Manhattan apartment market unshaken despite economy

Real Estate Weekly, April 18, 2001

Marcus & Millichap Real Estate Investment Brokerage Company recently released its Apartment Research Report for the Manhattan market, an attractive investment despite a weakening national economy, according to Mitchell R. LaBar, first senior vice president.

Following are some of the most significant aspects of the report:

Although the nation wide. economy slowed last year, New York still posted job growth of 1.9%, 0.7 percentage points more than 1999. New York City continues to lead the nation in total employment, with local unemployment rates at their lowest level in a decade. Along with Los Angeles, Manhattan has one of the tightest housing markets in the nation. Housing prices across the region were up approximately 13% in 2000 compared with 1999. This trend should moderate somewhat this year as the ability of buyers to keep pace with rising prices is quashed by the continuing economic uncertainty. Housing prices throughout New York are increasing approximately four times as fast as median household incomes -- even the strong local economy cannot maintain that pace in the long term.

Recent declines in interest rates will not be enough to increase construction activity, as current market conditions promote caution in the development arena. The brisk pace of multi-family construction in New York City of the past several years is expected to slow down somewhat in 2001. While many projects are in the planning stage throughout the region, current economic conditions have made investors, developers, and lenders more cautious regarding the demand for new space. With concessions and rent reductions being now the facts of life in the borough's multi-family market, there may be a need to reevaluate projected rents.

The City of New York is doing what it can to free up developable land, with plans to sell approximately 50 abandoned buildings in Harlem to several developers. Multi-family, single-family, and senior housing are scheduled at those sites for an estimated total of more than 1,600 new housing units. The Upper West Side will be the most active area in apartment construction this year, with more than 3,300 units in the planning or construction stages.

Apartment vacancy rates will continue to be among the tightest in the nation in 2001, averaging less than 5% for the second consecutive year. Vacancy rates in Manhattan will remain among the lowest in the country, in spite of slightly lowered demand due to economic and employment concerns. The flow of young professionals looking to trade up to more expensive apartments will moderate in the next 12 months as renters wait for the economy to stabilize. The local market will remain tight, but movement will be slow and result in downward pressure on rent increases.

The historically tight submarkets will change little this year. The Upper West Side, the Upper East Side and Midtown will have average vacancies of l to 2%. The West Village and SoHo/TriBeCa areas will also have little more than turnover vacancy. The north and south ends of Manhattan, where vacancies are typically higher, are in the midst of revitalization and redevelopment. The city-owned properties around Harlem being sold to developers hold the promise of alleviating the shortage of much-needed, more affordable housing. To the south, new apartment units are being built in Battery Park to compete with similar product on the New Jersey side of the Hudson.

Rents are expected to show modest gains across Manhattan this year , with concerns about the economy and job security limiting growth. The historically large multi-family rental increases in-New York are starting to feel the sting of the slowing economy. Asking rents have actually decreased in many areas, as concessions and rent reductions have become common place. Rents are still much higher than they were just three years ago, but the record increases of the past two years have ceased as the overall economy slows.

Upscale properties on the Upper West Side, the Upper East Side, and in the West Village will be hardest hit this year, as these high-rent neighborhoods have the farthest to fall.

Rents for one-bed-room units that averaged $3,300 per month six months ago stand to drop as much as 15 to 20% this year. Lower-end products on the outskirts of the market in rent-controlled areas will still show modest gains of 3 to 4%, but these increases will not be enough to make up the difference in the short term.