New York City rents have been falling for two years, but the Blackstone Group just bet $500 million on the sector.
The firm — which already owns Stuyvesant Town-Peter Cooper Village and Kips Bay Plaza — has agreed to buy Parker Towers, a 1,300-unit complex in Queens from the Jack Parker Corporation.
Though the deal allows Blackstone to capitalize on a relatively-affordable option for renters fleeing Manhattan, other multifamily investors, too, are looking beyond the current glut of new inventory.
“Really smart investors are starting to awaken to the idea that once the existing pipeline clears, there’s very little behind it,” said Will Silverman of Hodges Ward Elliott, who is representing the Carlyle Group in its $284 million acquisition of 1QPS in Long Island City. The 391-unit building was developed by a joint venture that includes the Hakim Organization, Property Markets Group and Howard Lorber’s New Valley.
Overall, sales volume in the multifamily sector hit $5.34 billion during the first half of 2018, up 64 percent from $3.25 billion a year earlier, according to Ariel Property Advisors. There were six transactions over $100 million during that time period, compared to just one in 2017. Some of the megadeals include the $905 million sale of Starrett City to Brooksville Company and Rockpoint Group in May.
“This time last year I felt like I was chasing ghosts,” said Marcus & Millichap’s Shaun Riney, who said he cut short a European vacation in August just to make it back to the city. “There’s no doubt transaction activity is way up.”
According to Riney, sellers are reacting to multiple factors, including rising interest rates, which means owners looking to refinance their debt may better off selling outright. That’s also created more opportunities for 1031 exchanges.
“There are more sellers in the marketplace than ever before and they’re more realistic on their pricing,” he said.
Several recent deals are part of Jack Parker’s seven-property portfolio, which spans three states and is worth an estimated $1.5 billion.
In addition to Parker Towers, Slate Property Group and GreenOak Real Estate were in talks to buy the Biltmore rental tower for $250 million from Jack Parker. The 464-unit building is located at 271 West 47th Street. And the Related Companies is buying the final piece of the company’s New York City portfolio for $250 million: the 291-unit Truffles Tribeca luxury rental.
Meanwhile, long-term owners and funds that can weather interest rate changes are taking advantage of opportunities.
That may be the case for investors like Dermot Company and Dutch pension fund PGGM. This summer, the partners were in talks to buy 101 West End Avenue, a 503-unit building, for $400 million from Equity Residential. (They are also in contract to buy 520 West 42nd Street for $193 million from AEW Capital Management.)
Incongruously, the rental market softened in August, when the median rental price in Manhattan dropped for the eighth time in nine months, according to a report by Miller Samuel and Douglas Elliman. Concessions increased month over month for 39 months. Rents in Brooklyn dipped slightly and rose in Queens, however, experts have pointed out that it was new development rentals giving the numbers a boost.
For Equity Residential, the deal to sell 101 West End Avenue represented an opportunity to move capital from a struggling market to one that’s heating up — namely, Denver. The real estate investment trust will have 8,500 units in the Big Apple by 2019, down from 19,400 at the start of 2018, executives said during a July 25 earnings call. (Earlier this year, the REIT also sold 420 East 80th Street for $85 million to Hampshire Properties.)
“We are trading capital from one market into another,” said CEO David Neithercut, though he cautioned Equity Residential isn’t exiting New York altogether. “As we look at what’s happening in New York and the low growth we’ve had there and the expectation for lower growth — in some of these assets as a result of the 421-a tax burn-off — it may make sense to rotate some capital into some other markets.”
Silverman said the last batch of rental development wasn’t fueled by the long-term supply and demand for housing in New York City. Instead, rezonings and the expiration of certain tax abatements pushed developers to build when they could. In fact, housing demand still outweighs supply in the city.
With a vacancy rate that hovers between 1 and 2 percent, “We’re incredibly spoiled in this market,” he said. “That plays tremendously to the benefit of the market.”
Overall, investment sales volume rose 20 percent to $21.6 billion during the first half of 2018, compared to $18 billion a year earlier, according to the Real Estate Board of New York. Investors are betting on “smart, long-term assets,” REBNY President John Banks said in a statement.
Multifamily was the most active segment of the Brooklyn sales market — accounting for 46 percent of transactions — compared to 38 percent in Manhattan and 26 percent in Queens.
In Brooklyn, multifamily sales volume rose 113 percent during the first half of the year to $1.7 billion, according to TerraCRG. That was largely driven by the $905 million sale of Starrett City, the affordable-housing complex with 5,581 units.
But even without that deal, sales volume was up 12 percent.
Terra CRG’s Matthew Cosentino said sellers who are wary of an interest rate hike and the rising costs of managing multifamily properties are jumping at a chance to sell when large funds will pay a premium.
Meanwhile, the borough’s strong economics has attracted investors and foreign buyers.
“If you’re looking at a three cap in Manhattan and you can get a similar building in Brooklyn for a five cap,” he said, “Brooklyn is now as desirable for many of these buyers.”