More New York City Multifamily Market Info…This Time from Recent CHIP Seminar

Last week I made my annual trek to the NY Buildings show over at the Javits Center. My business partner and I walked the show floor for an hour or so, with particular focus on various building electronic key and finger print recognition entry systems. Our goal is to find a way to make sure that only tenants of record and their families  can gain access to the building. Most landlords with rent stabilized units know that there is illegal subletting going on. We’re going to explore integrating such a system with our security cameras and will advise in the future as to how well the technology works for us.

Robert Shapiro presents a look at the 2012 market.

After the show, we ventured to a panel discussion hosted by CHIP, Community Housing Improvement Program, a trade association representing more than 2,500 apartment-building owners in New York City’s five boroughs. Robert Shapiro of Massey Knakal opened with a review of the 2012 market and Peter Von Der Ahe of Marcus & Millichap offered his perspective on the near future. Much of what these two well-known brokers reported echoed things I’ve reported in past blogs, namely the extent of the year-end capital gains law triggered transaction frenzy, the crazy current values, lack of inventory, amount of money chasing deals, etc.

I found myself shaking my head at some of the recent deals that Peter reported on. He noted that 111 Kent Avenue in Williamsburg has sold to West Coast-based American Realty Advisors for $56,000,000 or $913 per sq. ft. He reported that the cap rate on the deal was 3%. Granted, this is a well designed new rental building, but it’s priced with every unit already at market rate. He also pointed to a 14 unit rental building on Irving Place and 19th Street that is in contract for 1000 per sq. ft. Assuming you could get 100 per sq. ft. for the apartments (which I imagine would require a considerable investment in unit upgrades), by the time you look at gross vs. net square feet, the likely tax rate, and other operating costs, is there room for more than a couple percent cap rate? Maybe this is a conversion play, but seems like a lot of risk to me.

Andrew Barrocas, CEO of MNS, Real Impact Real Estate continued with the bullish market prognostications. With a focus on Brooklyn, Barracas painted a picture of a market that could only go up. He made it sound like there is unlimited demand for people willing to spend $2000 per sq. ft. for apartments and claimed that the Irving Place deal referenced above was “cheap.” I’m sorry, but when I hear such unbridled bullishness, I get nervous.

Andrew Hoffman offers buyer’s perspective.

The talk that I most identified with was given by Andrew Hoffman, COO of Stonehenge Partners, which manages a portfolio of mostly Manhattan multifamily assets worth approximately $1.5 billion. Hoffman come right out and said, “It’s a hard decision to buy” in today’s market. The biggest problem his firm faces is in sourcing properties and he hesitantly stated that once properties get into the hands of the major brokers, they get shopped around to the point where the pricing makes no sense to Stonehenge. It sounds like any deals they are likely to do these days will originate from internal cold calling to other owners in hopes of uncovering a reasonable seller.

However, Hoffman contends that there are still plenty of buildings that haven’t been properly worked (though maybe not that many in the core Manhattan market where Stonehenge tends to play). “The first thing I like to see is a really dirty boiler room,” states Hoffman, a sign that there is lots of opportunity to make the building better and thus increase value. Though I’m a relatively small player without decades of experience in multifamily, it was reassuring to see that Stonehenge’s strategy for unleashing value in regulated buildings is effectively no different than mine. They look at whether all the tenants are legal. Can they do any buyouts? Where are opportunities to do capital improvements and perhaps file for MCIs? He also pointed to the potential for retail buyouts, something I never considered. Clearly in the right neighborhood, where a major upgrade in a building’s retail could drive its value, this could be an effective strategy.

The final speaker was Jeff Farkas of Farkas Management, who, after successfully growing a small family multifamily portfolio into a fairly substantial one, sold off much of his Washington Heights interests in 2005 in order to diversify into municipal bonds and more core Manhattan holdings. His task on the panel was to present the perspective of “the seller” in today’s market and he made a fairly compelling argument for why one might want to let go of some property in the current environment. He cited data about how his portfolio grew 800% from 1986 until 2005, but only 50% more in the next eight years, after he sold. What was most interesting was that while the rent roll over those last eight years grew by that same 50%, the NOI in the buildings was unchanged–primarily due to increases in taxes and water and sewage charges. Thus, Farkas contended that most of the post-sale increase in value was due the decrease in interest rates and compression of cap rates. As a result, today’s values are extremely vulnerable to a spike in interest rates–something that eventually will come our way.

At the end of the panel, my partner turned to me and said, “I’m afraid that last guy made the most sense of anyone that we heard speak.” Though I tended to agree with him, we both are still looking at potential new acquisitions. However, as suggested by one of the panelists, for it to make any sense, it will likely have to be a quiet deal that has not been shopped all over the market.