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NEW YORK CITY2 0 1 2

MultifamilyMarketReport

Dear NYC multifamily market participant,

The multi-family property sales market in New York City is always a bellwether for the entire local sales market. There are more apartment buildings in Gotham than any other type of property; therefore, it is often the focus of analysis conducted on the broader market. This report contains, what we believe is, the most comprehensive overview of this market over an extended period of time. Given the length of time this report covers, trends become transparent providing tremendous insight into the market. We hope you find this report useful and welcome any additional questions you may have.

New York Citys multifamily property sales market continues to perform better than any other market segment, and with good reason. In addition to there being more apartment buildings than any other type of property in the city, demand from buyers in the marketplace for multi-family assets exceeds demand for any other property type by both number of investors looking to purchase and the amount of equity backing those numerous buyers.

This demand outweighs supply of properties for sale by a significant margin and, if fact, the only period, since at least 1984, when supply exceeded demand was a stretch which overlapped parts of 1992 and 1993 when the Resolution Trust Corporation was dumping hundreds of assets on the market from failed banks and even minimal amounts of equity were scarce. Since then, demand has always greatly exceeded supply, exerting upward pressure on values. So why is demand so high?

Multi-family properties in New York have several characteristics which put them at the top of the list for many investors. First, they are the easiest type of property to finance as lenders battle each other aggressively to make loans on multi-family properties here. Lenders crave these loans due to the historically low vacancy rate on New York City apartments, which is typically in the 1 to 2 percent range.

Couple this extraordinarily low vacancy rate along with the fact that New Yorks rent regulation system creates artificially low rent levels and there is little down side risk to these properties. Increasingly, however, the legislative and judicial environment is creating headwinds for the multifamily sector which, if current trends continue, will lead to less affordable housing in the city, a deterioration of the quality of the existing housing stock and the virtual elimination of quality rental housing in the city.

This piece will explore the history of the multi-family market over the medium and long-term. For the Manhattan market (south of 96th Street on the eastside and south of 110th Street on the westside), we present statistics on cap rates and gross rent multiples (GRMs) going back to 1984 when I first started selling apartment buildings in the city. For the other submarkets, including northern Manhattan, Brooklyn, Queens and The Bronx, we present statistics going back to 2001.

The various graphs within this piece show how the apartment building sector has performed. It is also important to note that, for the purpose of this analysis, we differentiate between walk-up buildings and elevator buildings. In New York City, these properties are considered two separate asset classes. While cap rates and GRMs between these two asset classes are highly correlated, they do act independently and, as evidenced in the data, are more dependent upon borrowing rates and ownership conversion dynamics as opposed to how the other type is performing.

In addition to looking at the absolute level of cap rates and gross rent multiples over time, we look at how yields on multi-family properties have compared to lending rates over time and the extent to which there has been positive or negative leverage conditions. Clearly, there is a high level of correlation between mortgage lending rates and cap rates; however, there have been periods where the market has fallen into a negative leverage position where caps rates have been lower than the cost of borrowing. Most notably you will see, in the charts that show this relationship, two distinct periods of negative leverage, one in the mid to late 80s during the coop conversion craze, and a second during the mid to late 2000s when condo conversion was very popular.

Given the perceived relative safety of these assets, we have also analyzed yields on multi-family assets compared to the risk free rate of return as reflected by the U.S. ten-year Treasury bond. Remarkably, we see that there have been years and, in fact, periods when the risk premium on real estate was actually negative. This makes no sense whatsoever, however, is indicative of the overwhelming demand for these assets and that many investors will sacrifice economic return today for perceived upside potential in the future.

