The Ups and Downs of the Multifamily Market

In the first half of 2010 (1H10), the activity in New York City’s multifamily market mirrored the overall investment sales

In the first half of 2010 (1H10), the activity in New York City’s multifamily market mirrored the overall investment sales market in many respects. This week we will take an in-depth look at the activity we are seeing in the multifamily market.

In the investment sales market, during 1H10, there were approximately $6.5 billion in transaction activity. This figure already surpasses the $6.2 billion of sales experienced in all of 2009. The activity in 1H10 represents a 131 percent increase in the dollar volume of sales on an annualized basis.

The multifamily apartment building market has behaved in much the same way. In 1H10, there were approximately $1.6 billion in investment sale transactions, exceeding the $1.26 billion in all of 2009. Activity in the multifamily sector in 1H10 represents a 151 percent increase on an annualized basis.

In 2009, there were 435 apartment buildings sold citywide. In 1H10, there were 304 buildings sold, a 40 percent increase on an annualized basis. The 435 buildings sold in 2009 contained 9,888 individual apartment units. In 1H10, the 304 buildings sold contained 8,701 individual units. On an annualized units-sold basis, there has been a 76 percent increase over 2009 levels.

While these percentage increases seem impressive, it is important to note that in 1H10, we were coming off 2009 all-time lows in terms of number of properties sold. To provide perspective, in 2007, there were 2,467 apartment buildings sold in the city. The 435 buildings sold in 2009 represent an 82 percent reduction in the number of multifamily properties sold from the peak to the low point.

When analyzing the New York City multifamily market, there are important distinctions to be made between walk-up buildings and elevator properties. While these two product types possess several similarities (such as New York’s cumbersome rent-regulation system), they are different enough that it makes tracking them separately very important.

Citywide, the number of walk-up buildings sold in 1H10 was 239, an increase of 37 percent on an annualized basis from the 348 walk-up buildings sold in 2009. The walk-up buildings sold in 1H10 contained a total of 3,315 individual apartment units, up 32 percent from the 5,022 units sold in all of 2009. The dollar volume of sales in the walk-up sector was $544 million, up 71 percent from the $638 million in all of 2009.

In the elevator-building sector, there were 65 multifamily buildings sold in 1H10, up 49 percent, on an annualized basis, from the 87 buildings sold in all of 2009. In the elevator buildings sold in 1H10, there were a total of 5,386 individual apartment units, up a whopping 121 percent above the 4,866 units moved in 2009. The metric that increased the most in the elevator sector was in the dollar volume of sales in 1H10, where $1.05 billion of transaction volume occurred, a staggering 233 percent increase, on an annualized basis, over the $627 million in sales occurring in 2009.


TO GET MORE insight into the functioning of the multifamily market, it is important to analyze each individual submarket and study the four major metrics that participants in the market use to gain insight into the sector: capitalization rate, gross rent multiplier, price per unit and price per square foot.

Each of these metrics, in its own way, reflects changes in value and the direction of the market on a relative basis. We will take a look at each of these metrics and highlight some submarket activity for both walk-up and elevator buildings. It should be noted that the metrics presented here are averages, and the highs and lows vary greatly within each submarket based upon several factors. It is difficult to draw conclusions about any single asset using these averages. Consultation with a market expert is advised to determine value accurately.


Capitalization Rates  

In 1H10, we continued to see cap-rate expansion from the levels produced in 2009. In the walk-up sector, cap-rate expansion occurred in Manhattan (defined as south of 96th Street on the East Side and south of 110th Street on the West Side), as well as in northern Manhattan and Queens, with the biggest increase coming, surprisingly, in the Manhattan market, where the 1H10 average was 6.08 percent, up 62 basis points from the 2009 average of 5.46.

Cap-rate expansion indicates a reduction in value. In each of these three submarkets, cap rates hit the highest levels they have been at since 2003.

In two submarkets, the Bronx and Brooklyn, cap rates fell in the walk-up sector. Cap rates falling indicate an increase in value. In the Bronx, they averaged 7.3 percent, down 21 basis points from the 2009 average and, in Brooklyn, they dropped 51 basis points to a 1H10 average of 7.09 percent.

In the elevator sector, cap rates were up in all submarkets. The biggest increases in cap rates in this sector occurred in Queens; the 6.56 1H10 average was up 52 basis points from 2009 levels. In northern Manhattan, the 6.01 percent 1H10 average was up 48 basis points. Given the more optimistic psychology in the market, it was surprising to see elevator cap rates rise in every submarket. We must, however, be cognizant that the positive feelings of participants in the market have been caused by increasing transaction volume and not value increases.


Gross Rent Multiple (GRM)  

In our gross-rent-multiple analysis for walk-up buildings, we see that the submarkets in Manhattan, northern Manhattan and Queens showed reductions (these go hand in hand with their cap-rate increases). The largest GRM reduction was a 0.55 multiple drop in northern Manhattan, which fell from a 2009 average of 8.25, to a 1H10 average of 7.70. GRMs increased in the Bronx and in Brooklyn, with the Brooklyn increase being the largest. Here, the 2009 average was 9.42 and the 1H10 average was 9.92, a one-half multiple increase (the GRM expansion in the Bronx and Brooklyn mirrors the cap-rate compression experienced in those two submarkets).

