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Multifamily fortunes set to be made with passage of tax reform bill

With the passage of the Tax Cuts and Jobs Act of 2017 in December, some real estate experts are predicting that the major cut to corporate taxes along with more individuals looking to rent than buy will lead to a big uptick in New York City’s multifamily market.

“The law benefits landlords over homeowners because landlords keep deductions,” said Mark Chin of Keller Williams, referring to the tax bill change on mortgage interest deduction.

James Nelson

“You’re going to see a couple of effects there: there is going to an increased interest in multifamily homes as an investment class, and you’ll see institutional money flowing into the city looking for quality assets.”

Chin also expects an increase in foreign buyers looking for stable investments in NYC where they can park their money, since they will also benefit from the corporate tax cut, which dropped to 21 percent from 35 percent.
James Nelson, a vice chairman of capital markets at Cushman & Wakefield, said the tax bill effects will impact the residential market before the commercial market.

Many potential first-time home buyers may elect to keep renting as a result of the loss of mortgage interest rate deductions, which could give a boost to the multifamily market, said Nelson.

The multifamily market in NYC has already shown strong gains in the last several months, even before the tax bill was passed by Congress.

According to research from Cushman & Wakefield, when comparing 3Q 2016 to 3Q 2017, NYC multifamily outperformed all other asset classes with only a 38 percent decline in dollar volume as opposed to 49 percent for all other property types.
During that same period, NYC multifamily pricing also far exceeded all other asset classes, posting an 11 percent increase psf as opposed to a two percent loss across all remaining property types.

“Even with all the new challenges, as it’s become a very pro-tenant environment with rent freezes, we’ve still been amazed at the prices we’ve been achieving,” said Nelson. “At the end of the day, investors are saying ‘Where else would I put my money?’”

Adam Hess

Multifamily building owners will be looking to sell, especially in established neighborhoods of Brooklyn, said Adam Hess, a partner at TerraCRG, the commercial real estate firm that focuses solely on Brooklyn.

Hess, who leads the multifamily investment sales division, said the tax bill will act as a catalyst for much higher sales volume in the market, especially in the second quarter of this year.

“Large multifamily owners will benefit from this,” said Hess. “It’s going to help the bottom line on any deal investors are looking at. In the fourth quarter of last year, we saw a nice pickup with investor interest.”

Though inventory is not as high as it was at the peak of the market in 2014 to 2015, Hess expects to see more sales in multifamily and inventory, which is around 70 percent of what it was during the peak, getting closer to 90 percent.
“People are looking more and more for safe assets in established areas,” said Hess, pointing to neighborhoods such as Park Slope, Clinton Hill, Carroll Gardens, and Brooklyn Heights.

“Rental markets are extremely stable. It’s one of the few asset classes that still have room for rent growth. People want to be a part of that.”

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