Multi-Family Real Estate Continues to be a Solid Investment

It has been a little over 2 years since I last wrote about the opportunities which are presenting themselves in Manhattan multi-family properties.  Since that time, the Manhattan multi-family housing market has shown much more than signs of stabilization, in fact, we have seen solid, stable and consistent growth on the income side as rents have increased at approximately 8% year over year with vacancy rates dropping to less than 1% throughout Manhattan.

A demographic that has shown remarkable resiliency and strength is among the 24-34 year old group. Despite the difficult times experienced by young people in the 24-34 demographic to find jobs nationwide, Manhattan continues to see steady and increasing demand for rental housing, which suggests that the New York job market is improving.

These investments are not sexy, in that they represent an opportunity for the acquisition of prime properties for investors with a conservative total return strategy and an intermediate to long term investment horizon.  While the market for these stabilized, cash flow generating multifamily residential properties in “AAA” locations in Manhattan can be purchased at capitalization rates of 5% – 7%, we are already seeing signs that Seller are asking for prices at capitalization rates of 2008 which were running below 4%. These low single digit cap rate asking prices did not make sense in 2008 and less so now, but it is an indicator of the rising demand for investing in multi-family real estate.

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.  Over the last 2 years, investments made during this period have benefited from a rare, recession induced 10% – 20% drop in Manhattan rents.  These declines have bottomed out as we have recently seen landlords eliminating incentives that had become commonplace in order to get a tenant to sign on the dotted line of a lease; all adding to the increase in rents and the tightening of vacancy rates

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.  In addition, as the condominium market has already re-emerged, increased market prices could create conditions for significantly outsized returns on investments.