New York Recovers, Housing Starts Drop: May Multifamily News Roundup

The Biggest May 2021 Real Estate News

We have summarized the biggest multifamily and real estate stories to emerge in May of 2021. The New York City market has begun to recover, and will likely further improve as reopening and return to work both accelerate. Housing dropped month-over-month, though they remain near historical highs, and Biden’s proposed changes to 1031 exchanges may increase investor exposure to capital gains taxes if passed.

Mixed Messages in New York City

Once the center of the pandemic in the United States, New York City has begun to reopen. Restaurants in the city can operate at full capacity. The city’s school system will do away with remote options for learning in the fall.

Despite reopening efforts, the impact of the pandemic on real estate has not ended. Office vacancies recently reached a 30-year high, sitting at 16.3%. On the residential side, 11.6% of apartments in Manhattan remain empty. Manhattan also lost its place as the top location in the United States for foreign investment in real estate for the first time since 2009. In 2009, Washington, D.C. took top place; this time, Canadian investments in Seattle pushed the west coast city above Manhattan.

A bull case for the city persists. Many employers have committed to repopulating their offices, entirely or partially, during summer or fall. Several New York City pension funds have partnered with Hudson, Inc. to build some $250 million worth of housing in and around the city. As reopening proceeds, investors should watch for returning city-dwellers and new residents attracted by employment and temporarily depressed rents.

Housing Starts Drop Unexpectedly in April

The costs of labor and lumber have weighed on builders. Numbers released in May reveal that housing starts fell further than anticipated in April due to these costs. Though the 9.5% discrepancy between expectations and actual starts was substantial, starts do remain high. March’s 1.733 million starts were the most for any month since June 2006. Additionally, the 1.569 million starts in April was a 67.3% increase over starts in April of 2020. Despite these difficulties, demand for housing has stayed high, matched by confident builder sentiment.

Biden May Modify 1031 Exchanges

The Biden administration has announced it may modify the tax break that enables 1031 exchanges. 1031 exchanges allow real estate investors to defer capital gains taxes when investing profits from property sales into another property. Under Biden’s plan, the amount investors can defer would fall to $500,000.

Opponents of the plan have said that it will stymie investment in the apartment sector, especially affordable housing. That would increase the cost of housing and decrease jobs in the construction industry. It would also endanger businesses owned by small investors who have seen rents collapse during the pandemic. Advocates of the change have asserted it would merely make real estate more similar to investments in typical securities. As of now, the proposal has not been attached to any legislation. Investors who use the 1031 should prepare for its modification and adjust their portfolios and expectations accordingly.

Other stories

  • Residential rents have begun to increase in many markets as the economy reopens, which may disproportionately impact low-earning families. 
  • Due to government action and forgiving policies from banks, real estate asset prices have remained stable, and investment continues to pour into assets of all classes.

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