The Opportunities Investing in Multi-family Properties

According to Steven A. Kirschenbaum of Madison Advisory Group, Investors in the real estate business seem to have begun to move back into the commercial office market despite little job growth to fill office buildings. What has become abundantly clear is that  investors have taken a close look at the opportunities in Manhattan multi-family properties, so much so that we are seeing extremely strong competition for these properties and by investors that never before looked at this sector.  The disruption in the real estate and mortgage markets starting in 2008 created a rare but now seemingly 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.  Beginning in 2010, well located Manhattan properties were being purchased at capitalization rates of 5% – 7% which permitted economic operation as a rental property, compared to capitalization rates of  the period from 2005-2008 that commonly ran below 3% (and were often negative), and which necessitated a condominium conversion as the only viable economic strategy.

Investments made during the 2010-2012 period benefited from the 2008-2010 recession induced 10% – 20% drop in Manhattan rents experienced from 2008-2010 but which rents roared back from 2010-2012.  Landlords have eliminated incentives that had become commonplace in order to get a tenant to sign on the dotted line of a lease.  The current strong rental market combined with the continuing low interest rate environment has pushed Seller to be asking Buyers to see deals at well below 4% Caps, Gross Rent Multiples at 15x and higher, and tenement buidlings at $750 plus per square foot.

That said, Multi-family residential is still 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.  Thus, investors who take advantage of the current market will see higher prices  for deals but, depending on your investment horizon, still make for a sound investment.