Almost half of The Bronx’s 567,446 residential units are in elevator apartment buildings which account for about 21% of the borough’s total assessed property value. The disparity is because housing carries considerable regulatory hassles that don’t come with renting warehouses. 2,679 of those units changed ownership last year, and more than 200 have traded in 2023. We recently trimmed our benchmark values because of sector headwinds and several low valued transactions, but some recent trades have come in better than the benchmarks.
The Ups and Downs
There are several reasons elevator apartments trade for less than other asset classes on a square foot and unit basis. One reason is the elevators, and all the expenses that come with maintaining and keeping them compliant. Depending on how many you have, their annual expense line will have at least two digits before the comma on your P&L.
Most of the 271,421 residential units in Bronx elevator apartment buildings are collecting regulated rents which also keep a lid on values. While larger buildings provide scale to mitigate higher expenses, regulated rent growth has been trending below inflation in recent years.
Besides inflationary headwinds, the apartment sector is now feeling the bite of the 2019 rent control law at the same time that Local Law 97 kicks in. All the pandemic programs have run their course and rent arrears are rising again. As financial pressures accumulate, new regulations demand major capital investments.
Why would anyone want to own elevator apartments? Regulators say it’s not so bad and point to record high rents, low vacancies, and ample government programs to help landlords provide critically needed housing to New York City’s workforce.
Building Bronx Housing
Most of the developments that are redrawing the Bronx skyline will be market rate rentals including enough affordable units to provide tax abatements to the projects. Although the 421a program has expired, something similar will need to take its place for The Bronx to meet its housing needs.
Almost 7,000 units are under construction in the South Bronx with another 2,000 coming online in the North and West. The East Bronx hasn’t seen its fair share of development despite housing needs for professionals working at Jacobi, Montefiore and Einstein medical centers. The area lacks the transit infrastructure that developers seek but the expansion of four new Metro-North stations should spur development in this underserved area.
More elevator buildings are also coming to the Jerome Avenue Corridor where 73 blocks between River Ave and Fordham Road, along the 4 train, have been rezoned. A number of plans have already been filed to turn the current stretch of auto-body shops and warehouses into gleaming mixed-use developments.
So, even as it gets tougher to be a landlord, there are plenty of reasons less than 1% of all Bronx elevator apartments sold last year. The classic advice to invest in middle class housing is alive and well in The Bronx.
Varying Valuations
Most of The Bronx elevator apartment stock is regulated as affordable housing, which hasn’t enjoyed the giddy rent growth seen elsewhere in recent years. Even so, those units are renting at record levels. The chart below from Costar Research shows how higher inflation has finally led to bigger rent bumps. Unfortunately, expenses have grown faster.
Costar predicts continued growth in apartment rents. The persistent housing shortage will fuel steady demand as the immigration wave washes upon the shores of The Bronx like all the immigrant waves that came before. An asset class with steady demand and without the speculative frenzies of other markets could provide a relatively safe harbor if the economy gets stormy.
The Federal Reserve is preparing markets for a long tightening phase that could generate that storm. Driving inflation down from 9% to 6% will be easier than getting it down to their 2% target. Tighter monetary policy raises concerns for any type of asset. Although higher cap rates present a headwind, real assets with rising rents have outperformed financial assets during inflationary periods.
However, not all elevator apartment buildings are in high demand. Some older buildings have been available and traded at prices below our benchmarks, while others have sold quickly at premiums. There have been enough premium transactions mixed in with the discounts to keep the rolling average price per unit above our $175k benchmark, although the average price per square foot is slightly below the $200 benchmark.
We have looked for signals of premiums or discounts but none stand out clearly. Some buildings with high Local Law 97 liability traded at discounts but others at premiums. We have seen premiums in opportunity zones, but not enough to prove a correlation. Even some older buildings have traded at values in line with newer construction.
Current offerings of Bronx Elevator Apartment Buildings
Valuing elevator apartment buildings is very property specific. Costar currently lists eight properties for sale in The Bronx across a range of valuations. Clicking on a marker in the interactive map above will bring up details of the listing. We are also aware of a handful of off-market offerings, and investors willing to come into properties as joint partners. Please contact us to learn more about any of them.
The featured photo atop this post is an offering at 931 East 179th Street. This West Farms new construction bordering Vidalia Park has 37 units, mostly 1 and 2 bedrooms, and low expenses thanks to a fresh 421a tax abatement.
Most of the $1,072,620 gross income falls to the bottom line, so the $12.9 million asking price equates to a 7.5% cap rate. Asking almost twice our unit value benchmark still translates to a premium return. Other newly constructed buildings are also offered at premium values with cap rates around 7%.
That seems to be the going rate on older buildings too. Several listings on the map are value-add opportunities where subsidized improvements could produce higher efficiencies. Getting them at a 7% cap rate now can result in much better returns after upgrading the facilities.
If you are looking to invest in Bronx elevator apartments, valuing a current offering, or a property you own, we are happy to assist with our databases and comparable sales information. Please contact us for a free consultation to help with your efforts in the market.
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