NYC Multifamily Pricing Tied to Debt Costs
New York City’s multifamily market has been derailed by the high interest rate environment. In 2024, transaction volumes were down nearly 40% as investors navigated market challenges. Experts DJ Johnston, EVP at Matthews Real Estate Investment Services, and Andrew Marcus, first VP at Matthews Real Estate Investment Services, expect distress asset sales will increase putting further downward pressure on pricing.
Relief is coming. Marcus and Johnston expect decreasing interest rates will infuse stability back into the market and give investors more confidence to make transactions. Here is a look at how these three key trends are shaping the multifamily market in New York City.
Multifamily Prices Hampered by Overregulation
High interest rates have stifled multifamily valuations and put upward pressure on cap rates across the country, but in New York City, the debt environment has had an outsized effect. The 2019 Housing Stability and Tenant Protection Act has made multifamily owners sensitive to cash flow changes and debt costs. Multifamily investment still worked in a low interest rate environment, when owners could buy at a higher cap rate than the interest rate.
“As rates have gone up significantly, there has been a lot of strain on that model, and owners weren’t able to tap into the upside,” says Johnston. “The risk is down, making it very difficult for investors in New York.”
Pricing is tracking in tandem with interest rates, according to Johnston. Pricing has moved down as interest rates increased, but the market has responded quickly to positive changes, too. When rates fell in the summer, pricing recovered, but Johnston says overall, prices have stabilized in recent months. Cap rates have settles at 6.5%. but historically cap rates have been between 5% and 6%.
Distress is Coming
Asset pricing might recover alongside interest rates next year, but Johnston and Marcus also anticipate an increase in distressed assets, which could serve to keep prices low. In the last year, the majority of multifamily buyers in New York City are one-off buyers.
While there is a significant amount of distress on the market, there is not currently a large enough buyer pool to absorb it. “If inventory goes up, there’s just not enough buyers right now to absorb all of that,” says Johnston. “That’s going to keep values low.”
Interest Rate Cuts Will Help Stabilize the Market
Lower interest rates would help asset pricing and reduce market distress—and rates seem to be heading in the right direction. “There is a sentiment across the marketplace that rates should be in a better place this time next year,” says Marcus.
Forecasts estimates that the Fed Funds rate will fall somewhere between 350 and 400. The Fed Funds rate would bring down the borrowing costs of lenders, helping to reduce mortgage rates, and many experts are expecting the Federal Reserve will reduce rates by at least 1%.
“That’s a tangible reduction in a lender’s own cost to make loans that can be shared with end borrowers,” says Marcus. Lower rates are good news for the industry and could help to fuel activity next year.
