Tenant habits within the workplace market, regulation in multifamily and a a lot greater value of capital contributed to a 43% drop in New York Metropolis funding gross sales to $12.8 billion in 1H 2023 from 1H 2022, in keeping with analysis compiled by Ariel Property Advisors.
Nevertheless, that drop was anticipated as we started to see a decelerate on the finish of 2022 resulting from quickly rising rates of interest. Because of this, whereas the primary quarter was lackluster, the market improved throughout the second quarter as savvy traders seized the chance to spend money on repriced property.
Workplace: Letting Go, Holding On, Recapitalizing and Repositioning
With New York Metropolis’s workplace occupancy charges hovering round 50% of pre-Covid ranges, the greenback quantity of workplace transactions fell 48% year-over-year to $2.4 billion in 1H 2023, one of many lowest ranges prior to now 10 years.
Mortgage Maturities Drive Selections
Whereas mortgage maturities are presenting a significant problem within the workplace market, they’re offering perception as to how workplace landlords and traders view the workplace world. Homeowners are primarily selecting which property to save lots of and which of them to let go. Subsequently, when the underlying fundamentals are weak and there’s no speedy hope for the asset, keys are handed again to lenders.
Nevertheless, traders with a long-term outlook and the power to face up to the storm are well-positioned, particularly as soon as they’ve shed their lowest performing property. These homeowners have managed to efficiently refinance, appeal to new capital, leverage the repriced values of their buildings and may be capable of drastically profit from this technique in the long term.
Examples of main landlords letting go of their property within the first six months of 2023 embrace RXR’s 61 Broadway; L&L Holding Firm’s Metropolitan Tower at 142 West 57th; Associated’s 2100 forty ninth Avenue and 2109 Borden Avenue in Lengthy Island Metropolis, Queens; and Blackstone’s 1740 Broadway.
A few of these similar homeowners, nevertheless, are holding onto workplace properties with robust underlying fundamentals by extending their loans and bringing in new capital. These embrace newer, well-located, occupied buildings with excessive rents reminiscent of SL Inexperienced’s 245 Park Avenue; Tishman Speyer’s 300 Park Avenue; RFR’s 375 Park Avenue; RXR’s 601 West twenty sixth Avenue; Blackstone’s Willis Tower in Chicago.
The workplace tower at 245 Park Avenue is a good instance of not solely holding on, but additionally bringing in a brand new funding at a slight low cost to the unique 2017 buy value, which is a good testomony to the curiosity in investing in high quality property.
Workplace property with weak underlying fundamentals however a powerful future, traded properly at a reduction over the previous six months both to traders or to person teams who consider in New York Metropolis’s workplace market long-term. These embrace the acquisitions of 40 Fulton Avenue, 126 East 56th Avenue and 529 fifth Avenue by David Werner Actual Property Investments, Sovereign Properties and Namdar, respectively. Proprietor-users stepped up with Hyundai buying 15 Laight Avenue; NYU buying 400 Lafayette Avenue; and Enchanté buying 149 Madison Avenue.
Multifamily: One Asset Class, Three Totally different Outcomes
Multifamily greenback quantity dipped to $1.1 billion in 1Q 2023 however soared 242% quarter-over-quarter to $3.9 billion in 2Q 2023, in keeping with Ariel Property Advisors’ Q2 2023 Multifamily Quarter in Review New York City. Nevertheless, every asset behaved otherwise relying on whether or not it was free market, lease stabilized or inexpensive housing.
Free market multifamily accounted for 51% of the multifamily greenback quantity within the first half of the yr. Important transactions included GO Companions buy of 265 East 66th Avenue for $402 million; Slate’s acquisition of 600 Columbus Avenue for $120 million; Namdar’s $100 million acquisition of 552 West 54th Avenue; and Stonehenge and Carlyle’s $114 million funding in 408 East 92nd Avenue.
