Amid New York Rent Regulations, Multifamily Investors Buy-Up Free-Market Units

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NEW YORK CITY-Multifamily investors are making rapid plays in the free-market property acquisition game, leaving their once beloved rent-stabilized assets on the bench since the New York State Legislature passed rent regulations this June.

Multifamily trades in New York City have slowed, but investors are still motivated to deploy capital in the sector and are especially focused on free-market units that allow for sequential rent increases and no restrictions for major capital improvements, according to Thomas Gammino, managing director at Jones Lang LaSalle, who is focused on the Upper East Side in Manhattan.

Average pricing for free-market properties jumped from $995 to $1,121 per square foot, even with less perceived upside, and could increase. Cap rates expanded by 83 basis points to 4.49%, according to the Avison Young Q1 2019 New York City Multi-Family Sales Report.

Rent regulations in the Housing Stability and Tenant Protection Act of 2019 had investors holding off on spending their dollar in the first half of the year, which is projected to keep pace until year-end.

Multi-family dollar volume is projected to hit $2.9 billion in 2019, its lowest total since 2010. Across the five boroughs property investment sales declined with Brooklyn taking the greatest hit, experiencing a 55% drop in sales volume, according to Avison Young data. Despite the math investors are bullish on free-market properties.

“We saw a rapid flight to quality, in which predominantly or entirely fair-market buildings with higher net operating incomes drove the sales market,” said Brandon Polakoff, Director of Avison Young Tri-State Investment Sales Group.

Given what’s happened in the multifamily arena since rent regulation passed in June, free-market units have presented an opportunity for landlords to price rents for whatever the local market will fetch without withholding from affordable housing laws.

“We haven’t seen trades take place in the Upper East Side since rent regulations came into play,” Gammino tells GlobeSt.com. “What we’re seeing in terms of demand are investors looking for buildings with free-market units and those buildings today are getting a premium that they wouldn’t have gotten in the past.”

Just several years ago, all of the attention was on buying rent-stabilized buildings at a premium, because rents were below market rate and there was little concern about expenses outpacing income, which is not the case with free-market units. Now investors who have the balance sheet are vying for the properties, especially for well-located assets.

Gammino is marketing 431 East 87th St., an 11,533-square-foot property that is new construction and includes condo-finish full-market rate units. For the 17-residential unit building, the asking price is $14.4 million.

“For something like this on the interior of the block, and only has a floor area ratio of four, the biggest appeal is that it’s all new construction,” Gammino said.

Bidding has been intense for the asset. In the investor pool are 1031 Exchange investors, local property owners, foreign and national-based investors, who are new to New York City.

The property transaction is expected to close year-end. In-unit amenities include washers and dryers, dishwashers and individual HVAC units. A stone’s throw away is the East 86th Street retail corridor,  home to stores such as Barnes and Noble, H&M, Shake Shack and Whole Foods. The 4, 5 and 6 trains and crosstown bus are accessible to the property.