Regional Spotlight: 3 Trends for NYC Multifamily in 2020

December 11, 2019

No investors bought or sold apartments properties in two major submarkets in New York City — Queens and Northern Manhattan — in July 2019, just a month after the state of New York overhauled rent regulations.

This is the first time that a New York City submarket — let alone two submarkets — posted zero transactions for a month since Ariel Property Advisors has tracked monthly multifamily sales beginning in 2011.

Throughout the city, the number of deals has slowed dramatically. Market watchers have expected the slowdown since lawmakers passed The Housing Stability and Tenant Protection Act of 2019 in June.

The slump in sales continued into September, according to a report from PropertyShark. "The key trend for the city's multifamily market in September was a large-scale slowdown," according to the data firm. "City-wide, sales volume fell a staggering 76 percent."

“The market is still evaluating the exact effects," Shimon Shkury, president of Ariel Property Advisors, a commercial real estate services and advisory firm, told National Real Estate Investor. “I think you will see a lot of pricing changes over the next couple years."

Will this trend continue into 2020? Here are some factors that could impact the multifamily market:

Multifamily Transactions Slow as Rent Control Law Takes Effect

The new law makes it much more difficult for property owners to get apartments out of the rent regulation program, according to a description by Ariel. It should have little effect on the often newer apartments that have never been under rent regulation. "These changes only affect current rent-control units," according to Marcus & Millichap's Institutional Property Advisors (IPA) division.

The law will repeal state provisions allowing landlords to deregulate apartments and charge market rates for units when rents exceed $2,700 a month. It also eliminates the "vacancy bonus" that allowed landlords to raise rents by 20 percent when a tenant moved out and reduces the amount that landlords can raise rents to reflect renovations.

Cap Rates Are Up Slightly

Capitalization rates are creeping higher for rent-regulated properties where the rents under the old rules could have risen quickly. "Changes to rent-control regulations in the state of New York announced in June will already be considered for underwriting valuations," according to Marcus & Millichap's Institutional Property Advisors (IPA) division.

Cap rates, which rise as prices fall relative to income, averaged 3.9 percent in Manhattan between February and July 2019. That's up from 3.7 percent the year before, according to Ariel Property Advisors. Cap rates rose the most in Queens, to 5.03 percent from 3.95 percent, and also rose in Brooklyn to 4.71 percent from 4.54 percent and in Northern Manhattan to 4.60 percent from 3.90 percent.

In the Bronx, where demand for apartments continues to rise quickly, cap rates inched lower to reach 4.93 percent, down from 4.95 percent.

"Over the next few quarters we will begin to see the true impact of reform on property values as all market participants begin to settle into our new world," Robert Knakal writes in the Commercial Observer.

Rental Demand Remains Strong

There are now fewer vacant apartments in New York City than any other time since the economy begun to grow after the Great Recession.

The percentage of vacant apartments in the metro area is now less than 2 percent, according to a report from Marcus & Millichap.

"New York's unique position as a cornerstone of global economic activity will continue to keep the fundamental trends positive even as the supply pipeline expands from last year," according to Marcus & Millichap.