New York City's multifamily sector has pulled ahead of all other asset types in the country's largest metro in terms of rents, a second-quarter report from Marcus & Millichap concludes. The market had been down, following an exodus during the pandemic as renters — many of whom had shifted to remote work — sought out less-expensive homes further away from the urban core, from New Jersey to Connecticut.

Overall, New York City rents averaged $2,800 at the end of March, registering a 3.6% uptick in the preceding 12 months. The market's rents had bounced back above where they'd been in 2019 last year, and this further growth highlights that the metro's rent growth trajectory is also back on track, after sharply dropping in 2020.

Why the Growth?

Limited availability of rental units is driving most of these rent increases. The report shows first-quarter vacancy at 1.9% — the lowest point since 2001. Simply put, the fewer spots available — and the less development activity underway — the more expensive it gets for those moving in.

Speaking to development activity, the Marcus & Millichap report projects that developers will add some 21,000 units to inventory this year. That marks about a 15% increase from 2021, when 18,300 units delivered. While that's certainly an increase, it's likely not enough to meet demand.

Further, even as multifamily rents have recovered, the overall economy has not — which could add even more pressure to the sector. Consider the number of companies shifting back to in-office work, leading many employees to return. And the metro could see significant future employment growth: The Bureau of Labor Statistics reported New York City's unemployment rate at 6.2% in May, double the 3.2% national figure. The BLS data shows that overall employment in the five boroughs is down by nearly 390,000 jobs compared to March 2020, right before the pandemic hit.

Solid Investment Activity

New York City has also drawn significant investor capital. A CBRE national report places the market third on the list for highest investment volumes in the year ending in March, outdone only by Dallas-Fort Worth and Atlanta. New York City's activity totaled $17.7 billion closed.

According to an Ariel Capital Advisors report, $2.9 billion of that was in the first quarter — that's a stunning, 451% increase compared to the first quarter of last year. The report does caution that the first-quarter investment volume may appear artificially high, however, due to Black Spruce's $837 million acquisition of The American Copper Buildings, a 950-unit Manhattan property.

That said, large deals close with relative regularity in New York City, so it all could tie in to indicate a wider increase in multifamily investment flowing through the boroughs. Although pricing has grown, and investors are flocking to higher-value, Class A assets in Manhattan and Brooklyn, one thing that could chill investment is the increase — and expected future increases — in financing costs. However, with many lenders viewing New York City assets as relative safe bets — and with rent growth keeping the asset class attractive for returns — there are still plenty of opportunities to finance an acquisition with a decent return.