How Much is it Worth? Pricing & Value Creation in NYC Multifamily

Most active investors and multifamily owners confront this question daily.  Though there are several complex analytical approaches to this question, the answer is dependent on a few straightforward factors. In our portfolio, recent market adjustments and a fundamental shift in how properties are underwritten has caused us to increase our focus on two fundamental questions: What is the property worth today, and how we can increase value over time.  Though simple, many investors do not have a clear view of these fundamental and critical questions.

In New York City, the tail of a 10-year bull market in multifamily real estate combined with changes in NYC rent laws and the impact of the pandemic has made determining fair value and establishing a clearing price for transactions incredibly challenging.

Real estate pricing has always been “sticky” relative to other assets and requires a period of price discovery to establish new clearing levels for transactions. That said, the NYC multifamily market is slowly beginning to produce some interesting investment opportunities.  As a result, we continue to focus on expanding our portfolio with attention on what we believe to be the true drivers of value in multifamily investing.

Current value is most often determined by the current net revenue generated by the property.  Most bank underwriting models prioritize cash flow when determining value and the associated amount of debt they will provide for an acquisition. Ironically, this same logic is often ignored by investors in value-add, multifamily properties. The buyer will often sacrifice a significant portion of the property’s potential upside by paying a higher purchase price for the property in question. Buyers are often not fully compensated for taking on both the cash expense as well as all the execution risk of implementing a value-add strategy.

Calculating the potential future value of a property requires focusing on the three main determinants of value creation: growth in the rent roll, operating expense management, and disciplined property management. While the traditional value-add strategy is to renovate apartments and common areas to justify charging higher rents, price corrections like the one underway in New York City, often require owners to consider expense management. Simple things like using LED bulbs in the common areas, regularly monitoring for leaky faucets and toilets, and making sure tenants’ windows are closed during the heating season can result in substantial savings and improved profitability. In many markets (including NYC), heating costs are one of the greatest potential areas for operating expense reduction. Options include converting from oil to gas as a fuel source and installing a high energy efficiency boiler can often result in significant savings.  At one of our East Harlem properties, the change from oil to gas has resulted in a savings of over $30,000 a year for the last four years.

Five Boro Multifamily remains active as the repricing of NYC multi-family real estate continues to unfold and present opportunities. We are actively pursuing transactions that utilize current cash flow to establish value and generate appropriate risk-adjusted returns for our investors.