Manhattan apartment building sales market sees spectacular resurgence.

Over the past six years, the multifamily building sales market in New York City has gone from stagnant to stunning. In 1991, the market had plunged to its bottom. It appeared that every building in the city was for sale and there were few takers. By 1997, even the rumor of an impending sale of a major apartment building sets off a feeding frenzy in the investment community. In the past 24 months alone, selling prices for well-located elevator apartment buildings have risen well over 25 percent. We haven't seen prices like this since the mid-1980's!

The result of this incredible strength in the sales market is prices exceeding 8 to 9 times the rent and plummeting cap rates down to 4 or $ percent.

Why the Surge?

The chief factors propelling the market today include an extremely strong rental market, with apartment occupancies at historical highs (over 99.5 + percent citywide) with demand far outstripping supply, and rent rolls that just keep on rising; as a corollary, there is a broadly held perception that Giuliani has improved the quality of life in the city, that crime is down, that everyone (yuppies, foreigners, and empty-nesters alike) wants to live here, and that housing demand will continue to remain strong.

There's tremendous liquidity in the market again, with institutional lenders aggressively putting out mortgage money on almost any well-located occupied building in the range of 70 to 75 percent of market value.

There's also a huge imbalance between supply and demand in the market, with very little good product available for sale, and significant competition between cash-rich investors (many of whom are shying away from an overheated Wall Street market and all of whom are chasing the same deals).

Also fueling the market is stable, relatively low interest rates. When you can borrow in the range of $ to 8.5 percent, the debt service payments don't eat-up your whole bottom line.

There is relatively little new residential construction on the immediate horizon, and there's also great optimism in the market that rent regulation laws will be altered in some fashion in 1997. These laws are set to expire this coming June.

Owners are hopeful that luxury decontrol will be extended by either: reducing the existing tenant's income level from $250,000 annually to the $150,000 to $200,000 range; or reducing the monthly threshold for an apartment to become deregulated from $2,000 to closer to $1,500; and/or extending luxury decontrol to the decontrolling of all previously stabilized apartments that become vacant and setting the new rate at market.

What's Ahead?

The investment brokerage community is hopeful that the balance of 1997 will bring us more deals to sell. We're starting to see some product come on the market as the direct result of the repeal this past summer of the state capital gains tax. But the repeal of this 10 percent "Cuomo" tax has not exactly flooded the market with sellers. It appears as though many owners are currently sitting on the fence, waiting for Congress to pass a substantial reduction of the 28 percent federal capital gains tax and/or Albany to alter the city's rent regulation laws.

Also, we hope to make headway in decontrolling more apartments. So far, less than 3,000 units have been decontrolled citywide. It's really the best way to bring supply and demand more into sync.

If prices continue to rise, perhaps rental buildings will start being converted to cooperatives or condominiums again. With the right building profile - large enough apartments and high enough rents - I wouldn't be surprised if we started seeing some significant conversion activity soon.

Investing today in New York City apartment buildings may not offer the high profile of the office buildings, however, the bottom line is a lot more stable and can't be wiped out by the loss of a single tenant. I consider them the darling of the commercial sales market today.