Are You Taking Advantage of the Historical Opportunities in NYC Multifamily? Marcus & Millichap Offers Advice
The New York multifamily investment market is sizzling…“In my 18 years in the multifamily and mixed-use sector, I have never seen so much simultaneous opportunity on both the seller and buyer side,” says Joe Koicim of the New York Multifamily Group at Marcus & Millichap. Koicim adds, “This is a historical time when there is a growing demand for assets and numerous reasons for people to sell.”As the most active middle-market investment team in the city, Marcus & Millichap controls a large swath of top-tier inventory, which allows them to create more opportunities for clients. “Our deal flow puts us in a unique and enviable position, and investors who want to buy multifamily properties in the midmarket range should be in touch with us to see what’s out there,” Salvatico says, adding that at any given time the team has up to 70 listings. New York Multifamily Group was especially active in Brooklyn over the last year- they closed over 23% of all Brooklyn multifamily deals over $3million.
A Booming Market
While demand in New York City flattened briefly during COVID-19, the tide has turned. Salvatico traces the start of the rise to May 2021, and the ramp-up continued. “At the end of 2021 there was a frenzy as rents rose and rates stayed low,” he says. “We saw rapid appreciation % in September and October, and a constant increase since then.”
What’s fueling this demand? Limited supply, caused by several factors, including the Housing Stability and Tenant Protection Act of 2019, augmented by the fact that there was little development during the pandemic. Although interest rates are a consideration, Salvatico anticipates rents will continue to outpace them, as there is no quick fix for the constrained supply. “The only way to address it is for the city to ease rent regulation changes from the 2019 HSTPA and allow zoning changes along with efficient tax abatement programs to promote more development. Even if the city were to allow these changes to happen immediately it would take at least two or three years to solve the apartment supply crisis we have throughout the city. This issue is not going away any time soon” he says.
Growth Continues to Spread
The interest has become widespread, starting with a flight to quality. “Everyone wants to buy prime New York property,” Koicim asserts.
“A” neighborhoods saw the most activity in 2021, and Salvatico sees it expanding to B neighborhoods, which he predicts will explode this summer, citing Williamsburg, Greenpoint, and Cobble Hill as three “A” Brooklyn neighborhoods which have evolved into world class locations like SoHo or the West Village. “As things get more expensive in areas like Williamsburg or Cobble Hill, people move to the “next” neighborhood, which is why we’re seeing savvy investors consider properties in Red Hook or Bushwick who would not have bought there previously.”
Certainly, properties with free-market rent are more attractive, especially as interest rates threaten to inch up. “Rent-regulated properties are hurt the most by rising interest rates since owners are dependent on the Rent Guidelines Board for the typically nominal annual rent increases in their rent regulated units,” Salvatico says. And given that there’s currently less price sensitivity as renters flock back to the city, Marcus & Millichap is seeing particular demand for places where owners can raise rents to match market appetites.
For example, Koicim just helped sell a portfolio of 14 buildings, noting 98% of which was free-market. “These free market, tax class protected buildings are seeing a tremendous amount of activity from both foreign and local capital.” Although free-market apartments will continue to see the most demand, he has also found a smaller cadre of investors looking for rent-stabilized buildings, as they are taking the long view that rent laws will change.
1031 Exchanges a Common Transaction
With all this interest, it’s an attractive time to sell, especially for those who want to get ahead of rising interest rates and potential new political regulations that could affect values. However, a lot of the activity is coming from sellers who want to diversify into other asset classes, many of whom are also searching for less management-intensive properties, such as retail.
The group is facilitating a robust number of 1031 exchanges into triple net lease assets around the country, a specialty of Marcus & Millichap. “We have a unique ability to do this as one of the only platforms that can connect both sides,” Koicim says. “Our depth of experience has strengthened our reputation in facilitating these transactions. While we’re brokers, we are also advisors.”
Salvatico notes that investors have seen the writing on the wall as the city makes it harder for individuals to manage larger buildings. “There’s so much paperwork involved in adhering to local laws that the individual investor has realized they need a full-time staff to manage these properties and don’t have the scale to do it. Instead, the smaller owners are selling to private equity and institutional investors who have the capacity to manage these units.”
Utilizing a 1031 exchange allows investors to take on a property that’s easier to manage while also deferring taxes. As one example, Koicim recently helped a client exchange a multifamily portfolio to re-invest into triple net leased (NNN) properties in the Southeast. “They shifted their business from managing a building and collecting rent to something with no management responsibility that also increased cash flow significantly.”
New Sources of Capital Seek City Opportunities
While the rent moratorium and COVID had temporarily impacted values in the multifamily market, demand is surging, driven by multiple new sources of capital.
“We are seeing a big rise in foreign and institutional capital as they’ve become comfortable with the rent laws,” Koicim says. That’s replacing the typical family office or smaller buyer, who are being outbid by institutional investors that have significant cash behind them, notes Salvatico, who just completed a sale of 10 buildings to a German investor. “The unrest in Europe will continue to push buyers here,” he says.
Rely on Proven Expertise
No matter what type of transaction a buyer or seller is considering, it’s advantageous to prioritize the track record and expertise of the broker they choose. That’s where Marcus & Millichap has a leg up, says Koicim. “We have never been busier, which means we are growing our team and expanding our capabilities. We’re getting the highest prices for sellers because of the connections and reputation we have fostered.”
He touts the entrepreneurial mindset and energy of his team. “We have a proven ability to find new capital and nurture relationships, and we can leverage a robust deal flow, which generates great outcomes for both sides,” he says. In addition, the team’s proprietary training and technology allow them to execute on a large scale.
“It’s a perfect window in time,” says Salvatico. “Rents are climbing higher, rates remain low, and we believe that the universal rent control some politicians are looking for won’t proceed because of the pain it would cause throughout the market. New York City real estate continues to prove it’s resilience and safety as an investment class. It’s hard to imagine more ideal conditions than right now to be on the buyer or seller side.”