Recent state rent regulations have changed so many of the long-standing multifamily rules that owners of apartment buildings are taking a “wait-and-see” approach.
“The game-changing rent laws have had an impact,” says Douglas Harmon of Cushman & Wakefield. “It has halted sales with any semblance of rent stabilization.”
But buildings with both a majority of affordable regulated units and property tax exemptions, buildings with numerous years left on their 421a property tax exemptions and buildings with mostly free-market rentals are now seeing interest from buyers who are trying to adapt to the new environment.
“The product that is all fair market — there is incredible demand for that product, and the values are steady relative to last year,” says Michael Teppedino of JLL.
For buildings with mostly regulated units, however, Teppedino and other investment brokers agree that values are dropping. “They are down in the double-digit range, but it could be anywhere from 10 to 30 percent,” he says. “There are ‘body fishers’ out to see if they can buy some of this on the cheap, but not enough to say, ‘Values are down X.’ ”
Some deals that had gone into contract prior to the sudden implementation of the state laws fell apart. In Brooklyn, a 16-unit building was in contract prior to June 15 for $4 million. Its sales broker then called Mike Niamonitakis of Meridian Properties, who owns about 4,000 area units, and told him the buyer had walked away from his deposit, and the building was his for the reduced price of $2.5 million.
“The registered last legal rents were an average of $600 to $850 per month, and most of the building had been vacant for a decade,” Niamonitakis recalls. Given the small rent increases now permitted, he will only be able to make a return on his investment by combining vacant units, which would allow him to charge higher rents.
“There has been a resetting of values for multifamily and a lot of money looking for deals, but we are not sure where they will be [on price],” says Jay Neveloff, head of real estate at law firm Kramer Levin.
There is still wide interest in Manhattan office buildings. The former Coca Cola Building at 711 Fifth Ave. is so desirable it sold twice: first by Harmon’s Cushman & Wakefield team for $909 million, then an off-shore investor sold its stake to Michael Shvo and a Turkish investor for a recapitalized $937 million. Harmon sold Google, which already owns Chelsea Market, the Milk Studios building across the street at 450 W. 15th St. for $600 million.
In Midtown South, Google’s rep, Darcy Stacom at CBRE, sold RFR’s 345 Park Ave. South, for $344.5 million to medical fund manager Deerfield for a life sciences “innovation campus.”
By the end of this year, brokers predict, there will have been enough sales to verify how badly the multifamily segment of the sales market was affected.
One of the reasons volume is down, Teppedino says, is that owners can refinance and worry about selling their buildings another time. “I’ve seen a lot of sellers who have been unable to get their price not trading the property and going into the refinance market. The lenders are still making loans on in-place cash flows, but they are not underwriting future growth,” he explains. “So you can still refinance into current income streams.”
There is also a flight of capital from New York. “Investors that had been focused on New York are now looking in Texas at Austin, and in Florida where there is job growth and the taxes and the local political climate are more favorable,” says Jason Meister of real estate advisory firm Ackman-Ziff.
Meister is still busy facilitating transit-oriented ground-up residential development deals along the commuter train lines in Westchester, Long Island and New Jersey.
“Given the market uncertainty and the sellers willing to trade, some investors believe this is one of the big buying opportunities,” says Woody Heller of Savills. “They say, ‘If we are comfortable in this area, we want to . . . gobble up as much as we can.’ ”
At least two investor groups have asked Meister to keep an eye out for rent regulated multifamily buildings that they will buy at a 5 percent capitalization rate based on an in-place rent roll — not far off the former sub-five cap rates.
“They want to buy in very strong locations on the island of Manhattan,” he says.
“Their business plan includes a retail component to be repositioned. And they will both lobby and hope that the laws will change.”
“There are still trades being made because the law won’t change so fast,” Neveloff says, adding that, so far, he’s “not seeing anybody jumping off a roof. I don’t see panic.”
