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Improvement in the city's employment picture is adding fuel to the fire of an already heated multifamily market. As we enter the summer, the vital signs of continued improvement in apartment operations — rising market rents and lower vacancy — are in place. Investors’ attraction to the relative stability of this market is growing. This is evident as overseas capital and a greater number of private investors join apartment REITs and private equity players, increasing the competition for market listings and compressing cap rates in their wake.
On the employment side, the financial sector has yet to rebuild headcounts to the pre-recession level. The loss of this traditional payroll leader during economic expansion has been replaced with the technology and business services’ broad job growth throughout the metro. These sectors have emerged as the new employment leaders, and the expansions of Google, Microsoft, Facebook and others are having a positive impact not only for the apartment market but also for allied employment sectors generating additional renter demand.
Additionally, New York City’s emergence as a venture capital powerhouse, closely trailing Silicon Valley and now ahead of Boston, supports additional demand throughout the market.
With sound apartment operations in place, investor competition for multifamily assets is intense in Manhattan. Investors are also emanating throughout the boroughs, as evidenced by established residential communities such as Williamsburg and Greenpoint in Brooklyn, and Astoria in Queens.
Cap rate compression in these neighborhoods is comparable to many Manhattan properties. The high demand for the limited assets is expanding the boundaries of buyer interest, with the upper reaches of northern Manhattan receiving intense investment competition.
As renter demand persists and investor interest rises, construction of new apartments continues to expand throughout the metro. For example, the residential areas of Manhattan’s Chelsea and Clinton, Brooklyn’s easternmost reaches in Williamsburg, and neighboring communities Bushwick, Bedford Stuyvesant and Brooklyn Heights are experiencing the largest influx of new units.
The scramble for multifamily properties is pulling cap rates down, with prime Manhattan apartment assets trading in the low 4 percent to mid-5 percent range, with select transactions for the most-prized core Manhattan assets dipping into the sub-4 percent level. Just across the East River, Brooklyn and Astoria investors trade apartments within the mid-4 to mid-5 percent range.
With cap rate compression showing almost no sign of abating, investors are managing these properties to generate a higher yield. These initiatives take the form of either capital improvement programs, or related lease turnover programs strategically designed to raise rents on renewal and drive improvement in net operating incomes.
Strengthening apartment operations throughout the city is expected. With interest rates at historic lows despite the recent upward movement in the 10-year Treasury yield, the lending environment remains highly accommodative. As the multifamily sector continues perform exceptionally well, an expanding number of investors will continue to move into apartments through the balance of the year. Renter demand and a tight vacancy rate are pushing new development and redevelopment at in-fill sites throughout the city. Despite cap rate compression, investors are not stepping away. Buyers will continue to prefer apartments’ favorable risk/return profile over other property sectors at this point in the economic cycle, driving acquisition activity throughout the rest of the year.
— Eric Thomas, senior vice president, Cresa New York