MARKET HIGHLIGHT, SEPTEMBER 2006
NEW YORK CITY BOROUGHS MARKET HIGHLIGHT
New York City Boroughs Multifamily Market
Historically, low interest rates and increasing confidence in the outer boroughs has created new watermark levels in pricing, with some areas generating low single-digit cap rates and double digit multiples of the rent. The recent acquisition of 2705 Colden Avenue in the Bronx for almost 9.5 times the rent roll — a little over a 6 percent capitalization rate and over $100,000 per unit — has most appraisers perplexed.
What can we expect for the next 12 to 18 months? With rising interest rates, skyrocketing fuel prices and more product on the market, my high school economics teacher would have told me that prices are poised for a drop. If sellers only knew this!
The widening gap between seller expectations and buyer desires in the residential market is making renting a sensible alternative for the time being. This demand for rental housing is making the multifamily product as desirable as ever. Add to this the unique conditions of rent stabilization and rent control, we’re looking at a perfect storm for today’s investor.
A prominent landlord with thousands of Bronx and Manhattan apartments once told me that rent stabilization has been both a blessing and a curse. The curse limits the ability to increase rents dramatically to market levels, while the blessing virtually guarantees consistent growth, year after year. So much so that many institutional type investors with access to pension funds and syndications of wealthy individuals have sensed the security and risk averse nature of these types of investments.
The South Bronx, along Third Avenue and 149th Street, is seeing a multimillion dollar commitment for nearly 1 million square feet of retail, office and residential space from Blackacre Capital Management LLC and Cypress Equities. The Related Companies has also begun the long awaited redevelopment of Third Avenue between 153rd and 156th Streets.
Along Fordham Road and to the south by 187th Street, and east by the Bronx Zoo, we are seeing a tremendous shortage of student housing as a result of Fordham University’s attraction to students outside of the New York area. Little Italy of Bronx, as it’s often referred to, is one of the borough’s best kept secrets. With a price of $50 per buildable foot, it is almost twice that of the borough’s average for vacant land.
As refinance money dries up and 1031 tax exchange buyers complete their exchanges, the pendulum will begin swinging back in the buyer’s direction. It’s the owner who goes beyond the Band-Aid type improvements and renovations in their properties that will still see the premium offers.
But if it’s double digit returns you’re looking for, you’ll still have to roll up your sleeves as you deal with hundreds of housing violations, non-paying tenants and years of deferred maintenance. Or as we brokers refer to them,“value added opportunities.”
— Marco Lala, managing partner, Massey Knakal Realty Services
Redevelopment of Industrial Facilities into Residential Housing
Redevelopment of industrial facilities into residential developments continues to dominate the landscape in New York City and the boroughs.
Currently, the New York commercial and industrial market is viewed as extremely tight with prices rising each day. Prominent developers such as the Annalex Group, Toll Brothers, Milestone Group and Avalon Bay are actively looking for large sites located in prime areas such as Queens or Brooklyn. Ideally, the banks like to finance the properties as rentals. One centrally located development site currently on the market has an offer of more than $100 million. Just 2 years ago, this property would have sold for 40 percent less.
Long Island City’s first residential condominium development site is viewed as the basis for this price adjustment. Developers are looking at the success of Arris Lofts, which is located at Court Square near the Citibank Building. With prices averaging $700 per square foot, 50 percent of the apartments have been spoken for. This success has encouraged developers to have confidence in the Long Island City area. They see that there is a big demand from families willing to relocate from New York City and parts of Queens, and the acquisition cost in Long Island City is 40 percent cheaper than other areas — with almost the same return. One property still available, a 205,000-square-foot development site having three-street frontage and no height restrictions is perfect for a condo or rental.
As a result of Long Island City’s success, other Queens submarkets such as Astoria, Sunnyside and Flushing, are seeing an overflow of interest. People are now realizing that in today’s market climate of low interest rates and 90 percent financing, they can afford to purchase a condominium, but cannot afford to be in the prime locations. Therefore people are willing to travel 20 minutes more to join the submarket where there is an existing residential neighborhood and already established amenities.
In Brooklyn, the success of Schaefer Landing and the recent development of the areas surrounding McCarren Park have brought tremendous response from developers. This area is considered a prime location, with apartments offering Manhattan skyline views, neighborhood parks, a new large city pool, and the amenities that are in the neighborhood, i.e., restaurants, supermarkets and art galleries.
Strong continued development is being supported by high absorption rates.
— David Junik, senior director for Greiner-Maltz
New York City Boroughs Investment Market
Activity in the outer borough investment sales market is mounting at a quickening pace. Two fundamental reasons for the increased volume are the constant demand for additional residential housing and the fact that the outer borough markets remain underserved from a commercial perspective. Low vacancy levels exist in all categories of the rental market including retail, residential, office and industrial space. The city has exploited its strengths in upzoning areas that can afford more density and downzoning areas where the infrastructure cannot support its increases. The demand to live, work and enjoy the diverse culture of the outer boroughs is at record levels.
