In the condo conversion craze of 2005-2007, it seemed like everything and anything was converted to condominiums. I sold 25 Fifth Avenue between East 9th and 10th Streets in 2005. Only one-third of the 93 units were free market at the time. The buyer, RFR, decided to sell the fair market units and wait on the remaining rent regulated units to become available.
RFR paid $46,300,000 which was $431/SF, a shockingly low 1.79% cap rate. All of our top dozen bidders were condo converters, with the exception of one user.
The move seemed to pay off for RFR as condos at 25 Fifth Avenue have recently sold for an average of $1,644/SF according to StreetEasy. With an average unit size of about 1,000 SF, the original 29 units could have sold for more than the purchase price alone, leaving 58 units to eventually sell. I'm sure that many of those have turned over since.
Today, investors would only attempt converting a mostly rent regulated building in the most prime Manhattan locations. Apartment buildings in areas such as Washington Heights, which had multiple conversions years back, are now being sold to operators who will continue to hold them as rentals.
The main reason for this trend in Washington Heights is a decline in condo prices, which once reached into the $600s per foot according to Robert M. Shapiro, our territory specialist. However, as other neighborhoods have become more affordable, such as in Harlem where new construction, full service condo product can be purchased at that level, pre-war conversions in Washington Heights now only command in the $400s/SF range.
Rob recently sold an elevator apartment building at 838 Riverside Drive (aka The Kingsland), located between West 158th and West 160th Streets in Northern Manhattan's Washington Heights neighborhood, for $9,400,000.
The six-story property is approximately 56,190 square feet and sits on a 102.75' x 150.5' lot. The building contains 42 residential units, averaging approximately 1,200 square feet. New gas lines were recently installed throughout the entire building and a rubber roof was completed about five years ago. The sale price equates to $167 per square foot and approximately $225,000 per unit.
More than half the units at 838 Riverside Drive were fair market. If those 22 units average 1,200 SF and sold for $450/SF, the total sell out would be close to $12,000,000. However, a converter would then have to pay close to 8% after brokerage fees and transfer taxes and about $100/SF to bring the units to condo level quality.
This would bring the net sellout into the low $8,000,000 range. Even if an investor sold the remaining units as a package at 20% of market value for around $2,000,000, the total sellout would still only be around $10,000,000. After soft costs, there would be little, if any, profit remaining which would then be taxed at an ordinary income rate.
Holding the property as a rental is far more promising for the future. Rob said that rents are now reaching $40/SF in Washington Heights. An investor could double the income over time at 838 Riverside Drive, with its rents currently averaging around $18/SF. At a price per square foot of well below replacement cost, it seems like a great time to be buying multifamily in the area.
While Manhattan condo conversions are in high demands, the trend in the outer boroughs is to capitalize on the thriving rental market.