In the elevator sector, GRM analysis was not in sync with cap-rate movement. In three submarkets-the Bronx, Brooklyn and Manhattan-GRMs dropped (which would be expected given cap-rate expansion in each submarket). The Manhattan submarket experienced the largest drop in average GRM in 1H10, where the average was 11.67, down from 13.3 in 2009. This 1.63 multiple drop pushed Manhattan GRMs all the way down to 2003 levels.

In northern Manhattan and Queens, 1H10 GRM averages were up about one-half of a multiple in each, an unusual occurrence given cap-rate expansion there.


Price Per Unit 

On a price-per-unit basis, submarkets in Manhattan, Bronx and Brooklyn experience increases in 1H10, while northern Manhattan and Queens experienced reductions. The largest increase was in Manhattan, where the average price per unit increased 12 percent; the biggest drop was in northern Manhattan, with a 24 percent reduction.

In the elevator sector, average prices per unit dropped in Manhattan and in the Bronx, while increases were experienced in northern Manhattan, Brooklyn and Queens. In the elevator sector, the largest decrease in price per unit was in the Manhattan market, where the average unit sold for 10 percent less than it did in 2009. The biggest increases were seen in northern Manhattan, with a 24 percent increase, and in Queens, which had a 23 percent increase.


Price Per Square Foot   

On a price-
per-square-foot basis (this is the metric that most accurately reflects the direction of value trends in the multifamily sector), the walk-up sector showed volatility. Increases in price per square foot were seen in the Bronx, Brooklyn and, most notably, in Manhattan, where the 1H10 average of $634 per square foot was up 26 percent from the 2009 average of $505. This $634 dollar average was a new record high for Manhattan. We saw reductions in price per square foot of 3 percent in Queens and approximately 20 percent in northern Manhattan.

In the elevator sector, we saw decreases in price per square foot in Manhattan, northern Manhattan and the Bronx, and significant increases in value per square foot in Brooklyn and Queens. These decreases are consistent with the cap-rate increases we saw in the elevator sector across the board.

In the Queens submarket, the 2009 average was $133 per square foot and, in 1H10, it climbed 42 percent to $189. In the Brooklyn submarket, the 2009 average was $126 per square foot, increasing by 56 percent to $196 in 1H10.

In both Queens and Brooklyn, in this sector, there were relatively few elevator apartment building sales, and a few transactions that occurred at very high prices per square foot, due to unusually superior location, accounted for the increases in these averages.


LOOKING AT ALL this data can be a little confusing, as clear trends have not been established. This is not uncommon in a market that is trying to find its bottom. Clearly, the volume numbers show that activity is increasing, and we believe this increased volume will continue through, at least, the end of 2010.

Pricing trends show a different story. The direction of value for product types in various submarkets continues to be volatile. Some sectors are up and some sectors are down, as the market tries to establish a firm bottom. Cap-rate expansion and gross-rent-multiple decreases are the most prevalent dynamics, indicating that market conditions are continuing to exert downward pressure on values. These trends are clear but not totally consistent. Counterintuitively, however, we have seen average prices per square foot increasing for both walk-ups and elevator buildings citywide. In the walk-up sector, an 11 percent increase was observed, and in the elevator building sector, an 8 percent increase was observed. This would lead one to assume residential rents were increasing. Most participants agree that concessions are being phased out, but few believe base rents were improving.

Given that properties in the multifamily market have always been, and will likely continue to be, the market in most demand, it is not surprising to see the volume of sales increasing the way it has. This is particularly true given the low 2009 base the market is bouncing off. These properties are also the easiest to finance based upon the limited downside created by rent regulation, making them a favorite among those looking for investment properties.

As far as the future of multifamily properties goes, regulatory changes will pose challenges. There have been several bills passed by the New York State Assembly that are sitting on the agenda for the Senate to address in the fall. Market participants have been concerned about these bills for quite a while, and it will be interesting to see if the Senate will deal with them prior to the midterm elections.

Additionally, the governor has proposed his own set of modifications to the rent-regulation system. Between the bills passed by the Assembly and the governor’s proposals, it is very likely that the rent-regulation system in New York will change very tangibly before the end of this year. Additionally, recent legal decisions have created additional uncertainty and cumbersome hurdles for operators and investors in New York’s apartment buildings.

Given the potential regulatory changes in this marketplace and the importance of the multifamily sector within the New York City investment sales marketplace, Massey Knakal will be sponsoring, along with GreenPearl Events, a multifamily summit on Sept. 21 at the McGraw Hill Conference Center. This all-day event will feature several panels with some of the most prominent speakers who are active participants in New York’s multifamily market. My friend Gary Barnet, president of Extel Development, will be delivering one of the keynote addresses, and I have been asked to present the other keynote speech.

If you have interest in attending the summit or learning more about it, feel free to go to


Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,075 properties, having a market value in excess of $6.5 billion.

The Ups and Downs of the Multifamily Market