State of the Market: Q2 2022 with James Nelson and Brandon Polakoff

I'm James Nelson. I'm the principal and head of Tri State Investment Sales here at Avis and Young, Brandon Polakoff. Brandon, you want to. Brandon's the principal and executive director of Tri State Investment Sales. He's also our regional authority on multifamily here. So he's going to be talking to us about what's going on in that portion of the market. So we want to keep these pretty tight. So we've been keeping these to 30 minutes. We want to provide the information. Usually one of the questions that I get right off the bat is will we have a copy of this report for you? Absolutely. For those of you who rsvp we will send out a, we can send out a recording of this as well as the actual deck so you have the information. We really pride ourselves in the quality of information that we put forth. We really go through and vet every single sale that takes place. We can only do that because we have a team, you know, of close to three dozen people. Many are on the line right now. They painstakingly go through, call the seller, call the buyer, look at all the sources, you know, whenever possible we're trying to get our hands on the information. If we didn't sell it ourselves, we want to know, you know, what was the tenancy of the property condition. So it's our pleasure to be able to share these findings with you. So I think with that, you know, just to give a quick macro overview. Obviously a lot going on with, with yet another rate hike yesterday with another 75 bips. I know there's a lot of concerns questions across the industry. What is this going to do to impact sales volume, pricing, you know, and it's to really break down valuation to its two truest, you know, basic points. You've got cap rate and you've got rental growth, noi growth which are the two major levers. And I know Brandon's going to talk more about this when we talk about what these rate increases have done to multifamily cap rates. But not to spoil the end of his movie, but you know, the rent growth has been exceptional and that's really what's offsetting a lot of this downward pressure that I think we would other be otherwise be seen. So but that being said, whenever we do these sales reports, I always preface it by saying these reports are really rear view indicators because these sales which encompass the second quarter were likely negotiated earlier in the year. So this is really telling us what was going on in the market in January, February, March. Again we didn't even have that first rate uptick until the middle of March and then that first 75 bip increase happened in the mid of June. So we are not going to see the impact of pricing and volume on those two rate hikes until our third quarter and more likely our fourth quarter. So sorry to disappoint. If you know, you were looking for that immediate impact, especially for those of you who are looking out, buying, looking for bargains and we are certainly seeing opportunities and Brandon's going to talk a little bit more about that because I think where we can be most helpful to you all is what we're seeing real time and that's what you know, where contracts getting signed, where deals getting done today. Right. So but that being said, let's look at the history of what we have here and the overview for the New York City sales market. So if you look at the second quarter and again we look at all sales above $5 million, multifamily, retail, land, office, those are the four major food groups that we're tracking. And as you can see here, if you annualize the first half of the year, it's still looking like a very solid year. Certainly well above, you know, our pandemic years of 2021. You know, if you annualize the first half activity, it's a pretty solid year, $26 billion in sales, it's still off the, you know, the 10 year average of 35 billion. So the question of course will be, you know, what's going to happen once the third and fourth quarter play out, based on what I said previously. But you could see, you know, the dollar volume, Tom, Manhattan, you know, again, 7% increase over the trailing four quarters. But Brooklyn having a very strong quarter with over a billion of trades. Queens having a big jump as well as the Bronx with close to 400 million. It was really only upper Manhattan where we saw very little dollar volume. And again, if you all have questions along the way, you know, we want to make this conversational so you know, feel free to jump in. We again, we made this a little less formal so we don't have the chat function. So if you want to come off mute, you've got a question, feel free to jump in. Okay, so as far as the number of sales we have in Manhattan, Queens, Bronx, upper Manhattan, we like green arrows. So we've got increased number of sales. It was only Brooklyn that had a decline. So Brooklyn had a lot of dollar volume, not as many trades. That means we're seeing more significant sales out there. It's Looking like if you annualize the first half of this year, you're looking at over 600 sales. The average is a thousand. So you know, again we talk about is it a seller's market, is the buyer's market when you know you only have 6, 700 properties selling per year in New York City. You know, regardless of kind of the macro trends that are happening, you know, there's always going to be that supply, demand imbalance. There's just not a lot of assets that the trade here every year. So with that, let's go ahead and jump into multifamily. So Brandon, if you want to kind of take us through this slide and some of the, you know, noteworthy sales that took place in the second quarter and then we can kind of jump into a little bit of Q and A with other things that are happening in the multifamily space.

