Trends in NYC's inflation resistant RE Market
Trends in NYC's inflation resistant RE Market
Is foreign CRE investment into the US a bellwether for the health of the global economy?
The US Dollar has surpassed the value of the Euro and analysts have begun to wonder if that means more foreign CRE investment into the US to take advantage of additional dollar payments.
Yes: CEO of Inditex Amancio Ortega seems to endorse that theory. He has spent close to $2Bn USD on international CRE assets in New York, Glasgow, and Toronto in the last 12 months.
No: Despite Ortega’s buys, the answer seems to be that no, rates alone won’t effect foreign investment too much. With European Central banks poised to raise rates further this year, the cost to hedge against currency fluctuations decreases and so it makes currency volatility less damaging for western nations.
What’s really going on: According to Bisnow, the real driver of North American investment is the uncertainty that exists in Europe due to the effects of the war in Russia. China, on the other hand, is less likely to buy international CRE as it once did because of its own CRE downturn, according to FTI Consulting’s Senior Managing Director, Josh Herrenkohl.
Meanwhile in NY…
Multifamily leads NYC real estate investment sales
According to Ariel Property Advisors, $22 billion was spent on the acquisition of office, retail, industrial and multifamily assets in the first half of 2022, the third-highest CRE spend in NYC since 2016. Some interesting themes to take note of:
On a price-per-foot basis, the cost of apartment buildings is still lower than it was in 2019.
Cap rates remain higher in NYC than in other key MSAs.
Approximately 75% of the $9 billion spent on multifamily was for market-rate housing and housing that still had 421a tax abatements in place.
There is institutional demand for NYC Multifamily: A&E, Blackstone, Stonehenge, Avanath, and Carlyle have bought buildings totaling +$100M in volume.
Private equity corner: Carlyle Group buys ~130 buildings in NY
David Rubenstein’s Carlyle group leads the pack in the number of buildings bought in the last 12 months by an institution. The group purchased approximately 130 buildings, each costing roughly $2-$3M a piece. Instead of going for large assets that enable centralized management and more efficient acquisitions, their strategy entails going after smaller buildings – buildings that have tax protections and that, more often than not, have free market units. Buying properties in NYC that are less than 11 apartments means those properties benefit from caps on how quickly their assessed values and taxes can climb in times of appreciating value. These properties also benefit from low operating costs due to not having doormen or elevators. These are referred to as tax class 2a or 2b buildings and are known as tax-class protected. Further, with free market apartments, there is no cap on how high rents can go. When combined, these qualities mean that in up-markets, investors are able to raise their top line revenues and take advantage of aggressive rent hikes, while keeping taxes – sometimes up to 40% of NYC multifamily operating expenses – relatively stable. Larger properties – over 10 units do not have these benefits. 50 or 100 unit-properties built prior to World War II, which are more common than those built afterward, tend more often to be entirely rent regulated, or close to that, especially if they exist in the outer boroughs. While 100+ unit properties enable buyers to enter a market quickly, they do not provide the same value creation opportunities that exist on properties that are free of rent control that are smaller.
And it seems that NY’s market is ripe with value creation opportunities as research form Street Easy corroborates.
Window into the NY market
Street Easy’s market report suggests that over 40% of new Manhattan rental inventory came to the market in Q2 due to renters failing to renew leases and leaving Manhattan. Those renters got COVID deals and then when rents came back up to market levels in 2022, they could no longer afford it. This data comes at an interesting time, as tenants and owners adapt their behaviors to news that Manhattan’s median rent hit $5,000. Could this increase in inventory spell a flattening of the rental curve on the island?
Street Easy’s report doesn’t spell that out exactly, but it strongly suggests it. While the inventory rental apartments on the market grows in Manhattan, outer boroughs are absorbing much of the excess demand for somewhat more affordable housing. Median asking rents in Queens and Brooklyn rose 13% and 12% respectively from Q1 to Q2 2022, while inventory levels in Queens declined 9%. Rent concessions stand at their lowest since 2015, with less than 7% of listings offering a month of free rent. Finally, one of the most telling indicators of the health of the market is the level of rent burden. According to StreetEasy data, tenants in Brooklyn and Manhattan spend approximately 60% and 50% of their respective incomes on their rent expenses.
StreetEasy’s data suggests that it is increasingly common that tenants are > than 30% rent burdened
Sources: The Real Deal, Bisnow, Forbes, StreetEasy
Originally published on August 8th, 2022