There continues to be a deep bench of institutional, personal and worldwide capital accessible to spend money on free market properties. These residence buildings profit from New York Metropolis’s favorable fundamentals reminiscent of job progress and authorities insurance policies that discourage new growth and, due to this fact, have created a housing scarcity that’s driving up rents by 10% year-over-year. The Metropolis has an estimated deficit of 376,000 models of housing at the moment, a determine that can rise to 560,000 by 2030.
Costs for lease stabilized buildings in 1H 2023 dropped to their lowest degree since 1H 2015 due to greater rates of interest mixed with the numerous structural modifications created by the Housing Stability and Tenant Safety Act of 2019 (HSTPA), a regulation that eradicated incentives to renovate buildings and vacant models. Because of this, we noticed buildings initially bought in 2014, 2015 and 2016 promote within the first six months of 2023 for a reduction of near 30%.
Decrease costs for lease stabilized property, nevertheless, are attracting sensible, personal cash and excessive web value people and households who perceive the product, consider the rules will likely be modified as a result of they’re unsustainable and are keen to stay it out for the long-term.
Reasonably priced Housing
Reasonably priced housing loved 34% of the full multifamily pie within the first six months of the yr. Traders on this asset class are mission-driven with a double backside line; looking for to combine monetary success with social accountability. The chance drivers embrace decrease property taxes, value-add alternatives that permit for lease will increase over time, particularly for vouchered tenants, and company financing.
A number of distinguished inexpensive transactions came about within the first half of the yr together with Nuveen’s buy of the Omni portfolio for near $1 billion, and the $150 million sale of Sea Park, an 818-unit former Mitchell Lama constructing with a land alternative, which was organized by Ariel Property Advisors. Moreover, Ariel is presently advertising practically 5,000 inexpensive models that will likely be bought this yr or the primary quarter of 2024.
Land of Alternative
New York Metropolis land gross sales dropped 30% year-over-year to $2.5 billion within the first half of 2023 in comparison with the primary half of 2022, which might be attributed to quite a few elements together with the failure of state lawmakers to approve a successor to the 421a tax abatement program, which expired over a yr in the past; the dramatic rise in building prices, each arduous prices and labor; and slower condominium gross sales resulting from greater rates of interest.
Nevertheless, decrease costs introduced alternatives for builders reminiscent of Rockrose, which acquired the St. Francis School campus in Downtown Brooklyn for $160 million, and different traders that purchased websites with the intention of land banking.
Land that’s 421a vested and certified for the tax abatement earlier than it expired final yr additionally traded at a premium as did inexpensive housing developments supported by town and state. Moreover, rezoned places within the Jamaica, Astoria and Willets Level areas of Queens contributed to that borough having fun with an 80% enhance in land transactions year-over-year.
What to Watch For
Wanting ahead, we count on to see:
- Non-public lenders step as much as fill the void left by the regional banks which might be going through larger scrutiny from regulators following the financial institution failures within the first half of the yr.
- Mortgage maturities contribute to further repricing for workplace and lease stabilized multifamily property, opening the door for traders to accumulate properties with robust fundamentals at a reduction. The FDIC’s sale of the Signature Financial institution portfolio later this yr additionally will current an attention-grabbing funding alternative.
- Though state lawmakers did not approve a complete housing coverage within the final legislative session, the governor introduced a brand new program that can present some tax aid to builders within the Gowanus part of Brooklyn, which is encouraging as a result of it could possibly be expanded to different components of the Metropolis.
Whereas there are challenges, financial indicators in New York Metropolis are robust. Subsequently, we consider sensible capital, which is ample, will return in a giant approach within the subsequent six to 18 months.
Content material for this text was taken from Ariel Property Advisors’ 2023 Mid-12 months Analysis Experiences, which I introduced at our agency’s Espresso & Cap Charges occasion on July 20, 2023. To entry Ariel’s analysis reviews and movies from the occasion, please click on here.