Sure, yeah. Thank you. I think if we want to go back, call it 10 years, you can obviously see the rise up till 2015, 2016, where you know, the average price per foot was over 1,000 a foot. We were looking at sub four caps. And then we, you see the interjection around 2019. That's, that's really when HSTPA hit, when cap rates started to balloon and price per foot came down pretty drastically. I would also note, and we could probably look back at this, I don't have it in front of me, but I'm sure the number of sales anecdotally came down pretty drastically as well. As we kind of went into 2020, you know, the number of sales and the cap rates started to again, it slightly increased. What we really saw at the peak of COVID you'll see price per foot came down pretty drastically, but ultimately there's weren't many trades. And then coming to today, we saw a massive jump in sales. What does that do? The buyer demand increases, we see cap rates come down, we see price per foot came up. Really just a function of supply and demand. And that's to today. But I think importantly to James's note, you know, we're, we're looking in a rear view mirror. So I actually came up in a few slides with some questions that'll give you a sense of where we are today. But this is, you know, as of Q2, this is where we stand, where the market candidly was on fire dating back to about August, about a year ago from today. So I guess we can quickly go to the next slide. 1. Yeah, there we go. Everyone loves the big juicy sales. So 8 Spruce street, this was sold by Brookfield and Nuveen to Blackstone. Some high level points. This was about a million square feet sold for $894 a foot. I think there wasn't much retail on this building. I think what's important to note here on all these sales. So these were all for old legacy 421A sales. So what's always important to track. And I saw Jesse Terry's on here and he's, he's very in tune with these, with these tax abatements. But what's important to track so is when were these projects completed and when were these abatements, when did they expire? Because when these units roll, they come out of rent regulation when the abatement expires as long as the right riders are in place. So in this case Spruce street, it was completed in 2012. The abatement goes through 2032. So you'll start to see the, the tax abatement burn off in the next couple of years. This was unique from the other two major sales. So 255 West 94th street and 140 Riverside. So 255 West 94th that was sold by related to a fund from Korea. It was about a 4.13 cap on the sale. What I think is important on that, I think the two major things. One, that was completed in 20, sorry, 2003. So that abatement actually expires next year in 2023. Which means that the units that are subject to rent regulation as part of the abatement will, will be undone. And, and those units can go to market. So you can see a big pop. I would say the other big thing about the Lyric, anecdotally, I think that the biggest challenge it had on the market was just there's a massive retail component. So there's a TD Bank, a Starbucks. There was a New York Sports Club. I think it's called Symphony Space, which is like a music venue, theater venue. So that obviously presented a challenge because it wasn't just strictly multifamily. And then 140 Riverside, this was sold by Equity Residential to A E. It was about 723 a foot. Just, you know, note it was completed in 2005 and the abatement expires in 2025, which is three years out. So probably at this point you're mostly buying, you know, with very limited tax benefit. They're mostly all phased in and I'm sure they're going to inject a lot of capital into the building. And look to improve it and just continue to push rents over the next three to five years.

That's great. Thank you, Brandon. So let's now talk about some of the trends questions here. So maybe you all saw that recent article in the New York Post that was based on the StreetEasy study. And I was actually a little surprised myself because I think if you ask most people, certainly some of the, you know, young professionals we have here in the office out there looking for apartments, I mean, you just hear these horror stories. And yet Street Easy was now saying, I think, Brandon, correct me if I'm wrong, 30, 40,000 units available. Their take was that this was now at a point where you have tenants actually vacating apartments because they cannot afford the rents. I think kind of, you know, you know, their thought was, you know, have we reached a tipping point? So we'd love to get your thoughts on what's going on with the rental market and what we can expect for the remainder of the year.

