Furthermore, development is expected to peak this year, thus slowing deliveries, especially for class B and C units. “Meanwhile, higher concessions will continue to drive class A buildings during lease-up,” according to Marcus & Millichap.

Encouraged by the relative affordability of Brooklyn properties compared to those in Manhattan, builders have set their sights on the East River waterfront. “Additionally, peaking deliveries are focused in Long Island City, Downtown Brooklyn and the Far West Side of Manhattan,” the report states.

That being said, new development have been trending smaller than in recent years, with an average size of less than 500 units per project. As a result, Marcus & Millichap says, “vacancy will remain compressed, allowing further rises in rental rates as the pace of completions falls beyond 2017.”

NEW YORK CITY—Even as apartment vacancies in the city have fallen to the lowest levels seen in nearly two decades, investment sales dollar volume and deal velocity in the sector have fallen by about 20% over the past year, says Marcus & Millichap. The deals that are getting done tend more toward class C properties, especially in Brooklyn.

It's in Brooklyn as well as Manhattan that investors have been focusing their attention, according to the firm's third-quarter research report. In Manhattan in particular, the focus has been on transitional neighborhoods, with the Upper West Side and Harlem submarkets leading investment volume and activity, Marcus & Millichap says.

Across the New York City metro area, including the northern suburbs in Westchester County, cap rates are currently in the mid-4% band, driven mainly by the high-3% first-year returns in Manhattan. In the outer boroughs, apartment properties typically trade in the high-4% and mid-5% range. Marcus & Millichap reports that “a widening gap between buyers and sellers has emerged over the past months as operations have become more challenged, lengthening closing times and placing upward pressure on cap rates.”

Conversely, longer-term fundamentals all bode well for the city's apartment sector. “Boosted by a diverse industry base, New York City is adding new workers at a consistent pace,” the report states. “Additionally, employment growth has skewed mostly toward high-wage sectors such as healthcare and professional employment, providing a boost in demand for the multitude of new class A deliveries.”

Furthermore, development is expected to peak this year, thus slowing deliveries, especially for class B and C units. “Meanwhile, higher concessions will continue to drive class A buildings during lease-up,” according to Marcus & Millichap.

Encouraged by the relative affordability of Brooklyn properties compared to those in Manhattan, builders have set their sights on the East River waterfront. “Additionally, peaking deliveries are focused in Long Island City, Downtown Brooklyn and the Far West Side of Manhattan,” the report states.

That being said, new development have been trending smaller than in recent years, with an average size of less than 500 units per project. As a result, Marcus & Millichap says, “vacancy will remain compressed, allowing further rises in rental rates as the pace of completions falls beyond 2017.”