Owners/operators/multifamily funds, what are you guys hearing in your world?
State assembly reached an agreement last night in Albany. The new regulations, expected to be signed in the law:
* eliminate vacancy decontrol (ability to bring up to market-rate when tenant leaves)
* limit Major Capital Improvement and Individual Apartment Improvement programs (little to no rent increases through reno)
* eliminate income-related deregulation (cannot charge market-rate for an apartment if the tenant’s income hits $200,000)
Seems to me this will hurt small landlords, further incentivise bad ones to keep their properties slums, stop refinancing, and ultimately distress a good chunk of housing stock. This affects 1 million units in NYC.
Just made a similar post. I'm interning for a large family owner in NYC and everyone in my office is pissed. You can pour hundreds of thousands of dollars into renovating apartments (as we are right now) and see rents go up by 2% or so (not sure exactly what the law says but that's what people are saying). I'm not sure who would invest in their current housing stock if their ROI is capped at such a low rate, and small owners who don't have deep pockets are likely to suffer the most, especially as expenses continue to increase.
I'm guessing that in a few years, exactly none of the housing problems plaguing the city will be solved by this, seems like Albany was taken over by activists.
Shoot my bad, must’ve hit publish at the same time. I’m on my phone which makes this site harder to use.
It will hurt/destroy the small operator. Not only will the ROI be capped, the rents themselves are already so low. Any owner who doesn’t think that’s a problem is one major repair away from bankruptcy.
I used to work for an operation similar to yours, and their model was to legally deregulate small walk ups from $800 (for a large 2BR in Manhattan) to $2000. Still reasonable in absolute terms, but preposterous in the eyes of these new regulations.
All good man no worries.
I feel lucky that we're not highly leveraged and have owned properties for decades but if I was someone who recently bought/built a building in the last few years with a high degree of leverage, I would be getting worried about my debt service with revenue now capped at such low levels. Any projections those folks made are probably useless in light of the new laws. I also now wonder what this will do to those trying to secure financing for new multi-family complexes in the future, or if anyone will choose to invest in those assets at all at this point.
To add to this, the city will still demand high real estate taxes which only seem to increase as time goes on. I really can't imagine who assessed this policy honestly and saw it as a good idea.
Right, if future cash flows will never be that impressive (and in some cases inflation will out-pace the increases) then many buildings aren't worth much more than their bricks. Will be interesting to see who gets creative and how.
Any existing owner being hurt by this is just using it as an excuse for bad buys in the last few years. RGB rents have only gone up by fractional amounts the last 5 years, less than 2% a year, so one cannot complain about the caps on rent increases. IAIs are almost impossible to do except on turnover. MCIs get capped now, sure, but if it's the difference between a 4% annual increase and a 2% is what is blowing up a deal, then the operator didn't have enough cushion.
And as for unit turnover and deregulation... do you know how hard this is to do now? From 2012-2017 something like 5,000 units a year were deregulated in NYC. That's a fair number, I guess, but one cannot make the case that we're going to see a wave of defaults simply because those 5,000 units no longer get deregulated.
What we're going to see is that people who bought in 2015-2017 on the back of cheap debt and the assumption they could buy-out or evict tenants getting their positions wiped out, and blaming the new rent regs for their bad decision making. As far as tenant protection goes, the writing was on the wall a long time ago. It's not easy, at all, to buy out tenants these days. There were approximately 966,000 rent stabilized apartments in NYC in 2017 (exc. rent controlled units); there were 3,517 that deregulated. That is .36% - even if you assume that many owners couldn't or wouldn't want to deregulate, you are still looking at minimal turnover. People made fortunes doing this in Brooklyn in the early aughts because with cheap buyouts and shady eviction practices they were getting 10-20% turnover. That just does not happen any more. Anyone who has underwrote to try and achieve that in the last half decade, deserves what they're getting.
It’s going to hurt all owners not just small ones. This will also create more slumlords.
Not to mention, many construction trades will also take a hit as people will now pull back on renovations. $15,000 renovation per unit cap for a pre-war building? Good luck with that.
Whoa whoa whoa. It is most definitely not a "cap" on renovations. It is a cap on renovations you can charge back to your tenants. Any operator who isn't an out-and-out slumlord should be budgeting opex for R&M that they weren't going to try and take IAI's for. Yeah, apartments are going to go to shit over time, I'm not disputing that the law is bad policy.
