This month’s record-setting sale of two multifamily rental properties on Long Island highlighted the growing appeal of the area’s most sought-after real estate asset class.
Friedkin Realty Group closed on its $150.5 million purchase of two Mineola rental properties two weeks ago. The San Francisco-based real estate investment firm bought the five-story, 275-unit apartment complex known as The Allure at 140 Old Country Road and the 36-unit Hudson House affordable rental building nearby at 104 Front St.
The Mineola properties, developed by Mill Creek Residential in 2015, had been owned by J.P. Morgan Asset Management before the sale to Friedkin, which set a record for the highest per-unit price ever in Nassau County at more than $483,900 per apartment, according to JLL which brokered the sale.
While the price opened some eyes in the area’s real estate community, it didn’t surprise those who’ve been keeping track of the skyrocketing demand for multifamily rental assets here. In fact, commercial real estate brokers say the per-unit price of multifamily properties on Long Island is up as much as 40 percent over the last five years.
Jeffrey Dunne, vice chairman at CBRE, says Long Island’s limited supply of rental properties has been one of the reasons for the higher prices.
“As apartment markets go, the percent of rental units in the overall Long Island housing stock pales in comparison to most other places,” Dunne said. “It’s very hard to develop on Long Island, so the amount of supply that comes online is much less.”
About 20 percent of the housing stock in Nassau and Suffolk counties is rental, while the percentage of rentals in other New York suburbs is closer to 35 percent and greater.
Dunne was the lead broker on last month’s $472.5 million sale of seven Long Island rental complexes that totaled 1,496 units. Melville-based Fairfield Properties, Long Island’s largest apartment landlord, bought the rental communities from Rochester-based Home Properties. Included in the acquisition were the 242-unit Westwood Village in Westbury; the 80-unit Heritage Square in East Meadow; the 82-unit Cambridge Village and 40-unit Yorkshire Village in Levittown; the 232-unit Mid-Island Apartments in Bay Shore; the 452-unit Southern Meadows in Bayport; and the 368-unit Lake Grove Apartments in Lake Grove.
Home Properties, which had more than 3,000 apartment units in Nassau and Suffolk, was taken private by Dallas-based Lone Star Funds in 2015.
Lone Star saw an opportunity to maximize value in Home’s apartment properties, so it invested in capital improvements, hired new management and pushed rents higher to create more value. Its portfolio attracted lots of interest from Fairfield and other investors as well.
John Thomas and Mark Walsh, principals of Select Real Equity Advisors in Huntington Station, recently brokered the sales of five former Home Properties communities amounting to more than 1,000 units for about $225 million.
“Long Island has a highly educated workforce, tremendous employment opportunities and high barriers to entry, which leads to a very strong multifamily investment landscape,” Walsh said. “There is also abundant financing and a low-interest rate environment for a desirable asset class.”
Thomas says over the last five years there’s been a greater velocity of multifamily transactions on Long Island and the prices continue to rise.
“We saw a lot of pushback from local investors on the increasing price structure for multifamily product,” Thomas said. “But we saw strong interest from investors from outside the marketplace. That helped local investors to recognize the strength of the multifamily market and that it had evolved and that their own portfolios became much more valuable.”
The lower risk and ease of financing relative to other commercial property investments has also boosted the multifamily sector here.
“Interest rates are low and they’ve been low for a long time and debt is very favorable, which works in the favor of people looking to buy multifamily properties,” said Mark Hamer, principal of Jericho-based Harvest Real Estate Services. “The structure of financing and the leverage you can put on multifamily is greater than you can put on other commercial sectors.”
Hamer added that the downside risk for investing in multifamily is very low around here because supply is constrained.
“Even in the downturn, the asset class that thrived was multifamily,” he said. “If you have vacant space in an office building in a downturn, it’s hard to get it leased. That’s not the case with multifamily, because people have to live somewhere. “It’s not as cyclical and your asset is going to stay leased. That’s what makes it so attractive.”
Hamer’s firm, which had been focused on the office and industrial markets, has turned its attention to developing multifamily housing in the last couple of years. The company is currently building two mixed-use projects in Huntington that total 22 apartments over ground-level commercial space.
Rishi Gupta, a managing director with Plainview-based Eagle Rock Properties, which owns about 2,500 rental apartments on Long Island, says real estate is all about supply and demand and the underlying fundamentals of the market.
“On Long Island, there’s a huge supply-and-demand imbalance for multifamily rentals,” Gupta said. “You have limited choices if you want to rent.”
Gupta added that the homeownership rate has been falling over the last several years and more people are renting, which is creating additional demand for apartment properties. The seasonally adjusted homeownership rate in the U.S. was 64.6 percent at the end of 2018, that’s down significantly from the 69.4 percent homeownership rate recorded in 2004.
“The trend towards less home ownership in itself has had a positive impact on the rental market and coupled with good rent growth across the board has investors interested in Long Island,” Dunne said.
Rent growth for apartments here has outpaced most other real estate sectors. While office rents on Long Island are virtually unchanged over the past decade, the fair market rent for a two-bedroom apartment in Nassau and Suffolk counties has increased by more than 20 percent since 2009, according to the U.S. Department of Housing and Urban Development.
“Those 3 to 5 percent annual rent increases is atypical for other types of properties and it’s what’s driving capital to the Long Island multifamily market,” Walsh said.
David Pennetta, executive director at Cushman & Wakefield, said Long Island multifamily housing is the safest real estate investment of all product types.
“The ratio of net operating income to sales price and the capitalization rate are yielding record pricing for multifamily rental properties,” Pennetta said. “Long Island is so upside down with its supply/demand ratio that we could add another 100,000 units and still not be near a balance.”
Hamer said while some municipalities have made progress in amending zoning codes to allow for more multifamily housing, the supply will continue to be constrained.
“It’s a very slow moving ship,” Hamer said. “For every two steps forward, there are two steps back. We are still woefully under-developed in multifamily.”
That makes existing multifamily properties here that much more valuable.
“The pool of multifamily investors has increased greatly as owners of other asset classes have realized the opportunity to diversify into the multifamily space,” Thomas said. “The demand will be there. The challenge is to find the opportunities in the marketplace.”