Manhattan Apartments Return to Peak Prices

Investors’ voracious appetites for multi-family buildings in Manhattan are pushing prices and capitalization rates back to market-peak levels.

Already this year, at least two top-end properties have traded for capitalization rates of 4% or lower. And a newly listed, 144-unit building at 21 West 86th Street that’s ripe for upgrading could trade at a skimpy 3% initial annual return, market players said.

While investors have turned to multi-family properties across the country for safety in an uncertain economy, the New York market is benefiting from what Eastdil Secured senior managing director Doug Harmon called a “near-perfect storm” of favorable factors. “Acquisition financing, cap rates, rebounding rents, low vacancies and a deep, enthusiastic broad-based desire [for apartments] are all functioning simultaneously at or near peak levels,” said Harmon, whose team brokered the two recent high-priced deals.

In mid-January, Kuwait’s Wafra Investment Advisory paid $134.1 million for the 144-unit Two Cooper Square in the Noho neighborhood. The $931,000/unit price translates to a cap rate of around 3.5%, said players familiar with the deal. And UDR will see an initial return of about 4% on its purchase of the Columbus Square complex, at Columbus Avenue and West 97th Street. The Highlands Ranch, Colo., REIT acquired the five-tower, 710-unit complex two weeks ago for $630 million, or $887,000/unit, from a partnership between Chetrit Group and Stellar Management, both of New York.

The listing of 21 West 86th Street, less than half a block from Central Park, is seen as a test of the demand for repositioning plays. It is expected to command bids of at least $100 million, or $694,000/unit. CBRE is shopping the property for a local family, pitching its potential for upgrading to luxury rentals or conversion into condominiums. It was built in 1927 as a hotel and converted to apartments in the 1980s.

Until recently, multi-family cap rates in Manhattan had hovered around 5% since the rental market began to soften in 2007, with only a handful of top-end properties dipping below that level. While pricing was strong compared with other cities, it was weak by New York standards. In 2005 and 2006, when investors were keen to reposition apartment properties as super-luxury rentals or convert them into high-end condos, they routinely traded for in-place capitalization rates of 4% or lower, looking for their real returns when they sold the properties down the line.

Now, some of that risky spirit is back, buoyed by improved fundamentals. Occupancy rates citywide are back to 97.7%, after dipping to 96.5% in 2009, and rents and property values are projected to continue rising.

Newer-vintage properties, like the Columbus Avenue complex UDR took down, are expected to see sub-4% cap rates this year as foreign investors compete with REITs and pension funds for core properties. And repositioning plays on Class-A properties have returned to favor. Witness UDR’s acquisition last year of the 706-unit Rivergate complex, at 401 East 34th Street, from Zucker Organization of New York for $443 million. That $627,000/unit price translated into about a 3% cap, market players said.

New York was the top apartment market in the country in 2011, according to Real Estate Alert’s Deal Database, which tracks sales of at least $25 million. More than $3.3 billion of properties traded hands, nearly triple the $1.3 billion total in 2010.

While only five large properties in Manhattan traded for more than $800,000/unit in the down days of 2008-2010, eight of last year’s deals exceeded that benchmark, as did both the Cooper Square and Columbus Avenue sales in the first two months of this year.

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