From a legislative and judicial perspective, we are in, and seem to be getting deeper into, a period of great uncertainty. Recent court decisions, like the Roberts case, in which the de-regulation of regulated apartments in buildings receiving J-51 benefits has been deemed illegal, have created turmoil for owners of units in this category. This was an irresponsible decision as the court determined deregulation was illegal but did not determine what the exposure was for owners nor how to rectify past handling of these apartments. Today, years later, owners who have free

NYC Multi-Family Market

w w w. m a s s e y k n a k a l . c o mw w w. m a s s e y k n a k a l . c o m

Manhattan Investment property Sales Volume

Source: Massey Knakal Realty Services

TURNOVERRATE 2.5% 2.8% 3.4% 2.8% 3.5% 3.1% 2.2% 1.7% 1.6% 1.9% 2.5% 2.4% 2.6% 2.8% 3.9% 2.6% 2.9% 1.9% 1.9% 1.6% 1.9% 2.5% 3.4% 3.0% 1.8% 1.2% 1.7% 2.5% 3.3%

YEAR 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

11%

10%

9%

8%

6%

5%

4%

3%

7%

UN

EM

PL

OY

ME

NT

R

AT

E

8%

7%

6%

5%

3%

2%

1%

0%

4%

TU

RN

OV

ER

P

ER

CE

NT

AG

E

8.7%

8.2%

7.4%

5.7%

5.1%

6.7%6.9%

8.7%

11.1%

10.3%

8.8%

8.2%

8.8%

9.4%

7.9%

6.9%

5.8%6.1%

8.0%8.3%

7.1%

5.8%

5.0%4.9% 5.5%

10.8%

9.5%

8.5%

7.5%7.2%

7.0%6.2%

5.5%

5.3%5.6%

6.8%

7.5%

6.9%

5.6%

5.4%

4.9%

4.5%4.2%

6.1%

4.0%

4.7%

5.8%

6.0%

5.5%

5.1%

4.6% 4.6%

5.8%

10.0%9.6%

8.9%

N E W YO R K C I T YN AT I O N A L

8.7%

8.1%

PR

OJ

EC

TE

D

91-92Recession

the GreatRecession

01-02Recession

NYC Multi-Family Market

market vacancies within these properties are still at a loss as to how to appropriately proceed. Even the best L & T attorneys in the city cant give their clients clear direction.

Another perplexing decision came out of the Grimm case in which the four year look back period can be pierced. This has created the need for buyers to conduct massive amounts of due diligence as exposure for overcharges travels with title and misdeeds of past owners accrue to a new owner immediately upon title transfer.

Based upon the results of the recent election, it is still unclear who will control the New York Senate which has a huge impact on the rent regulated housing market. The Republicans cannot have a majority but there is an independent group of four senate Democrats whose support is up to, presumably, the highest bidder. Many of the tangible shifts towards tenants occurred the last time the senate was controlled by Democrats and many in the industry fear the same thing may happen again.

Additionally, and almost more importantly than the federal election for our market, a big question is who the next Mayor of New York City will be in 2013. Reading the bios, websites and press clippings of those that have already thrown their hats in the ring, there seems to be an overwhelming sentiment for a moratorium on rent-regulated rent increases, repealing the Urstadt Law (which would turn oversight of rent-regulation to the NY City Council) and the elimination of high-income or

high-rent deregulation. These initiatives would have disastrous impacts on our housing market. These looming clouds create a potential mine-field for investors who are looking at this asset class.

Lastly, we have seen New York City implement a real estate tax policy which burdens income producing residential assets with tax obligations equal to or exceeding revenue increases in many cases. In New Yorks rental buildings, real estate taxes can be as much as 30 percent or more of gross revenue. This practice unfairly burdens this asset class relative to other housing options. To the extent real estate tax increases continue to erode appreciation and rent levels, the future of our housing stock both from a quantity and quality perspective becomes jeopardized.

While the future is uncertain, the past has been interesting and market statistics are provided within this report to illustrate how the market has performed. If you have any questions or comments, please feel free to reach out to me at any time.

Best regards, Bob

Robert A. KnakalChairman

Massey Knakal Realty Services275 Madison AvenueNew York, NY 10016

917.509.9501rknakal@masseyknakal.com

Major taxCode Change

91-92Recession

01-02Recession

the GreatRecession9.24%

6.27%

5