Seeking Stability, NYC Investors Shift From Office To Multifamily In Q3

Investment in New York City commercial real estate slowed for the fourth straight quarter as macroeconomic trends, coupled with changes to the ways New Yorkers live and work, saw investment strategies shift.

Multifamily has become a preferred asset class for investors again after New York City apartments had seen their values fall for years, with cap rates falling and dollar volume in Manhattan up more than 50% over the previous four-quarter average, according to Avison Young data. By contrast, in the third quarter, $745M of Manhattan office properties traded, 63% below the trailing four-quarter average.

A total of $5.18B of commercial properties traded hands in NYC during the third quarter, 11% down from Q2 and 16% below the trailing four-quarter average, according to Avison Young. The total number of sales also fell, and experts expect further difficulties as the year comes to a close.

“I think we've got a tough quarter or two ahead of us based on the headwinds coming from the rate hikes,” Avison Young Tri-State Investment Sales principal James Nelson told Bisnow. “I think it's going to be very challenging. I mean, we're just starting to see the volume slowed down as a result of those June increases.”

The expiration of the 421-a tax abatement — which developers relied on to develop rental housing — had its expected impact on the land sale market, with just six development sites trading hands in Manhattan at an average price of $547 per SF, a 36% bump from the trailing average — an indicator of future luxury condo projects, Nelson said.

Multifamily's big quarter — with almost $2.2B in properties trading, a 52% increase — was driven by sales of newer, market-rate properties as rents hit record levels this summer.

The largest multifamily sale during the quarter was 19 Dutch St., a 64-story, 330K SF building in Manhattan’s Financial district purchased from developer Carmel Partners by Ponte Gadea — the family real estate office of retailer Zara’s founder Spanish billionaire Armancio Ortega — for $487.5M.

The next biggest sales were the Upper West Side’s 160 Riverside Blvd., which Equity Residential sold to A&E Real Estate for $415M, and 685 First Ave., which sold to a joint venture between Black Spruce Management and Orbach Affordable Housing Solutions for $387.5M.

Foreign buyers and local private operators were being the biggest multifamily investment sales this quarter, Nelson said, with less activity from institutional investors and REITs.

“Orbach and Black Spruce have been consistently contrarian through some of this pullback in the market,” said Avison Young investment sales analyst Sean Noone. “While others might be getting out of the market, there are others who already [have] huge footprints in New York, who see this as an opportunity to be a little bit contrarian in the market to make a big splash, and gobble up a bunch of units — and higher-quality ones, as well.”

Some investors with a foot in both multifamily and office may be looking to better balance their portfolios, Nelson said, pointing to Empire State Realty Trust, which made its first entry in the multifamily market at the beginning of this year as it sought to diversify from office.

Meanwhile, slow trade in Manhattan office buildings during the quarter led to a decline in the price per foot. Just nine sales closed in the quarter, the most expensive of which was 95 Morton St., a 220K SF property leased to companies like PayPal and Venmo, which RFR sold to Meadow Partners for $288.2M in July. 

“Earlier in the year, we saw some really big ticket office sales that took place,” Nelson said. “This quarter, we did not see significant sales.”

Office investment is slowing not just because of interest rate hikes, but also because there are fewer investors seeking to add office to their portfolios, Noone noted. As with ESRT, pension funds have also sought to diversify their holdings by pulling away from office — with many looking to retail as a potential future bright spot.

Q3 showed a notable recovery for retail investment sales in Manhattan, Nelson said, with a higher number of sales making up for a lower dollar volume across the trailing four-quarter average.

While just 15 sales happened in Manhattan, coming to $132M, the average sale price was approximately $8.8M. One of the biggest sales of the quarter was 230 Varick St., a corner retail spot that sold for $13M to Abraham Grunhut and Abraham Lipschitz in late August  — a far cry from luxury retail spots on Fifth Avenue, Nelson said, but indicative of a post-vaccine recovery for the sector.

“This is more of a commentary on the type of retail which is selling, which is really more kind of the side street neighborhood, the retail restaurants, bars … that's the stuff that is in demand,” Nelson said. “The number of sales was actually up by a third, so there's actually more retail selling — it was just the smaller dollar volume.” 

Overall, Nelson expects to see things slow across asset classes over the coming quarter and spilling into 2023. Investors may hold off buying as they wait for rates to stabilize, adding to downward pressure on pricing.

“Really where I think the concern is going to be is in the first quarter of next year. I think that's where you could really see the major impact of rising rates,” he said. “If we get to a point where rates taper off and they settle, maybe we get a little bit of stability. That's when you'll see things start to pick up again.”