But this really should not "create" more slumlords. Any operator who isn't willing to cut into their profit margin to ensure their tenants live in reasonable health and safety is a slumlord, and that was the divide before, as well.
And you're right about construction, but it won't impact the unions at all, so the political ramifications of that won't be felt by anyone in Albany.
My expectation is that the NYC RGB is going to come back with some hefty renewal increases - you can't take away all of these mechanisms and give nothing in return. They had already hinted at this if all of these laws were to pass earlier in the year.
Pre-war stabilized building values just got absolutely crushed.
Old stabilized walk-ups are going to start falling apart. Disincentiziving MCIs is absolutely idiotic. This is what happens when a bunch of people who don't understand a thing about how real estate works get to enact laws. Can't wait to hear everyone crying bloody murder about how their living conditions are terrible in a few years! EVEN BETTER - can't wait till these idiots start complaining about how their rent increases went up. BUT WAIT I THOUGHT...LOL.
Indeed and this is much of the MF stock in NYC.
It's very performative. Residents in NYCHA buildings, the ultimate regulated non-MCI/IAI situation, are living in squalor while the same regulators work to recreate the same scenario on a larger scale. Don't forget that situation supposedly needs $32bb to fix.
So...uhhh...how bout those hefty renewal increases? amiright?
Haha yeah....this war should be a hell of a ride
Just came here to rant about the last two weeks spent updating the potential impact of this asinine legislation on the collateral values for our entire multi-family portfolio.
Can't wait to see how well this all works out.
So how does this work on new construction deals with 421-a and J-51 tax benefits? Does the new preferential rent law apply to those as well? That would throw a wrench into developers' proformas. Developers who were modeling 5% annual increases in growing markets could have their increases cut in half, or more?
A lot of these reforms on an individual basis had been expected or at least speculated upon for a while, but did not expect such a sudden and comprehensive roll out with one swing of the bat. Some of these regulations do have good intent (trying to curb criminal or unethical practices of a few bad apples), but the sudden drop of the hammer all at once is irresponsible for the sake of the wider industry. A more progressive roll out perhaps focusing on a few of these changes would have been an ok middle ground, and perhaps be more successful politically in the long run (I find such sudden broad based changes are rarely well executed). For example, as a starting point maybe focus on reforming one of either renovation based increases, MCIs, or vacancy boosts, while enhancing oversight of the other regulations.
Now eventually the market will re-adjust and we'll find a new equilibrium, but it will be difficult for a few years no doubt and punish anyone who's been over confident (which is a lot of people). Also, any potential deals in what's already been a relatively dry market will stay locked up until we get better clarity on what's going to happen (read: gonna be boring AF if you're in acquisitions) . BUT, might see some more opportunities from distressed assets starting in about a year or two which might liven things up. So that's one potential positive depending on your current position.
But everyone should take it as a major lesson to ALWAYS make sure your deal pencils out above water in a sort of "worst case scenario" event, be it from a recession, a political shift, anything. Maybe you've seen 8% rent growth for three years, but things always find a way to average out in the long run. No doubt NYC's real estate has been a bit of a runaway train for the last decade (good for you if you own a stake), but this move feels like pulling the emergency brake when perhaps they didn't need to. Will be interesting to see if the RE lobbyists change their long term strategy and structure, or if they'll keep playing the same game. Based on trends in current politics, I'd choose the former.
I mean, I agree that the reforms are stupid and will have a ton of side impacts down the road that will be bad for tenants, but the implication that the Legislature is somehow responsible for making sure that the real estate industry doesn't lose it's shirt is insane.
The truth is, none of the changes proposed on the economic side are that big a deal for any honest operator. If you bought MF in the city hoping for 5% rent increases, or getting 10% of your tenants out every year, then you are either an idiot or exactly the "bad apple" that legislation was actually needed to combat.
Well that's your opinion. People and firms in a position to understand the impact these changes will have on operations and management are going to make a killing in the next 6-12 months, I think. Local operators will be in decent shape, especially those that already know how to interact with city/state agencies.
Yeah, I mean, I won't cry if over-aggressive actors lose their shirt. About time.