Sure, yeah. So close. So 66,000 apartments of inventory in Q2, they predicted about a third of those were actually tenants that just couldn't afford their rent. Another I think, fact that I thought was very interesting and not surprising was that units that were listed in 20 and 20, 2020 and 2021, the asking rent on those units today is 20% higher, which is leading that, that growth. What I can say anecdotally is the rents aren't slowing down at this juncture. So we are marketing two dozen multi family properties right now. And this is really across Brooklyn, Manhattan, Queens, any fair market rent. So we just, we actually are going to be bringing to market a large property in Park Slope in the next week or two. They just had nine units roll in July alone. And for each one of those units, the rent increased between 25 and 30%, which is actually why we held off from marketing the asset. And you know, the cap rate on that sale changes dramatically. And when you look at what's going to be rolling in August as well, and I just lost the screen, but there's going to be another huge pop in those rents. So can you all still hear me? James, can you hear me still?

Yeah, no, we can hear you. And hopefully everybody can still see our slide here that says a closer look at multifamily. So, yeah, no, Brandon, that's super helpful. And I think the other point was, and Chip has been very vocal and they've been doing a good job for the industry on the social media channels talking about these 15 or 20,000 apartments that are just, you know, laying there empty and unrenovated. And that's, that's for a separate, a separate market report on why that is. But in short it doesn't make sense for landlords to pay to renovate those if they can only get I think a max of an $84 a month increase. So you know, we're hopeful that, that that'll still happen. And I mean Brandon, I don't know if you're going to touch on this but, but obviously with good cause, you know, at bay as some, some good, good news for the multifamily space finally. So I guess with that just to keep things moving and we already kind of alluded to it, interest rate hikes, early spring. Yeah, you know that report I think we talked about why caps are still lower and dollar volume rose. You know again that's, that's that whole, you know, rear view mirror thing.

But let me just do the last question real quick because I think I can go. And if you want to ask me separately about the profile buyers, what's trading, that kind of thing, I'm happy to speak offline. I think just a few interesting statistics. To James's point. We really dive into every sale so we don't want to just know price per foot location because every building is so different. I think something that I, my takeaway that was interesting, I think what the market might be interested in knowing. So in Q2 the average building, so on average the percentage of rent regulation was 29% which lines up with what we usually receive as far as requirements from buyers that they typically stay away from large scale regulation. Again this is for Manhattan, sorry. And the average price per foot for any building that was north of 29% rent regulated was 552 a foot. It's not that surprising but if you look back at what the market average was, the market average was, was about about $800 a foot. I think it was $813 a foot. So there's really, it goes to show that those fair market assets are still, they're still generating, you know, a serious dollar amount. I think it's the, the rent regulated assets that have just been devalued so much since 2019 that have really dragged down that average from you know, the 2015 high that we were looking at. I think one other thing I think that's interesting though, especially with the article that came out this morning that I don't want to speak too much about but about tax class 2A 2B buildings. I think it was really interesting. Only 16 of the 37 multifamily mixed use sales in Q2 were actually tax class 2A 2B. And what you found in Q2 that were that there was a lot of large portfolios and larger assets that sold which kind of steered away from the trend that we had seen for a while of these smaller buildings with tax class protection being a huge point. And I think the reason for this happens to be just the rent growth because when you have so many units and buyers can underwrite so much growth, they can really expand the income and that's why they were so targeted on it. Whereas if you have seven to 10 units, there's only so much additional revenue that you can generate. The last thing and James, then I'll let you go. Cap rates are very hard to determine right now. And I think we'll start to have better apples to apples comparison as we go on in time. But it really on a building by building basis depended on when Covid leases were rolling. So a 4 cap in one building and a 5 cap in the other might be, the identity might be identical buildings. But if one building had a lot of leases that were rolling in June, July, August, the cap rates inevitably going to be lower. But that same pop is going to be there as a building in August that sells, that had all their leases turn and call it, you know, February, March, if that makes any sense. So a lot of it was timing, dictating what the cap rates were.

