Multifamily Market Lacks Affordable Housing

NEW YORK CITY—“When we look at the sales over the past two years, we see the fourth quarter of 2015 in the multifamily sector as very clearly the top of the market and since that time the prices are down, anywhere from 5% to 10%,” says Peter Von Der Ahe, senior managing director at Marcus & Millichap.

Eric Margules, president and CEO of Margules Properties Inc., agrees, noting brokers are circling back to him on properties that were asking $12 million a year ago, which are still languishing on the market. He had offered the $9.5 to $10 million range and at the time was flat out rejected. Now, brokers are telling him they’re sharpening their pencils and maybe can make a deal in the mid-ten range.

Von Der Ahe says in the last year, debt brokers’ incomes have gone up where sales brokers’ incomes have come down. Instead of buyers competing against each other, he’s observing sellers weighing the options of adjusting prices by 10% or making a decision on whether they want to sell or not.

Von Der Ahe moderated the RealShare New York conference panel discussion titled, “Major Issues Impacting New York City’s Multifamily Sector” on Thursday. In addition to Margules, Michael Schneider, COO, Aristone Capital; David Greenberg, managing director, Jane Capital; Richard Conley, senior vice president, The Community Preservation Corporation; and Scott Rowland, managing director, real estate, RemsenCapital served as panelists.

With Marcus & Millichap, which has over 100 multifamily properties, for sales over the past year and a half, 40% of the equity is foreign, and often from high net worth families. These investors look at New York City real estate as a cash alternative because unlike with other markets, with a high degree of certainty, they can assume they will be able to exit any of these investments within 90 days, if they choose to, says Von Der Ahe.

As a subordinated debt lender, Aristone Capital caters to middle markets with A/B structures, construction, bridge, and mezzanine loans, and transitional transactions. Schneider notes that his investors also “love New York City” because “real estate that transacts in New York City is far more liquid than anywhere else.”

While pursuing emerging markets for multifamily properties, Jane Capital invested in Ridgewood, Queens, six years ago, relocating their offices there in 2013. Greenberg says sellers did not fully understand what they had in their properties, and brokers were not quite in the area. Thus, the company became hyper-focused on the market, doing high volume. The properties were smaller, so many of the big players were not interested. Thus, Jane Capital found a niche, without a great deal of competition, where they achieved very high yields.

For emerging markets, Margules says he looks to be near a transportation hub, such as in Jersey City, Journal Square, near the PATH train. His company sees the 7 train to Queens as the new L train. With the MTA’s plans to halt L service in 2019 for more than two years for Hurricane Sandy damage repairs, the 7 train, going to Grand Central Terminal and the High Line, will grow in importance.

Working on value-add properties, Margules focuses on getting vacancies to bring apartments to market value. “I try to find that diamond in the rough, where I can rapidly raise the rent,” he says.

Vacancies are easier to obtain in outlying boroughs, according to Margules. “There is such a disparity with the Manhattan $100 rent stabilized apartment when they are probably worth $3,500 once you get a vacancy,” he says. “You don’t have that disparity in Queens. So, vacancies are easier to come by and once you renovate them you can really jack up the rent, 40 or 60%.”

In contrast, Conley from the CPC emphasizes that an overwhelming demand for affordable multifamily housing with its limited, shrinking supply is causing a great deal of pain for people.

“One of the biggest issues facing people is the affordability for existing residents,” says Conley. “More than 700,000 households in the city are rent challenged, meaning they are paying more than 30 percent of their income to rent. And these are folks that don’t make a lot of money.”

The New York Times in 2016 reported more than half of renters in the city are cost-burdened.

Founded in the 1974, at the initiative of David Rockefeller, the CPC is a 501(c)(3) mortgage financing company created with the City of New York and a consortium of commercial banks. It has a mission to rebuild aging and distressed neighborhoods. To date, it has financed more than 170,660 affordable housing units.

Conley explains that the values of properties were so low that people were walking away from buildings into the 1980s. The corporation began lending construction loans and current loans in areas including the South Bronx and East New York.

The corporation kept their model intact and eventually established relationships with the city and state pension fund systems that provided permanent financing. They continue to finance on the corporate side with tax credit deals, creating subsidies for co-ops and construction where the city wants to see new affordable properties built in affordable neighborhoods.

The company is not regulated and its prices are higher than the open market but they tend to lend to riskier profiles. Although Mayor Bill De Blasio also has initiated an affordable housing program, the problem of affordable housing continues to grow, according to Conley.

“It always has been getting tighter and tighter because of the pressures in neighborhoods that have become attractive investments from a commercial angle,” says Conley. “We have rent stabilization but incomes haven’t kept up with the appreciation price and landlords don’t want to hear that.”