Apartment buildings in New York will be sold for $ 1.75 billion as part of a record deal on the pandemic

The multi-family portfolio deal is a sign of strength for the city's residential real estate market, even as rising interest rates threaten commercial transactions.

The Venture of a New York-based investment firm and U.S. developer has agreed to pay $1.75 billion for six rental apartment buildings in Manhattan, according to people familiar with the matter, the highest price for a multi-family portfolio in New York city since the pandemic began.

The planned purchase of the portfolio, which includes about 1,700 units mostly at market rates, Black Spruce Management LLC and Orbach Affordable Housing Solutions LLC represents a big bet on New York. The deal indicates that demand for rental apartments in Manhattan remains healthy, despite rising interest rates, turmoil in capital markets and fears of recession.

Rising rates have started to cut profits because buyers have to pay more to borrow money. Other commercial real estate sectors are showing their first signs of cooling in more than a year.

Still, bidding was strong for six towers on Manhattan's Upper East Side, according to people familiar with the matter. The winning rate would result in initial building returns in the range of 3% to 5% for buyers, according to people familiar with the matter. That yield is much lower than other types of commercial real estate and is comparable to what investors paid rent for apartments in New York before interest rates began to rise, analysts say.

The towers were built between the 1960s and 2018 by Sheldon Solow, a well-known New York developer, and all have doormen. One-bedroom apartments in buildings that were recently rented out at prices ranging from $3,900 to nearly $7,000 a month depending on the unit and building, according to the StreetEasy website. About 15% of the 1,700 housing units have their rents regulated by New York City.

Housing construction in New York City has recovered strongly after the initial exodus of New Yorkers at the beginning of the pandemic led to a sharp drop in home prices and rents. Luxury home sales hit record levels last year, and the average rent for an apartment in Manhattan rose to $4,000 a month for the first time in May, according to a report by Douglas Elliman. 

Many leases in a portfolio of six buildings were signed during the pandemic, when rental prices were lowered and new owners have the opportunity to generate income through rent increases. This bullish attitude stands in stark contrast to investors' attitudes toward office real estate in New York, which suffers from higher vacancies due to the popularity of remote work.

John Pawlowski, head of the residential real estate sector at research firm Green Street, said the residential real estate market, especially in New York, is holding up better than other sectors. Debt financing is still available, even if it costs more.

"People will still need apartments; there is still a lot of demand," Mr. Pawlowski said. "We'll see what happens in the economy, but 2022 and 2023 should be very good years for new York apartment landlords."

Landlords are in a better position than others to withstand rising interest rates because housing is a necessity that people can't easily give up, and 12-month rents allow for higher rents, analysts say. Still, if inflation causes a recession and higher unemployment, landlords will feel the consequences, Mr. Pawlowski said.

"People will start moving back with their parents, doubling with roommates to save on monthly rent costs and negotiate with their landlords for smaller rent increases," he said.

Mr. Solow, who died in 2020 at the age of 92, founded the Construction Company Solow more than 50 years ago. Its most famous building was the Midtown Office Tower at 9 West 57th Street, known for its sloping façade. Mr. Solow's company was acquired by his son Stefan Solovyov, who last year formed the holding company Soloviev Group. 

Black Spruce, a real estate investment company, was founded in 2009 and currently owns more than 4,000 apartments in the Greater New York City area. Orbach, also founded in 2009, is a private developer with a focus on affordable housing and a portfolio of more than 6,000 apartments across the U.S.

Black Spruce and Orbach teamed up earlier this year to buy the luxurious Murray Hill towers, known as the American Copper Buildings, for more than $800 million.