What is the historical capitalization rate for real estate in New York City?

Historical capitalization rates (cap rates) for real estate in New York City and the rest of the country experience cyclical patterns and vary by the particular market, such as multifamily apartment buildings and walk-up buildings versus those with elevators and commercial properties. As of the first half of 2018, cap rates in Manhattan had risen from the previous year to 3.8%.

Calculating the Capitalization Rate

The cap rate is the rate of potential return on a real estate investment. It is calculated by dividing the expected annual income generated by the property, less fixed and variable costs, by its total value. Industry analysts watch cap rates closely since they estimate returns on investments. Appraisers use the capitalization rate approach to determine an income-generating property's value. The market-derived capitalization rate is applied to a property's net operating income to estimate the current value of a property.

Between 1984 and 2009, the average cap rate was 8.4% for walk-up buildings and 7.68% for apartment buildings with elevators. The cap rate for buildings with elevators peaked at nearly 12% in both 1984 and 1992 and dropped to just over 3% in 2006. The rate for walk-ups was slightly higher in every year of that period except 1994, 2000, 2002 and 2004.

According to "National Real Estate Investor," $2.8 billion was invested in Manhattan real estate in the first half of 2018. This amount was an increase over the previous year, but still much lower than the approximately $4 billion spent during the same months in both 2015 and 2016. However, it shows investors are still willing to speculate on New York real estate due to low interest rates and significant tax benefits.

(For related reading, see "3 Ways to Invest in New York City Real Estate.")