NYC Multifamily Cap Rates Underwriting
For those who do deals in NYC, how much higher are you assuming for cap rates? Slapping a 5-cap range on a fully FM building just feels wrong.
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Watching what has happened to MF operating expense ratios over the last five years in NYC is more concerning than the cap rate tbh. Refinance risk is a real concern in this market.
To those not as familiar - is opex just increasing across the board? I know a different asset type just outside the city and while labor, taxes and insurance are all up, it's not catastrophic per se. Would've thought rent growth would also help offset some of that
It is, but it isn't that bad. If you own rent stabilized buildings then yes, it is catastrophic, but not because of opex growth - because rent growth is constrained. For example, the growth in water/sewer charges in NYC (at least for the assets I'm keeping an eye on) has been about 3.5% annually since 2017. That's not exactly an insane number, and is well under general rent growth in the city (which was 20% in three years, according to this article) until you remember that rent growth in rent stabilized buildings is like 1% over that time.
The point being, anyone saying that opex growth is what is going to kill deals was underwriting way too aggressively to begin with.
AH got it! This makes sense as I wasn't thinking of that scenario. Live in an area myself where there's local government mandated 10-20% annual water increases and we have rent stabilized too. Those groups have to be beside themselves. One told me that nominal increases in water are higher or at the same level as property taxes but was I was not even thinking about the rent restrictions
Thats actually pretty reasonable. MF caps for FM product in 2019 we looked at traded for a 3.5 cap. 10 yr treasury was 2% then. So thats a 150 bps spread. Right now the 10 yr is 4.15%, so just by the same logic I would want a 5.65% cap rate. The funny thing is that MF fundamentals are worse now for NYC than 2019. In 2019, rents are pushing up fast and predicted to stay that way. In 2022, yes occupancy is still strong, but in a post-covid world and a WFH environment, NYC hasn't fully recovered so your projected rent increases are not as high.
So to answer your question, yes slapping a 5 cap on a T12 NOI adjusted for tax is not ridiculous at all. These are different times we live in.
I disagree with your assertion that the NYC rental market is worse now than in 2019. If anything, it is much better for owners. The shortage and bidding wars are real. Yes, WFH has impacted the population of NY but you have to remember we are still a city of 9 million. Anyone who left because of COVID/WFH probably was replaced was by incoming college grads + job seekers. Maybe if you were talking about politics, then you can make the case that it is worse for owners. NYC is also the deepest rental market in the country. A recession won’t cause plummeting occupancy/demand.
Curious - 5.65% in this example is for FM finished/fully renovated product? Having a problem with projecting exit cap on deals with a business plan to completely reno
Why does it feel wrong? Do you think it should be higher or lower?
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