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A tight retail market, rising rents, and record low interest rates led to a jump in New York City multifamily investment sales in 2012.
Multifamily building sales in New York City rose to $7.3 billion in 2012, a 45 percent increase compared to 2011, according to Ariel Property Advisors’ Multifamily 2012 Year in Review: New York City. There were 639 multifamily transactions comprised of 965 buildings in 2012, a year-over-year increase of 36 percent and 42 percent, respectively. The fourth quarter was particularly robust as investors rushed to close deals before tax increases took effect.
In 2012, we also saw prices for multifamily buildings in prime New York City locations return to pre-financial crisis levels. In Manhattan, cap rates averaged below 4.75 percent and value-added assets traded at below 4 percent. Manhattan multifamily buildings operating at market rental rates even saw prices climb above $1,000 per square foot.
One example of this was 105 West 29th Street, where a sale closed in June for $280 million, or $1,056 per square foot. This same institutional investor paid $475 million, or $498 per square foot, in January 2010 for a portfolio comprised of similar core assets at 415 East 53rd Street, 777 Sixth Ave., and 831 Eighth Ave.
This pricing is supported by buyers who put a premium on newly constructed buildings that they believe can be converted to condos when underwriting standards relax and more borrowers qualify for mortgages. Several buildings that sold in Williamsburg, Brooklyn, in 2012 fell into this category and attracted Manhattan-type prices. In May, 111 Kent Ave. sold for $56 million, which translates to $757 per square foot and $903,000 per unit — more than double what was paid in 2011 by a buyer that completed the building and quickly rented the units at market rates. And in October, a newly constructed building at 224 Wythe Street sold for $13.5 million, which represents $744 per square foot and $357,000 per unit.
Significant pricing gains are not only a result of supply constraints and financing, but are also seen from investors that bought at the bottom of the market and added significant value by making improvements and raising rents. The added cash flow and compressed cap rates led many investors to lucrative exits after buying only two or three years earlier.
For example, 156 Prince St. in Manhattan, a 43-foot wide, elevatored, mixed-use building located in the heart of Soho sold in October for more than $19 million, which translates to $1,277 per square foot. The seller bought the property in 2011 for $520 per square foot, but added value by introducing new retail space on the ground floor.
The strong fundamentals that boosted the market for existing multifamily buildings also breathed new life into the multifamily development market, both in prime Manhattan and elsewhere. In Brooklyn, development site sales increased in Williamsburg/Greenpoint, Bedford-Stuyvesant/Bushwick/Crown Heights, and Downtown/Park Slope where upzoning along Flatbush Avenue, the BAM Cultural District, and the opening of the new Barclays Center have attracted developers that are planning new luxury high rises.
In Upper Manhattan, rents and condominium prices returned to 2008 levels, pushing up demand for development sites, although zoning laws will restrict the size of those projects to small- to mid-sized multifamily buildings. During the boom years, the price for development sites in Northern Manhattan averaged around $120 to $125 per buildable square foot, and we expect vacant land in this area to attract $100 per buildable square foot in 2013.
The first quarter of 2013 may see some slower sales after the flurry of closings in the fourth quarter of 2012 and as investors gain their footing in the new tax environment. Barring some unforeseen shock, however, we believe that 2013 will be another great year for the New York City multifamily market.
— Shimon Shkury, President of Ariel Property Advisors