The Hottest NYC Property Sectors To Invest in This Summer
The Hottest NYC Property Sectors To Invest in This Summer – New York City is often at the vanguard of trends that ripple out to the rest of the country; it’s also typically one of the most active property investment markets in the world. And while first quarter investment sales volume in New York City dropped by 53% from the fourth quarter of 2022, according to data provided by brokerage firm Avison Young, $2.2 billion in sales were still completed in the first three months of this year.
Moreover, even a novice investor understands that down markets often represent opportunity. That’s why LoopNet spoke with Cushman & Wakefield managing director Jonathan Squires about which sectors represent the best opportunities in New York City commercial real estate right now.
Of course, according to Squires, whether or not this moment in time actually is an opportunity depends largely on the perspective of the investor.
“If you’re looking long-term and you’re planning on holding it forever, or at least as part of your family legacy, I think right now is a great time to be buying. If you’re [looking to hold a property for] a year or two, or maybe even five years … I think that’s much riskier,” Squires said.
For those investors that are on the hunt right now, Squires highlighted subsidized housing, outdoor parking/storage facilities and neighborhood retail as three of the most currently compelling opportunities in New York City.
“The rise in interest rates has driven the price down way below replacement costs, which means that you can buy multifamily properties for less than it would cost to build them, even if you got the land for free.””
Jonathan Squires, managing director, C&W Capital Markets
Squires was bullish on multifamily in general. “You have a housing crisis in New York City and in the whole country,” he said. “The rise in interest rates has driven the price [of multifamily properties] down in New York City, and in much of the country, way below replacement costs, which means that you can buy multifamily properties for less than it would cost to build them, even if you got the land for free.”
The expiration of the 421-a tax exemption is putting additional pressure on the New York City housing supply. This regulation exempted developers of new multifamily properties totaling 300 units or more in New York State from paying any local taxes for up to three years during the construction period and up to 25 years once the building was completed, provided they set aside a portion of the development for affordable units. The expiration of this exemption last year has significantly constrained the multifamily development pipeline in New York City, leading to rising rents in non-stabilized apartments and sending many New Yorkers scrambling to secure a rent-stabilized unit.
In rent-stabilized New York properties in particular, Squires said that there is a “double whammy,” of rising interest rates and regulations introduced via the New York Housing Stability & Tenant Protection Act of 2019. The result is that “certain multifamily properties can be [purchased] in New York City now for less than $100 per square foot, which is something I thought I’d never see,” Squires said.
The 2019 law restricted the extent to which owners of rent-stabilized units could increase the rent once an apartment became vacant. Prior to the Housing Stability & Tenant Protection Act, owners could increase the rent on a stabilized unit by up to 20% upon vacancy, but they are now limited to an increase that typically represents little to no additional rental revenue. Further, rental increases based on major capital improvements at subsidized properties are now limited to just 2%, a decrease from the previous allowable limit of 6%-15%, depending on the specific county.
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Despite these restrictions, or perhaps because of them, rent-stabilized properties now represent a compelling investment opportunity, according to Squires. As an example of the kinds of discounts he’s observed in the market, Squires relayed some details about a transaction he recently completed that involved a fully rent-stabilized property along the Grand Concourse in the Bronx.
“The property was purchased five years ago for $100 million,” Squires said. “The owners put $20 million into the property. We sold the property five years later [in the first quarter of 2023] for $60 million.”
Squires estimated that, on average, he’s seeing discounts of 25%-30% on rent-stabilized multifamily properties compared to just a year ago, while cap rates have expanded during the same time period from 4% to as much as 7.5%.
Outdoor Parking/Storage Facilities
Infill industrial properties — which are still excellent investments generally, according to Squires — are also driving demand for outdoor parking/storage facilities.
Over the past decade, many outdoor storage/parking facilities — which often house construction vehicles and materials, buses or other municipal vehicle fleets — were eliminated to make way for last-mile distribution centers or other industrial uses.
Because of this trend, not many of these industrial parking/storage facilities remain in New York City, and Squires said that it’s one of the few, if not the only, asset types where he’s seen sales prices increase over the past 12 months. The constraints have become so severe that Squires said some investors have been musing about “knocking down buildings” because “you can get more [rent] for outdoor storage than you can for some of these older industrial properties,” Squires said.
Squires indicated that investors interested in outdoor parking/storage facilities need to be crafty and quick in order to secure a property. “There’s really no supply, and anything that does come up gets snapped up pretty quickly.”
“I’m seeing prices that are so low, it’s hard to imagine that they can get much lower.”
Jonathan Squires, managing director, C&W
The final property type that Squires referenced was something he termed “neighborhood retail.”
The term refers to retailers providing “certain services and goods that you are not able to order from Amazon and have delivered two days later.” In a New York City context, this means anything from a local clothing boutique to a casual bistro to the neighborhood dry cleaner.
The primary types of retailers that Squires said investors should focus on are “services, restaurants and experiential retailers.”
While Squires said that retail brokers have told him that rental rates are rising for well-located properties, he estimated that cap rates for prime retail in New York City have grown to 6.5%-7% compared to 4.5%-5% a year ago. Of course, he acknowledged that those cap rates can compress notably if the property has a high-credit tenant with a long-term lease in place.
In such instances, the higher sales price is based “much more on [the tenant’s] credit than the actual real estate.”
While Squires admitted that prices could still drop further over the course of the year, he said that interested investors should be wary of waiting too long before capturing opportunities.
“I see tremendous value now,” Squires said. “I’ve seen a number of these cycles where investors decided to stay on the sidelines, and they never knew when the bottom was. And if you’re six or 12 months late on that, you can miss a lot of the upside. I mean, I’m seeing prices that are so low, it’s hard to imagine that they can get much lower.”