It is well-known that The Bronx is one of the hottest commercial real estate markets in New York City, with a horde of high-profile institutional players recently scooping up properties in the sub-market. This popularity should continue for the foreseeable future as the region’s assets are among the city’s most affordable, with many offering one of the most coveted features for an investor: Higher returns.

(From left to right) By Daniel Mahfar, Investment Sales Professional; and Remi Mandell, Analyst – Investment Research.

Relative affordability and widely-perceived upside potential kept The Bronx’s overall real estate investment market firm last year. In 2018, the borough saw 312 transactions consisting of 511 properties, totaling $2.05 billion in gross consideration. Compared to 2017, dollar volume fell 8%, transaction volume edged up 1% and property volume rose 12%, according to Ariel Property Advisors’ “Bronx 2018 Year-End Sales Report.” To view the full report, click on: http://arielpa.com/report/report-APA-Bronx-2018-Sales-Report.

In search of strong income and high returns, cap rates on multifamily buildings in The Bronx have not gone unnoticed by investors. Cap rates, which have compressed throughout NYC for most of the past decade, held steady in The Bronx in 2018, averaging 4.94%, the highest of any sub-market. In Manhattan, Northern Manhattan, Brooklyn and Queens cap rates averaged 3.72%, 4.06%, 4.65%, and 4.31%, respectively.

Last year’s rising interest rate environment prompted many investors to seek the above-average yields and steady cash flows offered on multifamily properties in the borough. Indeed, these assets saw transaction volume increase 19% year-over-year to 176 sales, while dollar volume dipped by a mere 1% to $1.22 billion. Property volume soared 33% to 288 buildings, a result of multiple multifamily portfolios trading hands, including Black Spruce Properties’ $75 million sale of an 11-building portfolio in West Farms to Camber Property Group.

In the development market, last year’s Jerome Avenue rezoning bolstered demand in the already active sub-market. The rezoning – the fourth major zoning overhaul under Mayor de Blasio’s affordable housing plan and the first in The Bronx – covers 92 blocks across 2 miles along one of the borough’s busiest thoroughfares. Ariel Property Advisors has witnessed a significant uptick in requests for asset evaluations from owners of properties located along this corridor. Rising demand can be highlighted by Atlantic Development Group’s recent acquisition of 1331 Jerome Avenue. The 165,000 buildable square foot site sold for $11.1 million, equating to $67 per buildable square foot, above-average for the area and a testament to the region’s growing allure.

Due partly to deals along Jerome Avenue, The Bronx’s development site transaction volume leapt 26% to 72 sales in 2018. Dollar volume soared 114% to $498 million, although this can largely be attributed to the $165 million Brookfield acquisition of a 1.4 million-square-foot site in Mott Haven from the Chetrit Group and Somerset Partners.

Prices Pique Investors’ Interest

Pricing is by far one of the biggest drivers of demand in The Bronx. While multifamily property prices in 2018 rose 9% to $213 per square foot, it was sharply below Brooklyn, Northern Manhattan, and Queens, where the price per square foot averaged $389, $379 and $365, respectively. Manhattan was the priciest market, commanding an average of $891 per square foot, substantially more than The Bronx, and yet another reason why investors will continue to flock to NYC’s northernmost borough.

Land also got costlier last year, with the average price per buildable square foot for a development site in The Bronx rising 14% year-over-year to $72. However, that is far below Manhattan’s $691, Northern Manhattan’s $218, Brooklyn’s $261, and Queens’ $211 per buildable square foot.

Meanwhile, The Bronx’s relative affordability has prompted many Manhattan-centric developers to shift focus. For example, Sutton Group’s Wharton Properties, best known for their commercial properties dispersed around Midtown Manhattan, has been steadily growing a collection of commercial assets in The Bronx. The firm recently purchased the Pelham Bay Diner for $10.25 million after selling four Downtown Brooklyn properties. In addition, mega-developer Lightstone just bought two properties for $59 million that fall within an Economic Opportunity Zone along the Harlem River in Mott Haven.

The federal government’s Economic Opportunity Zone program has made a strong impact on The Bronx, and there are 75 zones situated there. In order to spur economic growth and development, the program offers substantial tax benefits, such as the deferment of capital gains taxes, in exchange for significant investment in the zones. Ariel Property Advisors expects development sites in these zones to command benchmark pricing, especially in areas that were in low demand before the program’s implementation, such as the South Bronx.

Nonetheless, certain assets in The Bronx are poised to fare better than others in 2019 due to widely-expected reforms made to rent regulation laws, which should emerge in June. Demand for multifamily buildings dominated by rent stabilized units should soften, but properties with plentiful free market units, as well as new construction buildings, should see an uptick in activity.

Looking ahead, the outlook for The Bronx’s investment sales market is quite favorable, with the rezoning of Jerome Avenue and Opportunity Zone program serving as major boons for development in many areas. Changes to New York’s rent regulation laws are a potential headwind for certain multifamily assets, but attractive pricing and enticing yields should keep overall activity strong. Once overlooked, The Bronx is now at the forefront of investors’ attention, which should make property appreciation all but inevitable.