NYC Real Estate: Where Are We Now?
Where Are We Going?

By Chad Tredway

Our customers often ask: How is the multifamily market performing? Where are we in the current cycle? And, where do we see each borough going? I recently had the pleasure of hosting a real estate forum to explore these questions—and more—with some colleagues from The Knakal Group at Cushman & Wakefield: Bob Knakal, Chairman of New York Investment Sales, Robert Shapiro, Executive Vice President, and Stephen Palmese, Vice Chairman.

I wanted to share a few of my top takeaways from the event:

  1. New York City continues to be a strong market for multifamily. The city has shown strong economic performance, adding more than 700,000 jobs in the past six years. Furthermore, New York City is projected to have more than 1 million people moving here over the next 20 years—which means we expect demand for apartments to continue to outweigh supply in the near term.
  2. New York City is not without its challenges. Investors should be mindful of both economic and market-related issues that can impact the performance of New York City real estate. Some of those challenges include complex rent regulation, rental growth that’s outpacing income levels and fluctuating land values that influence development decisions.
  3. Ultimately, markets are cyclical, and the New York City real estate market is no exception. Investors should be focused on fundamentals when evaluating their long-term strategy.

At Chase Commercial Term Lending, our goal is to be the easiest bank for you to do business with. And we understand that part of that equation is providing you with insights to inform your investment strategy.

I hope you find these insights valuable.

Best,

Chad Tredway Signature

Head of the Northeast for Commercial Term Lending

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Themes include:

1

A Look at the New York City Market

Bob Knakal, Cushman & Wakefield’s Chairman of New York Investment Sales, gave an overview of the performance of the broader New York City market and offered insight into what multifamily investors should be thinking about in order to be successful over the long term.

Bob Knakal

Bob Knakal
Chairman, New York Investment Sales
Cushman & Wakefield

Each asset class performs differently in various parts of the real estate cycle. Looking at these product types can give insight into how the market is performing. “Right now people are afraid that the market is going to change, that values are going to drop and that we’re headed toward another recession. Land and hotels are the two product types that will correct first,” said Knakal.

Land sales are indicative of how developers believe the market will be performing in the near future. “Land is such a telling product,” said Knakal, “because it shows how developers think the market will be in three to four years when the property they’re buying will enter the market in the form of office space, retail space, residential space, apartments, condominiums and/or hotels. With hotels, your lease is only for one day, so it’s highly reactive to changes in the marketplace.”

Because of these factors, the land and hotel sectors can offer insight into the direction of the overall market. In the past six months, land values in Manhattan are down 20% to 25%, and cap rates in the hotel sector are up 150 to 200 basis points. However, other asset classes continue to perform well, with office, retail and multifamily assets being supported by a strong economy. Knakal pointed out, “In the past six years, there have been over 700,000 jobs created in New York City, which significantly enhances the underlying fundamentals of the real estate market.”

Despite current performance, we know real estate is cyclical. Multifamily owners benefit because it is usually the last sector to turn and the first to recover. As Knakal explained, “Rent regulation creates an artificial floor on rents. And when rents are artificially low, there’s less downside.”

2

Key Indicators to Inform Your Strategy

No one knows exactly where the market is going—but, as Bob Knakal stated, “The market always has been and always will be cyclical.” [ Fig. 1 ] Understanding where we are in the current cycle and the health of the broader real estate market helps to explain where multifamily is headed.

Fig 1. All-Time Records in New York City
2014 5,536 Properties Sold. 2015 $75.5 Billion Dollar Volume
Source: The Knakal Group at Cushman & Wakefield Research

“2014 and 2015 were the two best back-to-back years we have ever seen in New York City building sales,” said Knakal. “There were 5,536 properties sold in 2014, which was an all-time record for the city by more than 10%. In 2015, there was a record for dollar volume, totaling $75.5 billion of investment sales activity for the year.”

However, that record-breaking pace can’t continue forever. "You can’t have two record years back to back and expect that things are just going to continue to build momentum like that," said Knakal. "They have to revert back toward the long-term average.” In Q1 of 2016, there were $14.1 billion in sales—as such, sales in 2016 are projected to be 25% lower in dollar volume than they were last year. Additionally, the number of properties sold is on track to be down 7%.

Cap rates have trended down for the last five years. [ Fig. 2] And values today are breaking records: For the first time in history, average prices in New York City have surpassed $500 to $518 per square foot. “If we separate that average price of $518 per square foot into Manhattan versus the outer boroughs, Manhattan is running at an all-time peak of almost $1,500 per square foot,” said Knakal. “And in the outer boroughs, we’re up to $379 per square foot. These are all-time records in terms of value per square foot.”

Fig. 2 New York City Average Cap Rate by Market

To show additional information, hover over sections of the graph. Click on categories to show and hide their data.

 
Average of Elevator, Walk-Up, Mixed Use, Office and Retail. Source: The Knakal Group at Cushman & Wakefield Research

With record values, we are still seeing cap rate compression but at a slower pace than in previous years. Average cap rates in 2016 are down roughly 20 basis points year over year. The New York City multifamily market experienced record years in terms of sales volumes and values, but now we are seeing that the volume of traded properties is down and property values are still increasing. The average price per unit is up 11%, the average price per square foot is up 13% and average gross rent multiples are up close to a full multiple.

As a whole, these indicators are positive. But, as Knakal explained, “This is also indicative of a market that's in transition mode, one where volume stops and value stays high. That’s a function of sellers who are actually selling, capitulating—and sellers who are not selling because they're not happy with the prices they're getting. So, while you have fewer transactions happening, the ones that are occurring are occurring at better price points.”