The Brooklyn market in recent years has become extremely attractive for investors. With a population of approximately 3 million people, Brooklyn is considered the fourth largest city in the United States. Recent projections for the housing market suggest that the borough will realize 100,000 units in housing in the next 10 years. Investment and development opportunities exist throughout the borough.
The Downtown Brooklyn market will gain approximately 3 million square feet of office space and approximately 15,000 units of housing in the next 5 years. These numbers are for projects already in the ground and for plans that are in the filing process. Highly sought after land on the Brooklyn waterfront can range from $125 to $200 per buildable foot. In these markets of large-scale development, existing building sales are at record levels as well. Average cap rates are at 7 percent and gross rent multiples are at 10 percent borough-wide. With this type of density being created by additional development, there is a great deal of activity in the retail sector. In a 1-year period, average retail rents borough-wide were up 10 percent. New construction has been absorbed as quickly as it can be built in the retail, residential and office sectors.
Local retailers and national companies are realizing the density, transportation opportunities and quality of the local infrastructure. While historical residential neighborhoods maintain their charm, many areas throughout the borough will continue to see a surge in activity. The overall forecast for existing building sales in all market segments will remain strong and demand for development will continue to flourish.
— Brian Leary, managing partner of the Brooklyn office for Massey Knakal Realty Services
New York City Boroughs Retail Market
There are many reasons for the robust health and the continued growth of retail markets in the New York City boroughs. One of the primary reasons is the significant growth in population throughout the entire metropolitan region, which has ignited a growing demand for housing as well as retail.
Park Slope in Brooklyn is one of the clearest examples of a neighborhood that has benefited from this population explosion. The combination of the quality of housing in the area and its proximity to Prospect Park has made this neighborhood the primary choice of young professionals and their families. Wherever this dynamic exists, retail services are sure to follow. In many cases, the nature of this historical neighborhood has determined the size and quality of the retail stores. For example, the commercial buildings along 5th Avenue and 7th Avenue are older and have become home to owner-managed, high-end boutiques and restaurants. During the past decade the asking rents in the area have gone from an average of $40 per square foot to upwards of $100 per square foot — rivaling the long established Montague Street in Brooklyn Heights.
On the other end of the spectrum, the Department of City Planning in Brooklyn has developed a comprehensive and far-reaching development plan for downtown Brooklyn. The development area encompasses the Fulton Mall, the Brooklyn Academy of Music (BAM) cultural district, DUMBO and the Atlantic Yards. While there has been a temporary set back in the plans for the Atlantic Yards as the community determines the negative impact such a large development would have on its neighborhoods, it is important to note that the first phase of the Atlantic Yards redevelopment, the Atlantic Center, has been an unqualified success. The center is fully occupied, there is a waiting list and the original asking rent of $70 per square foot has doubled.
The borough of Queens is experiencing change as well. Developers such as the Muss Organization and Vornado Realty Trust are taking advantage of some of the larger tracts of underdeveloped land in the borough. In Flushing Meadow, there are plans for residential and retail development along with entertainment venues and office space. Many of these projects are still in the development stages, but the strength of the market is clear.
The Queens Center, owned by the Macerich Group at Woodhaven Boulevard, is one of the most successful shopping centers nationally. The center has reported asking rents of $15 per square foot, and as a result has recently expanded. The other developers, among them the Vornado Realty Trust, are developing retail along Queens Boulevard in Rego Park and non-traditional anchors like Target are reported to be signing on. Asking rents in the Queens Boulevard developments are in the $125-per-square-foot range. These larger developments differ radically from the very established Austin Street in Forest Hills. This shopping street has been a magnet for Queens shoppers for more than 50 years. The street is home to mainstream upscale retailers like Ann Taylor and is now being considered as a third and fourth location for more cutting edge Manhattan retailers like Scoop and Intermix. Asking rents along Austin street are in the $150-per-square-foot range.
Staten Island is a world unto itself, nonetheless it’s main shopping areas, such as Richmond Hill, Forest Avenue and Hyland Boulevard, are healthy and demand for space outstrips supply. Major stores, including Marshall’s, Kohl’s, JC Penney, Sears and Best Buy have long understood the strength of the demand in this market. The Bronx is finally getting the attention it deserves. Fordham Road is New York City’s third largest retail corridor with more than 200 stores, including The Children’s Place, The GAP, PC Richards and Seaman’s Furniture. The Grand Concourse and its magnificent residential buildings are being renovated.
— Christine Emery, senior managing director, Lansco Corporation/CORFAC
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