At the end of the day these weren't passed to cool off the NYC real estate market. It was done (and foolishly, in my opinion) because there are a few bad apples who have poisoned the barrel for everyone else. There are some genuine horror stories in NYC MF, and real slumlords out there. Unfortunately there isn't a great way to fix that, legislation is a broad hammer when a scalpel was needed.
The lesson here is that the MF industry proved incapable of regulating itself, and so it had even worse penalties imposed from above.
Agreed on many points. Always tricky finding a balance in an industry where you're simplifying perhaps most personal thing in people's lives into "units". It's a perfect storm for conflict. My hope was maybe they'd focus on oversight, but that may just not be possible at the scale of the city and with internal corruption that exists across so many city and state agencies.
On the 6-12 month timeline, my reason for thinking more like 1-2 years is that, provided all the uncertainty, I think most will want to wait to see these in action for a little while before they start to react, and then those who have a better handle on the situation can start to take advantage. But maybe we'll start seeing some activity sooner?
Agreed, but there are plenty of “honest” operators who are about to have their worldview turned upside down. Many 20-unit walkups (Nolita/EV/Harlem/Williamsburg) will be worth their 1999 prices, if they trade at all.
That would imply this was not political theatre.
Blue states like to regulate housing. News at 11.
lmao fuck the kids who are just about to start in MF like me i guess
I understand there is still upside in Free Market MF buildings and in Development, but isn't that upside limited if the neighboring RS MF buildings are going to be falling apart because there is no incentive to renovate and make improvements.
Maybe it is time to move asset classes or market. Or maybe both.
They long term play will now be to buy all those Rent Regulated buildings as covered land. Hold for 10-20-years and then demolish. If I was an owner with deep pockets, I would just stop renewing any rent regulated unit that turns over. Eventually you get 2-units next to each other, then preform an alt-2 to convert to 1 unit. Also there are still a lot of buildings that have asbestos, you could as an owner knock some loose and then report it. The tenants will have to vacate by the city and in the meantime you can demolish the building.
This doesn't really work. The carry on those buildings is enormous. The reason MF in NYC was in dire straits is because the city laws the property tax burden disproportionately on multi-family rental buildings. Even with no tenants and no expenses, you're still looking at a ton of tax expense. No one has deep enough pockets to withstand that kind of carry, not when margins on new construction are as skinny as they are.
I hate to be "that guy" but this attitude right here? This is why Albany came down so harshly on the side of tenants. Because way too many smaller owner/operators thought this kind of shit was acceptable. Yeah, the new law is bad public policy and is going to rebound on the city and state in ways they cannot foresee, let alone on tenants. But the anger that spawned it? That wasn't misplaced. As I said earlier, the NYC CRE community has always made the case that it can regulate its own bad actors internally to an extent that the Legislature or City Council didn't need to get involved. Until it became obvious that that was not the case. And this kind of remark, which I've heard seriously uttered over the weekend, is proof positive that the the Legislature was right to be worried about abuse of the system, even if their chosen method of combating it (new legislation instead of effectively enforcing the old) was wrong.
The real "long term play" is to understand that the rules of the game have changed, and adapt accordingly. Trying to fit an old business execution plan into new market conditions is why you end up with dinosaur families/family offices; the world changed and their outlook didn't so now they sit on the sidelines.
Anyone have any insight on how this will impact deals with Section 8 contracts?
Curious as well. Looking forward to reading through the documentation when it's out.
What do you mean? Section 8 is a federal program, Rent Stabilization is NYS. To the extent a lot of Sec8 contracts cover buildings which are also rent stabilized, there are going to be carveouts so that federal law supersedes, is what I've heard, since rent increases won't burden tenants in that case.
What you suggested sounds reasonable and is what I would hope would happen. However, I am not confident it will be spelled out that clearly in the bill.
Realize this is a bit of a dead horse now, but some bullet points from a buddy who works in prop mgmt at a national firm (written up by company attorneys). Adds a lot more risk to MF operations:
The last two aren't deal breakers but holy shit to the first three. Absolutely ripe for fraud.
