What are the current Manhattan, Brooklyn, Queens cap rates for Retail, Multi-Family and Office?

Rank: Chimp | 11

If anyone has the current cap rates (and 6-12 month forecast) for these asset classes in NYC, I would greatly appreciate it.

Comments (38)

 
Dec 31,2016

According to CoStar in the past year:

Manhattan Multi: 4.1% cap rate
Manhattan Office: 4.5% cap rate
Manhattan Retail: 4.3% cap rate

Brooklyn Multi: 4.8%
Brooklyn Office: 5.6%
Brooklyn Retail: 5.1%

Queens Multi: 4.4%
Queens Office: 6.3%
Queens Retail: 6.1%

I don't see these changing much in 2017.

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Dec 31,2016

The thinning spread between multi-family Manhattan cap rates and the rising cost of capital (including fees, etc to obtain said capital) means investors are going to have to get more creative in 2017 especially if their play is not long term/legacy appreciation and more cash flow centric.

 
Dec 31,2016

The real question is the cap rates in October vs cap rates on Dec 20.

 
 
Dec 31,2016

Every brokerage will put out free research on the subject - CBRE, JLL, etc.

 
 
Dec 31,2016

Too damned low for my liking. However, the market seems to be doing very well on multiple fronts. Major retail corridors are seeing constant rental demand from multinational tenants, there simply isn't enough housing for everyone who wants to be in the city and is also pretty fairly priced on an international level. Commercial rents and occupancy rates seem to be back at the pre bubble highs, especially because of the continuous growth of the tech sector.

Honestly, I am on the fence with NYC at this time. I know rates will go up sooner than later, but I also know that NYC is probably one of the only markets where growth will be able to keep up with those increasing rates.

 
Dec 31,2016

MF cap rates are at an all-time low because of cheap debt, 1031 $, and foreign capital chasing too few deals. Interest rates will rise in 2016/2017 and buying into a 2%-4% cap will only make sense if your future rental growth rates achieve a consistent increase of at least 5%-7% Y-o-Y which I don't believe will happen except for some secondary markets that will be a discount to the primary residential markets. There is definitely growth left in the residential market to justify acquiring low cap rate, value add plays. The supply coming into market is priced at luxury levels which I don't believe is sustainable and investors who took a 5-7 year bet on the market will get burned due to aggressive rental growth assumptions. There is projected to be another million new New Yorkers in the next 10 years, so demand will always outlast supply, but not in the luxury market. I don't even want to talk about the condo market which has a large bubble and an inevitable crash... But, I would consider what happens in the secondary residential markets in NYC when capital markets dries up... do you take the stance that those select secondary residential markets will be resilient or they will be crushed...

As for office properties, that's a tough market because foreign capital (Asia) are trying to buy everything all-cash to park their $. However, I don't believe trophy office asset cap rates in NYC will jump up over 5.0% - 5.5% even with interest rates on the rise. As for the office pipeline coming in the next 5-7 years is getting pretty scary. There are so many large blocks of space available in Midtown West and with the financial district and hudson yards projects pumping out class B+ and above product, I worry who the tenants will be.... tech? Once the IPO market dries up and VCs don't fund every start-up (which it seems like it), tenants will default and vacancies will rise.

Now, I have a MF background so please take my office market analysis with a grain of salt. I can easily further elaborate on the residential side which is developing a major bubble and will have to correct soon. For me, if you wanted to get into an under served asset type in NYC, I would focus on retail in those secondary residential markets. The writing is on the wall which new and higher income streams moving into these gentrifying markets. Retail is a laggard to residential growth (look at court street). Now, I would invest in retail moving forward...

 
Dec 31,2016

NY MF caps are usually between 3%-5%. The 5% cap deals are the properties that need a ton of work. As the poster above mentioned there is still plenty of people moving to NYC as the economy continues to add the jobs it lost during 2008/2009. Given that there is virtually no land left and a rising demand, prices will have to rise. This has made NYC one of the safest CRE markets, but the issue is that interest rates could eventually reach a point where they rise above cap rates (something you never want to see). NYC is the safest place to park money, but due to this, the returns are horrible and thats why you really only see large funds throwing down capital since they got no other options. As for the office market, caps are still pretty compressed but about 50% higher than MF, but I dont think investors understand the gravity of the situation. The WTC developments alone are adding millions of square feet of office. The NYC market won't be able to absorb the new space for a long time.

