to collect rent, in some cases due to misinformation spread among tenants that they did not have to pay due to factors such as the pandemic or inflation. For example, even the New York City Housing Authority, which has historically collected more than 90 percent of rents on properties they control, recently reported that the number has plunged to 65 percent over the past 12 months.
Outlook for 2023: Cautiously Optimistic
Despite these challenges, we remain cautiously optimistic that the second half of 2023 could be active for the multifamily asset class. My partners and I are regularly hearing various signs pointing toward this.
Said Sozio, “The bid-ask spread widened towards the end of 2022 coupled with inventory that is relatively low, causing a slow-down in transactions. However, there are a lot of discussions about where values are and what the next step should be. We believe this will result in a very transactional second half of the year.”
There are numerous attractive multifamily properties we expect to hit the market this year, many at a very low basis. Some are from long-time owners that are ready to exit the market based on lifestyle decisions, which could create opportunities to acquire prime assets that have been unavailable for decades.
Finally, there is still a lot of capital on the sidelines that could be deployed across multifamily real estate this year as interest rates begin softening a bit.
For more information about the multifamily market, please refer to Ariel’s 2022 Multifamily Year in Review.
