By Al Barbarino
Rental rates continue to spiral upward as buyers look to Manhattan multifamily properties as a reliable investment — even as a wave of new construction lies over the horizon.
The apartment building became the darling of the industry during the recession, as would-be homeowners flocked to the rental market, along with investors.
The trend continues in an era marked by extremely low development and construction.
“There’s no meaningful amount of rental product coming onto the market,” said James P. Nelson, a partner at Massey Knakal. “Even after the crash in 2009, there was very little construction and the construction that has taken place is condo.”
This has driven rental prices to all-time highs. Average rents in Manhattan (studio to 3-bed) hit a record high of $3,510 per month in May, up from $3,354 last year, according to data from residential brokerage firm Citi Habitats.
Meanwhile, demand for multifamily properties grows. Dollar volume of $574.4 million in Q1 2012 crushed the 2011 number of $128.2 million, as demand heated up and buyers paid $344,840 per unit, compared with $226,786, respectively, according to data from Ariel Property Advisors.
“We’re going to keep seeing the rental market going up because of strong fundamentals and supply constraints,” said Shimon Shkury, president at Ariel Property Advisors.
But recent data also shows an uptick in new buildings permits in Manhattan. As of the end of May, there were 30 new residential building permits issued by the DOB — that’s three times the number from last year (when there were 36 such permits issued in the entire year).
Rents are so high that some argue that they will have to stabilize. If that happens and building prices continue to rise — and a heap of new product eventually hits the market — that could result in a crunch in profit margin for owners.
“Clearly, if supply catches up with the demand, the rental market might become a little bit flatter,” Skury said. “But it’s going to take another 18 to 36 months for that product to be finished, so we have a clear window right now because it takes time to build.”
Things are also a bit different in New York City, where rent-stabilized apartments are protected from steep rent increases. It has become a universally accepted idea that this drives up free market rents. But landlords can also convert buildings to the free market if rent-protected tenants move out (or are moved out) and significant changes are made to increase property value.
“Upside is not just about how much more rent you can get in the future based on free market rents,” Skury said. “In New York City, it means how many rent-stabilized apartments you can turn around into the free market.”
Timour Shafran, managing partner at Citicore, a firm that specializes in multifamily sales, estimated that as many as nine out of ten property sales in the city involve rent-stabilized properties.
This sends free market rents “through the roof,” he said. Rents in gentrifying neighborhoods are at levels that “owners could never have imagined,” while apartments in prime Manhattan locations can only be afforded by people who work for “Morgan Stanley or Chase” who are willing to pay $5,000 for a one-bedroom.
“It’s a little crazy as far as I’m concerned,” Shafran said. “Regulated buildings are not being torn down to be replaced by what you need as housing stock, so the development that’s being done is not nearly enough to fill the demand.
“There’s not a lot out there, so people are asking for big numbers and, if they can’t get them immediately, they sit on the deal because they can.”