By Al Barbarino
Multi-family apartment buildings in the city are often viewed as the primary market through which owner-occupiers aim to live rent free by dwelling in one unit and collecting rent on the rest.
But it’s a “dream” that’s fading, as more and more multifamily properties, particularly brownstone-style homes that once housed three or four individual apartment units, are converted back to one or two family homes.
“The dream used to be to live in one unit of a residential building and collect rent to live for free,” said James Nelson, a partner at Massey Knakal. “That type of investment is almost disappearing.”
This is causing potential owner-occupiers to consider buying retail spaces with residential units above instead, a similar concept that some say offers what are often higher returns.
These situations are considered by some to be even more profitable than multi-family investment options because retail commands much higher rents than residential units do.
Others view the responsibilities of keeping watch over multiple residential tenants to be more burdensome and time-consuming than doing so with one or two established retail outlets.
“The mixed-use scenarios with retail are significantly more profitable,” said Nelson, who has seen potential owner-occupiers shift focus from multifamily to “live-plus” retail opportunities.
His latest listing is a 2,889 s/f, three-story, mixed-use walk-up building at 37-41 8th Avenue, located between Jane and Horatio Streets in the West Village.
Why collect rent in the mid-$70’s psf when you could take in roughly $200 psf from a retail tenant, he asked.
Massey Knakal is marketing the property as an opportunity for either an investor to receive a steady stream of in-place income, or for a user to live in the duplex unit while receiving income from the retail units below.
In the latter scenario, the two retail units on the ground floor with leases in place through 2013 would give the owner more than $150,000 per year in rent; all told, Nelson pointed out that the retail rent accounts for about two thirds of the income, or about $3 million, of the $4.6 million asking price.
That leaves the potential owner with an upper duplex apartment for about a million and a half dollars, in a neighborhood where a similar duplex alone would easily fetch over $2 million, he said.
But such ventures shouldn’t be taken lightly, others said. The duplex that’s part of Nelson’s listing is fully renovated, but that isn’t always the case, adding a significant undertaking to the standard maintenance and repair obligations an owner faces.
In many instances, reasonably-priced live-plus retail opportunities require significant renovations and require an owner “who is open to taking on a project,” said Louis Puopolo, a vice president at Prudential Douglas Elliman, adding that “a lot of buyers who want to have a property like that can’t afford one that is new or renovated.”
Puopolo is marketing a three-story mixed-use building at 15 Eighth Avenue in the Village for $3.5 million — featuring a residential duplex and retail space — to owners who could develop the building as an investment or own and occupy it for immediate rental income.
While the property isn’t in “bad condition,” it’s due for a renovation, Puopolo said.
Like Nelson, Puopolo has noticed that many multi-family buildings in Manhattan’s sought-after neighborhoods have been converted to single family homes, in many cases by investors who buy the properties, renovate them and then demand upwards of $2,500 psf when re-selling them.
In addition to areas like the East and West Village and other Manhattan enclaves dominated by Brownstone-style buildings, a similar shift from multi-unit to single and perhaps double units has occurred in many of Brooklyn’s pricier neighborhoods, like Park Slope, Brooklyn Heights and Carroll Gardens, said Donald Brennan, owner and broker with Brooklyn-based Brennan Realty Services.
But he considers the mixed-use opportunities to be something that “may occur way off the beaten path,” typically reserved for a commercial buyer who is more focused on the retail end of the transaction.
“A very, very small percentage of the population can pull that off,” he said, referring to the buyers he services in Brooklyn.
But Brennan does have a “handful of buy side clients who are considering acquiring 3- to 4-families and then reduce their density to one to two-family.”
Generally speaking, Brownstone’s built in the 1800’s as single family homes gradually were converted to multi-family apartments through the 1900’s, but things are now “cycling back the other way — not at the same pace, but at a pretty good clip,” Brennan said.
“Owner occupants are more confident investing in three or four families,” he said. “The demand is hard to gauge,” he added.
But Brennan and most other industry professionals seem to agree that demand is at a level that far outpaces declining supply, which could lead more owner-occupiers to consider mixed-use investment opportunities in the future.