Cap rates on Manhattan multi-family buildings fall to six-year low

April 27, 2012 08:30AM

As Manhattan rents reach record heights, investors are pushing prices of apartment buildings on the island into a new stratosphere and limiting returns. Citing Real Capital Analytics data, Bloomberg News reported that the capitalization for multi-family buildings in Manhattan averaged 4.4 percent in the first quarter of the year. That’s the lowest return rate since the third quarter of 2005.

As the difference between the cap rate on Manhattan apartment buildings and the return on U.S. Treasuries narrows, investors will be completely dependent upon rent increases for profit, Bloomberg noted.

“The gains are more limited going forward,” said Chandan Economics President Sam Chandan. “That being said, the market is significantly supply constrained, and that’s one of the key factors that will support rent growth irrespective of market conditions.” Research suggests rents will rise by as much as 6.75 percent this year.

As investors increasingly look to Manhattan’s multi-family market because of limited supply and tight lending standards for home buyers, distressed buildings are no longer available for discounts. In fact, Manhattan multi-family buildings sold at an average of $493,980 per unit at the end of 2011, the highest total on record. [Bloomberg]