There has no doubt been a great cap rate compression for investment properties in NYC this year. This is thanks in large part to a major shift in the supply demand imbalance. In 2007, our firm had 750 exclusive listings. After a major drop in 2009, where the market was at a standstill, the inventory was never replenished. Even as of late last year, our firm was only handling around 550 listings, while maintaining a consistent market share to 2007. We found that many owners elected to hold onto their properties as there was little for them to reinvest into and alternative investments offered little but volatility.
This reduced inventory was decimated at the end of last year as long term owners looked to sell before the federal capital gains tax rates increased from effectively 15% to 23.8%. As a result, our office closed over 100 sales in December alone, with a third of those being contract closes. When all was said and done, we had 425 remaining listings come January.
What we found at the beginning of this year was the same amount of buyers were present from last year, if not more. With the volatility in the stock and commodities market, many global investors are aggressively seeking out real estate, as it is the only hard asset that cash flows. Evidence of this is that the Norwegian pension fund, Norges, which just paid about $600 million for a 49.9 percent stake in 5 buildings in New York, Washington and Boston. Their first US acquisition is only the tip of the iceberg for this $6B fund. (Later this month, I will go to China to present to several groups of investors who are also anxious to find ways to invest here.)
This all being said, we have found that most of this foreign and institutional capital is focused on Manhattan alone, with a few exceptions in Downtown Brookyn. For many, NYC is Manhattan. Regardless of how great the opportunity, many buyers and brokers still say they are only looking south of 96th Street. With everything going on in the Outer Boroughs, this bias still amazes me.
There is so much growth potential in the outer boroughs. In addition, to the million new residents that NYC is expecting in the next 10 to 15 years, there are massive residential developments which are being built to accommodate them, many of which are on the waterfront. There is not enough retail to accommodate. I once heard the CIO from Vornado say that the average consumer has 30 SF to shop in the rest of the US, but in the outer boroughs only have 5.
So where are these 7 caps: outer boroughs with retail or industrial? I’m currently handling the sale of 132-05 Atlantic Avenue. It is a 196’ wide, 2 story, 72k SF warehouse building in Queens right of the Van Wyck Expressway. It’s NN leased to the City of New York for the next 17 years. It has an in place 6.9% cap. Granted, the City does have certain termination rights with penalties, but they have been at this location for decades. It’s also around the corner from Staples, meaning that one day it could be a big box opportunity.
If you like mixed-use, the Bronx also has plenty of 7-8% caps available. We have a corner building for sale, 3060 Third Avenue, at the corner of 157th Street. It has a laundromat and four apartments above.
Finally if you want in place yield, but want to remain in Manhattan, try the retail condo at 20 West Street. Boasting a brand new lease to the Learning Experience and offering a 5% cap, 20 West Street holds a lot of potential. Located only a few blocks from the World Trade Center, the coming years will bring plenty of transformation.
Don’t get me wrong, I’m not giving up on 3% caps for multifamily if there’s enough upside and if the price per square foot is right, but if you’re a yield buyer, then now is the time to act. Even though rates have crept up in the last few weeks, you can still lock in money that is below the 5, 10, and 20 year averages and benefit from positive leverage to increase your cash-on-cash return.
James P. Nelson, Partner
James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 250 properties and loans with an aggregate value of close to $2 billion in the NY Metro Area. He can be reached at firstname.lastname@example.org or 212-660-7710.
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