Super helpful. And again I think the importance is really to kind of dig into the, you know, the figures. And so we're very grateful kind of the time that you take to kind of really understand the trends. And it's hard to paint the multifamily market with one brush. Just like it's very difficult to, you know, you know, paint the entire investment sales market. It's so specific to asset class, location profile. So we're going to keep moving here and talk about land sales which again not, not a lot of sales here. You know, still only about 10 pieces of land that sold average is about 360 a buildable. I think what's you know, telling here is obviously with the expiration of the 421 a we're not seeing new rental developments out there. You know, there is certainly demand for condo development. You know, we're still seeing some extraordinary sales on the condo front, 25003000 a foot in some cases even higher. So there is still demand for that. But very, very few sales that we're seeing out there. So I think that's going to also help the, you know, the rental market moving forward because in two to three years there's not going to be any new supply. So hopefully Albany can figure out, you know, how to incentivize developers again to build. So but if you look at some of these sales that took place 260 South street for $78 million this is over a 300,000 square foot site that should treat bought from CIM and L&M partners. This has plans for 1300 units on a 64 and 70 story tower. So unknown whether this will be rental or condo. You've got the corner of 75th and 3rd Avenue that sold for $61 million. That's 470A buildable foot. L Odd was the buyer from Premier Equities Plans that would not be surprised if this was for condo development. Lastly we have 48589 Ninth Avenue this was over 100,000ft of buildable. So also a 460A buildable foot trade. JD Jasper was the buyer and again with with additional rights you can get this up to over a hundred thousand feet of buildables. So that's again not, not a lot of development to speak to. Meanwhile on the retail front, you know here I wouldn't pay too much attention to kind of the price swings. Retail as you know is so dependent on location, side street versus avenue versus tenancy. So you know when you hear 1250 a foot, retail prices are down 36% on a per square foot basis. Well look, I would argue that over 14 sales the sample size just isn't big enough. But look, I think what is meaningful, as you see the cap rates are definitely trending up here. You know we're seeing a lot of retail in the market north of a 5 cap that's out there. You know in some cases we have retail being offered at 7 8% caps. Arguably those situations have downside. Not upside down Tom, but looking at some of the sales that took place this past quarter. 12 West 48th street this was a trade that sold for $49.5 million. This was a 4.3 cap. This was a brand new glass four story 75 foot elevator building. You had Citibank on the ground floor and a cafe, you know, glass jewel box, 15 to 18 foot high ceilings. There was doctor's offices above 857 Broadway sells for $22 million. This was a 1031 buyer who paid you know, a strong $1900 a foot. I'm sure they like the fact that this had 144ft of wraparound frontage. Here you had two ground floor retail spaces, including Pratt as well as Chloe's Soft Serve Fruit. And then lastly, 415 W. 13th St. In the Meatpacking here you've got. The buyer was Torchlight, if I'm not mistaken. This was a distressed deal as there was at one point an $18 million loan. So it looks like maybe the sponsor, the borrower, was able to get out from under a $21 million price. That's over $1,900 a foot, which is pretty impressive. Next is office. Still not a lot of trades here. So everybody keeps waiting to keep asking James, what, you know, where are these class B C office buildings that are 50% vacant? How do we convert them to residential? We're spending a thinking about that right now. But so far it's still been, you know, the 60, you know, the class A trophy type deals that are still dominating the headlines. So it's still showing a mid four cap at over $1200 a foot. Meaningful sales. Here was 450 Park Avenue for $445 million, 1300 a foot. SL Green purchases this from Oxford Properties and Crown. You know, SL Green has been the biggest net seller in the market over the last couple of years. So I think that's encouraging that they're buying back in. Obviously they've had great leasing traction at 1 Vanderbilt. So looking to parlay here, you know, this building was mostly occupied. You had Benco, Brandesco, BDT Capital Partners, Oxford, and then Aston Martin is going to go in on the ground floor. You also have 475 Fifth Avenue trading for $291 million. Over a thousand a foot, by the way. 450 park was 1300 a foot here at 475 Fifth. RFR buys this building from Nuveen. It's a 23 story office building with 100ft of wraparound frontage. 68 units, you know, almost fully occupied. They got $180 million of debt on that from Citigroup. Lastly, 352 West 52nd street sells for $47.5 million. CVEST was the buyer here from Opus. This was a medical office building in Hell's Kitchen. You had NYU Langone, had an ambulatory care center there for almost the entire building. So again, these are still mostly, you know, fully occupied, more core type assets where the buyers can continue to reposition. But we didn't have any sizable transactions this year with significant vacancies. So I think just to wrap things up. You know, we're obviously keeping a very close look at what, what interest rates are going to do to investor appetite for certainly cap rates. We're watching what's going on with rental growth and the one thing that we talked about kind of offsetting this is this exceptional demand. So will we see more of these conversions of these office buildings to residential? I know Silverstein did one down on John street last quarter and so, you know, a lot of this has to do with zoning, you know. So is Albany going to be flexible allowing redevelopment? If so will the requirements. So a lot going on. I think I'll stop there. And if anyone else, you know, has any questions and yes, we do have a chat function. So if you'd rather just put your question in chat, we're happy to do that or if anyone just wants to come off mute, we're happy to do that as well. Or Brandon, I can also flip it back to you and ask if there's anything else we, we missed.

