During the past year, apartment building trades have flourished, particularly when there is a picture-perfect property or a high market-rate unit count. While there is more funding available for $100 million dollar deals, future political decisions that could roil the rental market have begun to influence the shifting of portfolios across the city.
The market was buoyed early in the year with the $905 million purchase of Brooklyn’s 5,581-unit Starrett City by Brooksville and Rockpoint. Equity Residential later sold 101 West End Ave., with 506 units, for $416.1 million to Steve Benjamin of Dermot Company together with PGGM, a Dutch pension fund. The same investor group also purchased the 375-unit Helux at 520 W. 43rd St. for $193 million.
The Vanbarton Group bought 330-unit The Vogue at 990 Sixth Ave. along with 19 retail spaces for $316 million, or $818 per square foot.
A Brookfield fund bought a stake in the five-building Waterside Plaza complex, which towers over the East River at East 23rd Street.
“There is an insatiable level of demand for a limited supply of larger multi-family deals,” says Douglas Harmon of Cushman & Wakefield, who marketed those buildings. “But that doesn’t mean one should throw up a for-sale sign and expect offers to flood in.”
According to Darcy Stacom of CBRE, there are more funds available — and thus investors — for the “smaller” deals.
“The ideal deal size is $150 million to $200 million,” she adds. “Above that, there is a limited investment pool.”
Still, Stacom sold the leasehold on World Wide Group’s rental, Aalto57, at 1065 Second Ave. on the southwest corner of East 57th Street — below the condominiums — for $276 million. Buyer Oxford Property Group paid the equivalent of $1,209 per foot and $1.63 million per unit. A significant retail component and the all-market-rate rents skewed pricing upward.
In Midtown, the Biltmore at 271 W. 47th St. was sold for roughly $290 million, or $625,000 per unit, from the Jack Parker Corporation to GreenOak after being marketed by Jimmy Kuhn at Newmark Knight Frank. With 464 units across 53 stories, the building has a club lounge, a fireplace, a games area with billiards, a screening room and a fitness facility.
A stake owned by TH Real Estate and marketed by Stacom in the distinctive Forest City rental at 8 Spruce St. in Lower Manhattan, designed with an undulating façade by Frank Gehry, was pulled from the market after Brookfield cut a deal to buy Forest City itself.
According to Paul Massey of B6 Real Estate Advisors, the city is still in a housing crisis due to the need of affordable units.
The overhang and a hiatus between the end of the old 421a tax-incentive program and a new one means there are not many projects in the development pipeline. Because of this, fewer units will be coming to market despite the ongoing need for housing — which would only worsen with a potential influx of Amazon employees.
“If you run out of supply and demand is steady, you will rent those apartments and then rents will rise,” predicts Andrew Scandalios of HFF.
Scandalios marketed a 30 percent stake in Dermot’s new 21 West End Ave., which was sold to the PGGM fund in March and revalued at $650 million. The pricing for the 616 units equates to $1.1 million each.
The Corner Apartments at 200 W. 72nd St., on the southwest corner of Broadway, was marketed by Scandalios for TH Real Estate and is in contract to a converter. All the units rent at high market rates.
Then there’s the Echelon Chelsea, a mid-block rental at 27 W. 21st St. with 109 units that was developed by Roseland. It is also in contract through Scandalios.
In 2010, Massey says, the average capitalization rate on apartment building sales was 6.5 percent. Now, at 3.75 percent, cap rates are at a historical low. They reflect the immediate return on investment, so a low rate means that sales prices are high. And no buyer wants to pay so much that they can’t afford to make the improvements that will later translate to higher rents — or get stuck with lower rents if Albany decides to scrap regulations favorable to building owners next year.
As a result, brokers say, low cap rates have caused many buyers of core properties to drop out of the market. Investors also worry about both interest rates and rental concessions climbing.
“There are fewer buyers who think [pricing] should be at all-time highs,” explains James Nelson of Avison Young, and that is leading to fewer buyers chasing each listing.
Any new building owner faces intense competition to lease out market-rate luxury apartments. Most must provide incentives like free months and amenities to lock renters into leases.
“If you lose two months because of free rent, you’ve lost 15 percent of the value,” observes Kuhn of NKF.
Activity has also been down in 2018 versus 2017 in most areas. “The reductions have been 20, 30 and 40 percent for both the number of transactions and the dollar volumes,” says Bob Knakal of JLL.
But Brooklyn is now rivaling Manhattan as an investment leader since $3.5 billion worth of multi-family buildings were sold this year in each borough, Massey says.
The modular tower at 461 Dean St. near Barclays Center was developed by Forest City and sold through Stacom for $156 million to Principal in March 2018. The pricing equates to $672 per square foot and a low $430,000 per unit (since half the rentals are affordable).
In November, affordable housing developer Jonathan Rose Associates purchased Shore Hill Housing, a 558-unit complex in Bay Ridge, through Kuhn for $150 million.
Last month, Parker Towers — three 20-story buildings at 104-20 Queens Boulevard in Forest Hills with 1,327 units total — were sold through Kuhn by the Jack Parker Corporation to Blackstone for $475 million, roughly $358,000 per unit.
One unique building on the market is Perch Harlem at 542 W. 153rd St. The 34-unit market-rate rental was developed to Passive House standards and is being marketed by Eric Anton’s team at Marcus & Millichap with expected pricing around $30 million.
“Sellers and their advisers need to assess the special circumstances of each deal,” Harmon says. “The New York market is harder to navigate than it appears and new qualified buyers are not easily identified.”
