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Wall Street Bonuses Likely To Trigger New York Apartment Sales

Hefty profits at Wall Street firms and bonuses paid at the end of 2009 are expected to boost apartment sales in Manhattan this year, according to a report issued today by real estate investment services firm Marcus & Millichap.

Spending from the bonus payouts should trickle into local service industries and stimulate both hiring and apartment transactions, Marcus & Millichap notes in a first-quarter market update.

Many buyers are looking for multifamily properties with eight units or fewer, priced between $500,000 and $600,000 per unit. Larger investors want assets of up to 30 units costing about $200,000 per unit.

Manhattan apartment owners have taken some hard knocks in recent months. Declines in rents and revenues led to a 39% tumble in the median price of transactions over the past year to $165,630 per unit, according to Marcus & Millichap. That follows a 13% price increase in the prior 12 months.

In Manhattan, as elsewhere in the U.S., economic headwinds are easing and a pickup in hiring is expected to lead to modest improvement in occupancy. Overall, however, the multifamily fundamentals remain soft. Effective rents at large, market-rate properties in the borough are projected to fall 3.2% to $3,176 per month in 2010. Last year, effective rents fell 9.1%, according to Marcus & Millichap.

Across the country, the takeaway is that although fundamentals have bottomed out and aren’t expected to improve dramatically this year, the pace of transactions has heated up significantly, offering encouragement to investors.

“On the sales side, we’ve seen a steady increase in business since September,” says Linwood Thompson, senior vice president and managing director of the multi-housing group at Marcus & Millichap. “We’re nowhere near the go-go days of 2005, 2006 and 2007,” he says, but nationally, the number of transactions within his company is on the rise.

Sales volume for multifamily properties represented by the brokerage and priced at $10 million and up rose by 70% from January through April, compared with the same period last year, he says. “I think most other brokerages are seeing an increase as well.”

With regard to the capital markets, multifamily loan originations rose in the fourth quarter but have not reached the levels of late 2008, according to William Hughes, senior vice president at Marcus & Millichap Capital Corp. On average, loan-to-values are at 65% to 75%, he says.

Jobs hold the key

In New York, news on the jobs front has been less than encouraging. Employers eliminated 48,700 jobs or 1.3% of payrolls, in the 12 months ending in the first quarter. That’s less economic bloodshed than in the previous year when 79,600 workers lost their jobs, according to Marcus & Millichap.

Job postings in the technology sector surged 18% in the first quarter of 2010, although many other sectors are expected to suffer net losses this year, reports New York-based real estate research firm Reis.

Because of the slow recovery related to jobs, fundamentals, including occupancy rates, will not rebound as quickly as transactions, says Thompson. “You need GDP growth in the economy for two to three quarters before you get employment growth.

Then you need two to three quarters of employment growth before you see demand for apartments start to heat back up, as people get jobs, and start moving out of their parents’ homes and getting their own apartment,” he says.

“We’re in GDP growth now, but we don’t have stellar job growth yet,” says Thompson. Once jobs do start growing, the apartment industry will lag the job growth by at least two quarters, he adds.

“We don’t see fundamentals getting any worse in 2010. We think we’re at the bottom,” adds Thompson. “We’re just going to languish on the bottom for about another year until we start to get some employment growth.”

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