No default, no problem

Why the current headwinds are actually okay to nyc multifamily

Start with inflation which raised the costs of goods and labor. Add some rate hikes as a remedy to the mounting inflation. Witness bank collapses in 1H 2023 due to loan assets dropping in value and customers withdrawing their deposits in masse. And now, wait patiently as the U.S. government defaults on its debt? Wait, what?

This can’t happen. This would be very different from all the other economic setbacks of the last few years. All the headwinds in NY multifamily so far have been manageable, especially considering the greater threats NYC has faced, such as the big drop off in value because of rent regulations in 2019.

• Inflation in the economy has made going to the store, flying on vacation, and servicing building operating expenses quite a bit more expensive. It has also delivered higher rents. Rents in April of 2023 broke records in the NYC borough of Manhattan. That is not doom and gloom. That is exciting, especially as cities with less activity post-covid see real rent slow-downs or even declines, but NY marches forward.

• Rate hikes began on March 16^th, 2022, and are likely done now. The hikes have been painful for many. A client of mine recently had a rate reset in the middle (5/5) of his 10-year mortgage term. From 4.5% to 7.5%. That’s not great. I expect to sell that building soon. He is not alone, and asset pricing has been affected by interest rate changes. Some owners have also decided to go in different directions - to sell when lower rate environments come back. Still, barring speculative property purchases since the advent of COVID-19, most owners seem to grumble about interest rates, without triggering distressed sales. The big distress that investors predicted hasn’t come true and deals are happening at 2022 levels +/- the effects of higher cost of debt.

• Bank collapses started in March with (Silvergate?) Silicon Valley Bank and have now continued through to May with First Republic. These bank failures have created some ripples in the water. Few seem to know if those ripples eventually turn into waves capable of lasting damage to the system, or just remain as small disturbances that require awareness and caution. A mortgage broker I chatted with recently delighted in the bank failures. The confusion the banking turmoil created meant that more borrowers needed guidance on where to go for multifamily loans. Like insects are drawn to light, the broker explained, investors would be drawn to him to illuminate current debt options. That same broker quoted me 5 years of interest-only debt on a renovated Manhattan tax class 2B building for somewhere between 5.25%-5.75% on 50% LTV debt, with no recourse to the borrower. Good deals are out there.

Some U.S-wide multifamily data speaks to a slow-down in deal activity in the economy, but it’s important to remember that that is a lagging indicator, and that being in the market is the only way to truly know where things lie, or when they will improve. Investment sales veteran Bob Knakal recently wrote in the Commercial Observer that it’s almost imperceptible to know when the market switches from being softer to going back to the upswing. I agree 100%. It’s also worth remembering that NY saw a similar decline in transaction volume from 2018 to 2019, when more aggressive rent regulations were passed. Things got even worse in 2020 during covid, when volume dropped down to almost the same amount as the decline that is being seen today. Sales volumes ebb and flow. NY has seen worse days. Things today are okay. Deals will come. Prices will adjust, and things will unthaw. As long as the U.S. doesn’t default, I expect multifamily deal volume to tick up considerably in Q3.