Rental Real Estate.... An Investor's Dilemma

Rental Real Estate…. An Investor’s Dilemma

By Brent Katzmann, NYS Lic Associate Broker

I’ve been writing much of this year about the emerging trends in residential real estate in our market, and yet single-family residential is just one part of our larger housing marketplace, albeit the largest.

For years, the Ithaca area has also been an attractive marketplace for investors looking to own one or several smaller multi-family units, generally 2-10 dwellings in a single building. Clearly, much of this has been driven by growing enrollments at Cornell, Ithaca College, and TC3, as well as a healthy job market for young professionals, medical staff, and workers in the services industry. Due to the transient nature of many of these residents, a property owner could expect to experience regular turnover and opportunities to reassess rental rates and adjust for growing property values and the taxes they generate, and experience regular cash flow as their assets grew in value. When the pandemic hit in 2020, it helped generate a surge in investor interest as Tompkins County experienced an influx of new residents and a work-from-home phenomenon that caused increased interest in multifamily investing.

The chart below shows the jump in sales activity and values following several consistent sales years.

As interest was growing among investors, both local entrepreneurs and out of town buyers, some of our local municipalities began in 2023 to take note of the activity and started discussing new regulations to control both long and short term rentals with an eye towards balancing rental prices and discouraging investor activity through the introduction of owner occupancy requirements and, in the case of the City of Ithaca, passing legislation that regulates the pace of rental rate growth and reduces the rights of property owners to terminate leases at lease end.

Another noteworthy factor in multi-family values and sales is interest rates. A slight increase or decrease in interest rates can make a significant difference in the cash flow of an income property. Rising assessments and subsequent increases in tax expenses also significantly impact profitability and, therefore, value. Given this, it may be hard to find investments in real estate that are great cash generators right now. Investors need to seek out and choose investments that can perform well in this climate, and with the stock producing strong returns over the past several months, it seems likely that that has factored into the decline in real estate investment sales as well.

The data supports these assumptions as both the number of multi-family properties changing hands and the average values of those properties at the time of sale experienced declines beginning in 2023.

While year to date we seem to be seeing some rebound in sales prices from 2024, the volume is down significantly and, as the next chart shows, properties in both the Town and City of Ithaca, where rental regulations are most stringent, are taking significantly longer to sell and are realizing sales prices relatively well below the asking price, in some cases below current assessed values, neither of which have been the case in prior years.

To be clear, the market this year has been difficult to read on many levels as economic policies have fluctuated, the pace of hiring slowed, and property owners have had to decide if it’s the right time for them to cash in on their equity growth of the past few years or wait for a re-stabilization of market forces. One other factor potentially influencing their thinking is that there continues to be large-scale new construction of multi-family projects being built and expected to hit the market next year, including the Aurora Apartments on Meadow Street near the new Cayuga Medical facility, The Breeze on the old Ithaca Gun Factory site, and Theory, a massive building going up on East State Street. Together, these will bring nearly 600 new market-rate apartments online. These are in addition to several hundred income-qualified units being developed around the City.

In conversations with other agents and watching the rental market this fall, it appears that rental prices are moderating and vacancy rates are growing slightly from prior years, although this data is purely empirical as occupancy data is not centralized and any federal census data is delayed by several months, even years. Will the market be able to continue to support more and more rental units and hold their value? It’s a fair question, although the resiliency of the market here regularly surprises us all. Here are some reasons for taking the long view of real estate investment in our market:

Cornell has always grown consistently, even when the messaging might suggest otherwise.
Naysayers about the massive number of units that came on the market over the past 10 years expected to see vacancy rates grow, and they didn’t. Other than a couple of notable failures by overextended individual investors, properties continue to fill up to a healthy and sustainable level.
The period from 2020-2023 was a historical anomaly.
Even with the loss of Federal funding to many local institutions and agencies, adjustments will be made to normalize budgets and investments.
Ithaca and the surrounding communities have always offered a healthy, vibrant, diverse, and entrepreneurial environment and remain attractive to both climate refugees and those seeking a smaller, but no less inviting market.

Together, these factors suggest that we remain a reasonable, even solid place to make real estate investments, especially as we see interest rates start to drop along with market prices.