 
Dec 31,2016

The MF market is being pushed by the condo market, as a majority of the people buying them are redeveloping into Condos instead of renovating as rentals. Its currently the highest and best use. Buy at $1000/foot, spend $200 renovating, Sell out for $1,750/foot.

I don't really agree about the office market however. Seems to me that the market is just full of junk trying to get top dollar. You have "2.0" (tech,fashion, media, advertising, social media) firms who want midtown south, and midtown south has some decent office space, but the vast majority is utter trash owned by people who haven't invested a dime since disco was popular. Look at the Ring portfolio for a prime example of how bad these owners can be. Meanwhile, you have places like 200 5th ave which completely demolishes anything else for blocks. These types of tenants want the hipster artistic flatiron style, with huge open spaces and exposed brick interiors. They generally don't want flashy glass towers. I suspect the only reason why the 51 ASTOR building got rented so fast is because of a good mixture of hip location and demand from more "mature" tech companies and educational institutions looking for Class A space in the area (which was sorely lacking).

The WTC will probably never make any money, since the WTC towers always had a vacancy problem, and the port authority ended up leasing most of it to really random tenants since the 70s.

I feel like Hudson yards is going to mostly appeal to the more "snobby" midtown tenants who like the inherent prestige of new buildings without having to suffer the horrible fate of moving "downtown" where all the new money is.
A good example is time warner, which I believe sold its "old" space at colombus circle in order to get new diggs at hudson yards.

A lot of the old office buildings not located on prestigious blocks are going to be floating in limbo until HY gets filled out and tenants are forced to rent them.

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Dec 31,2016

I am seeing cap rates even lower than that, I'm talking sub 2%, some investors are really targeting some positive HPA in the region.... and with the backlog of foreclosures and short sales... I'm not so sure that we'll be seeing that kind of price appreciation. In fact the region is one of the few in the country that had negative price growth.

 
Dec 31,2016
onebuck:

I am seeing cap rates even lower than that, I'm talking sub 2%, some investors are really targeting some positive HPA in the region.... and with the backlog of foreclosures and short sales... I'm not so sure that we'll be seeing that kind of price appreciation. In fact the region is one of the few in the country that had negative price growth.

Where did you see a 2% cap rate? I mean... if I buy a 100,000 sf class B suburban office building in a 7% cap market that happens to be temporarily dark for $1.00, that's a 0% cap rate, but nobody would argue I overpaid. I mean, cap rate makes sense when talking about a building that's leased up to market but it's still a quick and dirty valuation number that doesn't pick up everything. What's the story on the 2% cap building (no names basis obv.)?

Anyways, yeah cap rates have gotten crazy tight over the past year, but it's a function of the availability of financing. CMBS spreads are record tight and the underwriters are falling over themselves to originate product - it's a highly commoditized market where the borrowers send out a package to every bank on Wall Street and pick the most aggressive term sheet, which generally came from the underwriter who paid the least attention. Classic case of buyer's remorse - if you are the tightest spread/least structure out of 20 CMBS shops, you probably missed something.

Anyways, as long as interest rates stay low, "yields" on stable, leverageable operating assets will remain low, which is one way of looking at what a cap rate represents. If I can acquire an asset that reliably throws off "X" cash, and can finance it for a monthly payment of "X-1" cash, that's generally going to be a compelling trade. This tightening isn't a real estate only phenomenon, it applies to all similarly leveragable operating assets - capital leases, structured settlements, bank loans via the now booming CLO market, barges/railcars/shipping containers, even consumer credit... specialty finance companies are making a killing these days. In a low yield environment, people will always try to arb the spread between financial assets and stable cash cow operating assets, it's a golden rule of life. The more money that chases this arb, the more that spread tightens, which requires the "yield" on said stable cash cow operating assets to collapse.

Intellectually, many if not most investors, both hot money and real money, think about these types of assets as essentially bonds. I mean all a cap rate is is a rough approximation of a bond yield right? Cap rates are an answer to the classic fixed income question of "what am I paying up front for how much cashflow with what risk attached?" CRE prices to a cap the way that bonds price to a yield.

