The Opportunities Investing in the Multi-family Real Estate Sector

While investors in the real estate business continue to wait for the commercial office tsunami to hit the shore, as will inevitably be the case, investors would be well served to take a close look at the opportunities which are presenting themselves in Manhattan multi-family properties.  Unlike the rest of the commercial real estate market, the Manhattan multi-family housing market is showing signs of stabilization, and presents an opportunity for the acquisition of prime properties for investors with a conservative total return strategy and an intermediate to long term investment horizon.  The disruption in the real estate and mortgage markets has created a rare and, no doubt, temporary opportunity to purchase mature, stabilized, cash flow generating multifamily residential properties in “AAA” locations on New York City’s Manhattan Island at cyclically low prices.  Well located Manhattan properties can now be purchased at capitalization rates of 5% – 7% which permit economic operation as a rental property compared to capitalization rates of a few years ago that commonly ran below 3% (were often negative), and which necessitated a condominium conversion as the only viable economic strategy.

Multi-family residential is the most stable and liquid of commercial real estate investments in Manhattan where rental apartments constitute approximately 65% of the entire housing stock.  Manhattan multi-family properties provide reliable current cash flow with embedded long term upside potential due to systemic supply constraints (ensuring demand), and residential rent regulations which generally hold apartment rents below market but permit predictable, annual rental increases.  However, investments made during this period will further benefit from a rare, recession induced 10% – 20% drop in Manhattan rents experienced over the last year.  These declines are now approaching bottom as we have recently seen landlords reducing and, in many cases, eliminating incentives that had become commonplace in order to get a tenant to sign on the dotted line of a lease.  Thus, investors who take advantage of the current market will see a window of lower prices due not only to increased yield requirements, but also lower NOI’s (net operating income) from reduced market rents.  As the more secular demand and supply trends reassert themselves and rents begin to rise again, this added window will close.

Finally, multi-family residential properties are traditionally and currently the most liquid of any asset class in commercial real estate.  This is especially true today with the U.S. Government Sponsored Entities such as Freddie Mac, Fannie Mae and HUD, as well as numerous commercial banks providing a steady stream of inexpensive debt capital to the multi-family markets.  This liquidity enables reliable reversion expectations for investors through refinancings or asset sales.  When valued on a rental basis, Manhattan multi-family properties purchased today should provide total returns in mid to low teens with current (pre-tax) cash-on-cash returns in the mid to high single digits.  When the condominium market re-emerges at some point in the future, increased market prices could create conditions for significantly outsized returns on investments.