That firm needs better lawyers; either that, or the account managers are not understanding the message being passed across. Or perhaps they're being overly broad. For example, #2 is actually a stay of eviction for up to a year if "suitable housing in the same neighborhood" isn't available, or if it will cause extreme hardship. This is obviously an attempt to keep homelessness down. But more to the point, you aren't burdened with these tenants forever and it's sure to be litigated. What constitutes "suitable housing"? Either way it's not like you're stuck with the people forever. Also, this is at the discretion of the judge presiding over the L/T case, and not necessarily an inherent right the tenants will have or get every time.
The first point is also wrong. The bill calls out "tenant blacklists" for tenants who litigate against landlords for unsafe living conditions and the like. It actually explicitly calls out that nonpayment of rent is carved out of this. (Part M Section 5c). Basically it just requires that the burden of proof is on the landlord to prove that changes to a tenant's lease are not retaliatory.
I'm not saying these provisions aren't crazy, but people are painting a doom and gloom scenario which is not entirely accurate. Edifice 's friend works in property management at a firm that doesn't specialize in NYC management - it's not surprising that they drew unusually broad conclusions from this. Also, it sounds like there is a bit of a game of telephone going on as the message is passed from lawyer to prop mgr to Edifice to this post.
No one is talking about how once a RS apartment reaches the threshold (2,775) it doesn’t become FM!?
Because legally there is no threshold anymore to talk about
Billions of dollars of property value has been wiped out from NYC, yet that's not going to affect property taxes - that's still going to rise. Renters don't care about the hardship the landlord's face - they only care about themselves and how their 3 jobs at fast food places can't pay the rent. Tenants don't know or care about the financials of a building - they only care that they pay as little as possible in rent. The only solution is a Utopian society where the government distributes jobs and housing to everyone equally. What's that form of government called again?
This is terrible for NYC and will definitely deteriorate the housing stock. I'm thinking that there's going to be some upside in the distant future when property values hit their low points and a lot of buildings fall into disrepair.
Agree, you have 30% of polled owners that are not going to put vacant RS units back on the market, and 50% are only going to minor repairs. My prediction is that a lot of owners will let their buildings go to shit, get the tenants out then get a certificate of rehabilitation from the DHCR. It is a long term play, but I would start buying these buildings in the next 1-5 years, but only the ones in good areas.
I agree with the overall point but I'll bet my last dollar that those "polls" end up vastly, vastly overstating the number of landlords who don't lease their vacant RS apartments. The industry is in doom and gloom mode at the moment, because that's what you do when you get hit with a massive sea change in legislation like this. It'll be more or less business as usual by this time next year. Owners can't afford to sit on 20 or 30% vacant buildings; they'll default and their lender will sell it at a discount to someone who will rent up those units.
I can see the headlines now:
"You thought BLEECKER ST retail was bad? Here are 10,000 units LANDLORDS REFUSE to RENT!"
"SLUMLORDS aggravate housing CRISIS by keeping homes VACANT"
"The one WEIRD TRICK Senate majority leader Andrea Stewart-Cousins and Assembly speaker Carl Heastie used to remove HORNY singles from YOUR neighborhood"
Never ceases to amaze me that ppl who know nothing about economics think it wise to enact stringent economic policy and that, after a seemingly unending number of failed policies, they haven't yet learned that the intentions behind price controls have nothing to do w/ the outcomes of price controls. Incentives are causal mechanisms, intent isn't.
BX currently halting all renovations at Stuy Town.
https://therealdeal.com/2019/07/12/rent-regulation-laws-prompt-blacksto…
Well it was only a matter of time but should the Supreme Court choose to hear this case it will be interesting. If I remember the SC declined to hear a suit in rent control in 2012 but given the outcry and change in a much more conservative court Landlords might have a case.
https://www.wsj.com/articles/landlords-challenge-new-yorks-rent-control…
Reflecting on this post five years later, it's noteworthy that NYC rent-stabilized (RS) buildings have returned to pricing levels last seen in 2010. The question arises if property pricing trends persist in a downward trajectory, or could they potentially rebound from this point onward?
My speculation leans towards the notion that property values may continue to experience cap rate expansion, primarily due to the existing rent laws, high utility costs, stringent local regulations, and associated expenses operating these old buildings (major Capex involved), all of which collectively put downward pressure on property values.
A lot transaction activity in rent stabilized apartments recently. Mostly private capital or HNW buyers. Going to be interesting to see how they make money on these deals.
long investment horizon assuming a shift in regulatory climate is the only way these things make any sense
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