Yeah, I mean I think kind of just, I think the one thing that I, I kind of alluded to it towards the end was just how at least in the, you know, in the multifamily it's also the office space and it'll impact retail and everything is, you know, I think when interest rates change pretty dramatically, you know, on larger sales there's obviously generally more debt required or financing required. So and then in like the smaller space you have a lot more cash buyers. So it'll be interesting to kind of see if the trend continues of these large scale properties selling or if the rates are going to have a much bigger impact on those properties than they will. And you know that at 5 to call $20 million space, that's something I'm going to keep an eye on though obviously it's fun to do larger transactions so hopefully we can get our hands on them.

Good. And I do, I see a question about vacant retail sites, you know, cap rates and. Great question. Look, we're still and I think next quarter we'll have Brent Gladowski, who leads our retail sales come in and really talk about what's going on there. But in short, we are still seeing strong user demand for vacant retail. So we sold a retail condo at 163 Dwayne. That was the former Boule Bakery. I think we're closing next week on 515 Canal to a not for profit. So the smaller vacant retail properties, there's still demand there from end users. I still think it's an incredible opportunity in the Market. Many of you know, Jeff Sutton and you know, legendary retail investor, and he really pioneered the idea of kind of bringing the tenant to the table. You know, open countless Payless, Walgreens, and I think now more than ever, with the amount of vacant retail out there, if you have strong tenant relationships that you can bring to the table, sign a lease concurrent with a contract. If Scott Singer, who heads our debt equity group, is on the line, he would tell you how much easier that becomes to finance as well. So I think huge opportunity there. I also wrote a white paper that talked about how bullish I am on retail, especially with high street. We're handling some assets right now in SoHo. And you know, if peak rent on Broadway was 1000 a foot, you know, a lot of these rents today are at 202 50. So I think what you see is that the pendulum has swung way too far. And, you know, will retail rents on Broadway go back up to 1,000 a foot? You know, hopefully one day if you're an owner of a property there. But I think, you know, they're certainly not going to stay at 250. And, you know, we're already seeing foot traffic. And by the way, for any of you listening who need foot traffic studies, we've got incredible analytic tools here that use anonymized cell phone data. So you could give us an address and we could tell you what is the foot traffic today versus, you know, three years ago, you know, or usually people want to see what it was compared to February 2020 right before COVID And the good news, some of these areas, like Times Square, we're seeing that the pedestrian counts are now at the same level as where they were pre Covid. And, you know, that's still without international tourism coming back to where it was before. So I think a lot, a lot of reasons to be positive here and you know, just to summarize, a lot going on out there. So any specific questions you have about asset classes, neighborhoods, we're happy to share this report with you, our sales comps. But anything that comes up, you know, feel free to reach out to myself or Brandon or anyone on, on our team. We're uniquely positioned out there that we have one sales group. So sometimes people ask, you know, james, does it matter if I call you? Brandon, doesn't matter. Call, you know, call any of us. We're all piped in. We meet as a team every single morning. That's why we're sharing what's going on. That's why we work great as a group to help you all out. So it's our pleasure and we just appreciate your support coming out today. And we will certainly look forward to what comes up next with this third quarter report. So, yeah, buckle your seatbelts. It should be an interesting ride. So thank you again for joining today. We look forward to being in touch.

Thank you.