NYC State of the Market | Q3 2019

The Housing Stability and Tenant Protection Act of 2019 that was passed back in June has dampened the New York City apartment investment market. The new tenant-friendly legislation has shifted the multifamily pricing paradigm from future cash flow pricing to current cash flow pricing. With that, the opportunity to buy rent stabilized multifamily assets based on their value-add potential has all but vanished, and it has taken a lot of the demand for New York City multifamily investments with it. Multifamily trading volume surpassed $3.4 billion in the second and third quarters of 2019, a 24% decrease from one year ago and the lowest volume since 2012 when $2.5 billion traded. Property velocity and transaction velocity were down as well, with 300 buildings sold across 274 deals from April through September, a decrease of 30% and 23%, respectively. On an annualized basis, New York City is on pace to record approximately 400 multifamily transactions in 2019, nearly 60% less than the five-year average of 960 transactions annually and a level not seen since the Great Recession. The metro’s average sales price surpassed $286,360/unit ($283.22/SF) and cap rates ticked up to 5.14% in the second and third quarter of 2019. 

As for the rental market though, fundamentals continue to be robust in New York City despite the passage of the new rent laws. Even with more than 60,000 units delivered since 2016, vacancies are at a cyclical low of 1.5% and rent growth has rebounded after recovering from the increased competition of new supply. The metro’s average rent surpassed $3,330 in Q3 2019, an increase of 3.6% from one year ago and a new all-time high. The surge of development was likely created by the potential expiration of the 421-a property tax exemption for new housing, with grandfathering for buildings that were under construction (foundations in place) on the date of expiration. The tax break was renewed later, but not before a large number of development sites were rushed into production. 

With 134,200 jobs added over the past 12 months ending in August 2019, the New York MSA recorded its 104th consecutive month of net job growth to the current economic cycle. Additionally, positive momentum in key demographics such as household income and unemployment rate have further supported another year of economic expansion in the metro. Although the multifamily market has significantly slowed down, a low interest rate environment and global uncertainties will continue to support lofty valuations across the metro outside of rent regulated multifamily, at least for the time being. After all, this is still New York City, arguably the safest place to invest into commercial real estate in the world.