If you're a big CRE market player like say... MetLife for example, you're making a relative value play here. Broadly, you play in the whole spectrum - CMBS/structured exposures, taking down whole mortgages on your B/S, and buying properties outright. If you want to increase exposure to US CRE, in order to compare the risk/reward profile of these asset classes, you're comparing cap rates on real property to yields on mortgages or CMBS bonds. If yields on CMBS and whole loans compress, you'll allocate more money to real property, which will compress cap rates.

These nutty cap rates are just a symptom of a low interest rate environment, not an accurate long term valuation of CRE. Stay the fuck away from CRE from the equity side for the next few years.

 
Dec 31,2016

i remember seeing a 3-4% multifamily in glendale, ca recently

 
Dec 31,2016

Those are some crazy numbers... I can't fathom people paying that much.

 
Dec 31,2016

2%!!!!!!!! Why not just buy some treasuries and call it a day? Seriously I never understood the point of someone bidding down cap rates. If they are looking for safety, they'd be better of buying shares of AT&T and probably has lower risk than investing in a single property.

 
Dec 31,2016

I live in a lower appreciation area, so this seems pretty crazy to me.. What % year over year rent appreciation are these guys expecting to get for a multfamily property trading at a 2 or 3 cap?

 
Dec 31,2016

Depends on the style. High growth properties have the lowest cap rates (5th avenue retail, value-add,redevelopment).

Stabilized properties go up towards 7% if you play your cards right. Prices should increase with appreciation (at least) with a good chance of higher average growth in the long term.

 
Dec 31,2016

Per CoStar, average cap rates on office properties were around 5% in 2012. The environment is definitely very competitive and values are comparable to 2007 - whether or not that is justified is another conversation.

 
Dec 31,2016

I think Sony traded at 5.5, but they're the sole tenant and vacating in a few years. Lots of potential there with rents trending upward.

 
Dec 31,2016

sdb,

Do you happen to know where I can find the latest reports on cap rates for different markets? I'm curious to know cap rates for lodging/office and which top 20 MSAs have the highest rates.

 
Dec 31,2016
TeddyTheBear:

sdb,

Do you happen to know where I can find the latest reports on cap rates for different markets? I'm curious to know cap rates for lodging/office and which top 20 MSAs have the highest rates.

Not sdb but you can find them from basically any real estate advisory firm. My favorite is Greenstreet's for broad regional info and Reis for in-depth submarket stuff. If you go on any major broker's website they'll probably have one, try CBRE. Really though, if you want to know cap rates, pull down a bunch of Annex A-1s from recent CMBS deals and build a comp set. These are semi-public widely available excel sheets that show relatively detailed information on every loan in every private label CMBS transaction ever. Pull ~10 comparable properties from a few of these and average that cap rate - much more accurate than some garbage report that reduces all properties of a given class to a single number for a whole MSA.

 
 
Dec 31,2016

5 cap to 9 cap depending on the size of the project, smaller projects(sub 3/4) i've seen listed from 7-9 caps

 
Best Response
Dec 31,2016

Where the hell are you finding 7-9% cap rates in NYC?

 
Dec 31,2016

really small projects in the boroughs, I get calls from small brokers occasionally. Most are in the 5-7 cap rate range.

 
Dec 31,2016
 
Dec 31,2016

Care to go into more detail? I've never seen anything trade / be valued at less than a 6 cap, and even that is pushing it.

 
Dec 31,2016

lol was just going to ask the same thing

 
Dec 31,2016

If you have 7-9 Caps in Brooklyn im a buyer In 3 Seconds

 
Dec 31,2016

Who can even believe advertised cap rates on small buildings. Alot of small mom and pop landlords barely keep any records, probably made up by broker

 
Dec 31,2016

Cap rates tend to drop signifigantly when you replace the broker reported operating expenses with something more realisitic like 35% of the rent roll.

 
Dec 31,2016

I mean depends on the market, but you are buying at next year's NOI so historical rent is not the most important thing.

 
Dec 31,2016

All a broker does is say Revenue = x, opex = .3*X. Then they get mad at me when I say no, their 5% cap deal is realistically a 2.5% cap, and I am sorry I can not compete with the retired doctor who is fine with a 8% IRR.

Can things please get cheaper again?

 
Dec 31,2016

Show me an 8IRR in Bk at a 2.5 cap. I'm interested in which sub-market your looking at or are you UW with getting out Rent stabilized tenants

 
Dec 31,2016

All I meant is that its hard to compete with other investors who have much lower return expectations-- they are willing to pay significantly more

 
Dec 31,2016

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