New York City has been the capital of global theater for more than 200 years. The latest economic downturn has affected all sectors of New York City employment, including Broadway, where more than 46 shows have closed since 2008.
Similarly, multifamily has been affected, with the sector seeing a rash of mortgage delinquencies, stalled projects, and broken condo deals. However, the curtain appears to be rising on a new act for multifamily real estate as plummeting cap rates and increased investor appetite suggest that this may not be a Greek tragedy for owners of multifamily product after all.
Turning the Corner
The New York metro has not been immune to the spikes in unemployment levels seen across the country. Over the course of 2009, the New York metro (defined as including the city’s five boroughs—Manhattan, Brooklyn, Queens, the Bronx, and Staten Island—as well as Westchester and Putnam counties in New York and Bergen and Hudson counties in New Jersey) lost 2 percent of its job base, or 102,000 jobs.
Although devastating, this downturn was only the metro’s third-largest in the past 20 years. The early 2000s saw job losses of 250,000, and the early 1990s recession eliminated more than 500,000 jobs (a whopping 10 percent of the employment base).
Peak-to-trough, the metro’s total employment losses are anticipated to be 3.9 percent, compared to 5.1 percent nationally. New York’s job losses appear to be bottoming out, with average job losses of 25,400 over the past four quarters, compared to 92,000 jobs lost in the fourth quarter of 2008 alone.
Similarly, vacancies in the metro have already topped 5 percent, up from a trough of 4.3 percent at the end of 2007, and a barrier breached only twice since 1982. Industry observers, including most brokerage firms, expect vacancies to top out at around 6 percent later this year. Quarterly rental demand losses peaked in the first half of 2009, and while job losses have started to ease, employment growth is still negative and household formation remains slow.
The downturn in demand will continue to have the biggest effect on the most populous submarkets—Brooklyn, Queens, and Manhattan—which experienced the greatest demand growth during the middle years of this decade. Net demand decline on a nominal and percentage basis has been worse in these three submarkets than anywhere else in the metro.
Overall, 2010 will be a year of transition for the New York market, as peak metrics are unlikely to be reached again until at least 2012.
Although sales volume within the metro remains at low levels, 5,600 units ($900 million worth of deals valued at $5 million or more) exchanged hands in 2009, and that number is expected to increase significantly over the coming year. Multifamily remains the product type of choice, and the New York metro is still targeted by a wide range of well-capitalized buyers.
For example, currently on the market is an institutionally-owned apartment building on New Jersey’s Hudson waterfront. More than 150 investors were registered for the sale, with more than 30 submitting credible bids. Bidders represented a wide variety of companies, including pension fund advisors, public and private REITs, condo converters, and private multifamily companies. This bidding pool represented a combination of all-cash and leveraged buyers.
Additional large deals are beginning to trade as well, highlighted by Equity Residential’s recent purchase of three high-rise apartment towers in Manhattan from Macklowe Properties. The three assets (the 323-unit RiverTower; the 294-unit 777 Sixth Avenue; and the 293-unit Longacre House) sold for $475 million, or $470,000 per unit. The Long-acre House asset is still under contract and due to close by mid-year.
Supply Keeps Coming
The metro’s physical and natural barriers to entry have combined with high construction costs and curtailed incentive programs to limit annual new construction to only 0.8 percent of existing supply this decade. However, 2007 witnessed the highest issuance of residential building permits since 1972, and several large projects started that year are due to come online in 2010. These projects total 4,200 units, and, along with additional inventory from condo-to-rental conversions, they should have a greater effect on their immediate neighborhoods than on the metro as a whole.
Construction in Manhattan has been relatively limited as well, as plans have been temporarily shelved for Related’s development of the 26-acre Hudson Rail Yards—an initiative projected to support 5,500 residential units, as well as 5.5 million square feet of commercial space. However, Larry Silverstein’s 1,350-unit Silver Towers came online in the area late last year, and TF Cornerstone’s Hudson Mews is scheduled to add 1,100 units to the neighborhood in mid-2010. Other notable projects include FiDi’s Beekman Tower (902 units, delivering March 2011); Avalon Fort Green (631 units, delivering March 2010); and Ridge Hill Village in Yonkers (600 units, delivering June 2010).
Hudson and Bergen counties added more units in 2009 than in any other year since 2003. In Jersey City, that included the 360-unit Aquablu and 481-unit 70 Green Street. In Bergen County, that included the 399–unit Flat Rock Square, the 158–unit Gateways at Saddle Brook, and the 406-unit Wesmont Station.
Falling Back to Earth
Rents in the New York metro area fell in 2008 but only modestly, as vacancies still stayed nominally low. Landlords are now quickly dropping face rents to keep their occupancies up in light of rising vacancies. While rent losses are not as bad as initially feared, residents are able to find more substantial rent savings through concessions.
Rental activity was up significantly in the latter half of 2009. Units remained on the market for three weeks less in the fourth quarter of 2009 than in the same period 12 months earlier—76 days versus 97 days, respectively.
As concessions burn off, net effective rents will likely grow in 2011, but the recovery will be limited and in line with that of the city’s economy.
Overall, multifamily inventory throughout Manhattan has decreased with 6,851 active listings as of year’s end, representing a 24.6 percent decrease from that of year’s end 2008. This excess inventory was worked off by the surge in summer and fall sales activity, which is ordinarily seen during the spring market. This decline in listing inventory does not include the “shadow inventory” of stalled new development projects, which is estimated to be 6,000 units.
Despite the short-term hurdles facing the New York area housing market, the curtain is rising to reveal a multifamily market poised for long-term growth and success.
Andrew Scandalios is a senior managing director in the New York City office of Holliday Fenoglio Fowler.