3

A Look at Upper Manhattan and the Bronx

Robert M. Shapiro, Executive Vice President at Cushman & Wakefield, spoke about why Northern Manhattan may be the next Brooklyn and growing investor interest in the Bronx.

Rob Shapiro

Robert M. Shapiro
Executive Vice President
Cushman & Wakefield

A Transformative Time for Upper Manhattan

Northern Manhattan still shows tremendous growth opportunity. “The Northern Manhattan market is an area where a lot of investors are trying to build economies of scale,” Shapiro said. “It’s one of the few high-density areas with rent-regulated properties where investors can get in there and do that.” [ Fig. 3 ]

Fig. 3 Northern Manhattan Sales Volume

To show additional information, hover over sections of the graph. Click on categories to show and hide their data.

 
*Annualized. Source: The Knakal Group at Cushman & Wakefield Research

Shapiro noted that one of the reasons there’s still tremendous upside in Northern Manhattan is because the neighborhoods haven't fully gone through what he calls "Brooklynization.” “On average, properties are renting for about $20 a square foot,” he said. “And when these apartments are turned to market rate units, they’re achieving rents at a $40-square-foot level.”

The market is experiencing similar growth to that of Brooklyn a few years ago, but it still has a ways to go. “The area has great arteries of transportation,” Shapiro elaborated. “You’re never more than three or four blocks away from the subway up there. And you have great institutional anchors, like Columbia University. The area is also undergoing a cultural transformation—you have trendy neighborhoods that are popping up and drawing people in.”

Northern Manhattan is showing a different trend than the rest of Manhattan: while property sales are down, dollar volumes are up—which reflects investors’ willingness to pay higher prices for properties they believe to have significant upside. “Northern Manhattan is on pace right now to outperform the total dollar volume of 2015 levels, at $1.2 billion worth of sales,” Shapiro said. “But the number of buildings is going to be down to around 150. This signals that the price per square foot is going to keep increasing in Uptown.”

Overall, Shapiro feels bullish on Northern Manhattan in the long term. As he said, “If we can keep the quality of life up, we’ll be able to see these neighborhoods continue to thrive.”

The Bronx market’s performance is very strong, and it’s projected to continue on this track. Cap rates in the Bronx are between 5% and 6%. This is compared to the other boroughs where cap rates are often below 5%. [ Fig. 4 ] As Shapiro said, “The Bronx multifamily market is booming— people are really focusing on the Bronx, in large part because of its high cap rates.”

“The Bronx multifamily market is booming— people are really focusing on the Bronx, in large part because of its high cap rates.”
Fig. 4 The Bronx Investment Sales Volume

To show additional information, hover over sections of the graph. Click on categories to show and hide their data.

 
*Annualized on 1Q & Partial 2Q. Source: The Knakal Group at Cushman & Wakefield Research

Unlike Manhattan and Northern Manhattan, both dollar volumes and the number of properties sold are expected to increase in the Bronx. “The Bronx is projected to have an annualized number of close to $2 billion of transactions this year and a total of 517 properties sold,” said Shapiro, “which is up from 394 properties the year prior.”

The Bronx offers affordable rental alternatives—it has the lowest vacancy rates of all the boroughs. “I’m hearing from landlords that this is a great rental market, that there’s no vacancy in the Bronx,” said Shapiro. “And, rents are continuing to grow, albeit at a slower pace.”

The Bronx continues to evolve and thrive, and as Shapiro said, “There’s a very big push to the Bronx, chasing that yield.”

4

A Look at Brooklyn and Queens

Stephen Palmese, Vice Chairman at Cushman & Wakefield, discussed future growth in the Brooklyn and Queens markets and offered insight into what will drive this growth in the near term.

Stephen Palmese

Stephen Palmese
Vice Chairman
Cushman & Wakefield

How Do Brooklyn and Queens Stack Up?

Brooklyn and Queens have both experienced rapid transformations in recent years. As sales volumes temper across the city, investors are wondering if these boroughs can sustain their current trajectories. Palmese expects widespread growth in Brooklyn and more tempered, concentrated growth in Queens. “I think Brooklyn is in the fourth inning, maybe moving into the fifth inning,” he said. “I think we’ve got another 20 years of growth in Brooklyn. Queens is really in the second inning of growth. I still think Queens has 30 years of growth, but we are talking about a few submarkets.”

There are three growth drivers in Brooklyn and Queens: increased job growth, robust residential development and strong institutional appetite. Brooklyn had 3% job growth in 2015, while Queens had a 1.8% increase—compared to Manhattan which had employment growth of 0.1%. [ Fig. 5 ] Palmese noted, “Brooklyn had the greatest employment growth in the nation for counties with populations over 1 million people. And according census data, it had the highest percentage of population growth in the five boroughs.”

Fig. 5 What’s Driving Value in Brooklyn and Queens?
Job Growth Residential Development Institutional Appetite
Source: The Knakal Group at Cushman & Wakefield Research

Furthermore, Brooklyn leads the boroughs in the number of residential units approved for construction—with more than Queens and Manhattan combined. According to Palmese, “In 2015, Brooklyn had 26,026 units approved for construction, a massive 245% increase from 2014.” Queens placed second amongst the boroughs with 12,667 units approved for construction in 2015—a 159% increase from 4,900 in 2014.

There’s also a significant amount of institutional capital flowing into Brooklyn. “From 2011 to now, there were only 11 sales that totaled $100 million or greater in Brooklyn, and 50% of those happened in 2015 alone,” Palmese said. “Institutional capital attracts more institutional capital.”

Overall, Palmese said that the outlooks for New York’s eastern-most boroughs are positive. “There’s likely to be a lot of long-term growth in both Brooklyn and Queens.”

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