Once upon a time, in a land far, far away, there was this urban oasis perceived by the world as the epicenter of capitalism where people flocked from all over to realize their professional and personal dreams. Capitalism was embraced and upward mobility was not a slogan but a truism of what was possible for anyone willing to work hard for it. That place was called New York City and the year was 2018.
The Rules Governing Rent Regulation in NYC Turned Upside Down
In 2019, the legislative Armageddon commenced from headquarters in Albany. New York State passed the Housing Stability and Tenant Protection Act (HSTPA) and, overnight, the economic incentive to maintain or improve rent stabilized properties evaporated. It even stopped making sense, in many cases, to rent out recently vacated units. Best to leave the units vacant and hope for the laws to change than receive a nominal rent and an endless parade of 311 complaints. The consequences were foreseeable to all except those in government so it seemed. Your humble author wrote this piece the day the law came into effect in June 2019 (link here) and I’m no genius just an astute observer.
Rent Stabilized Properties are Distressed and it’s just the Beginning
Now some four years later with elevated interest rates, the entire asset class is at risk. Expect a tsunami of defaults in the coming months, especially from those owners who purchased properties just before the HSTPA came into effect and capitalization rates were below 4%. Sugar Hill Capital Partners was the first notable group to fall, defaulting on most of their assets in 2022. Many are now concerned that the Sugar Hill “foreclosure cases may be the proverbial tip of the iceberg.” So far, politicians remain on the sidelines unwilling to modify HSTPA and may even be gleeful by what they are witnessing if, as they must believe, it assures their re-election.
Distressed sales of rent stabilized buildings are ramping up. Two institutional players, Taconic Partners, and Clarion Partners, sold a 14-building Bronx portfolio in April 2023 at a 40% discount to what they paid in 2018. The 550-unit Dunbar Apartments in Upper Manhattan sold for a bit over $86 million, or just enough to cover the adjustable rate loan. One broker active in this space lamented that despite pricing these assets so low, he “still isn’t getting any bids.” According to The Real Deal, there are $161 million in foreclosures on rent stabilized buildings in NYC and many more in default. City Skyline Realty has at least $76 million in delinquent debt and $10 million in foreclosure in connection with one of their Bronx buildings.
Owning Rent-Stabilized Buildings: Reckless Decision Making or Unfortunate Circumstances?
Were all these groups—many institutional owners—reckless or just unfortunate? Hard to say and perhaps it’s a bit of both. One could argue that it’s a risky game to own a highly concentrated portfolio of rent stabilized properties in a few select neighborhoods. That said, Vornado Realty Trust and SL Green Realty—both led by well-regarded industry legends—suffer from a similar fact pattern the only difference being they operate in the office market. In fact, it is quite common for owners to stick to an asset class they know well and in markets they specialize in.
Albany didn’t tweak the rent laws with the HSTPA, they changed the game entirely throwing owners overboard into shark-infested waters with little warning and the most meager of provisions. Perhaps they didn’t understand the full impact of the law on owners at the time but they certainly do now. Without the ability to renovate apartments and increase rent rolls, these buildings and their owners were doomed the day the law passed. Inflation isn’t helping either. According to real estate attorney, Sherwin Belkin, “if the costs are going up and the income stream is substantially reduced, that’s going to put a lot of folks underwater or close to it.” So, where do we go from here?
What can Owners do to Survive and Keep their Assets?
For certain borrowers and types of loans, kicking in more capital may result in an extension of the loan allowing ownership to live to see another day. Government agency loans (which are amongst the biggest lenders for rent stabilized buildings), however, are less forgiving and generally don’t have the appetite for so-called workouts. Furthermore, many borrowers don’t have the ability or willingness to add more equity in the current environment only to lose the building at a later date. Why throw good money after bad the thinking goes.
The industry is bracing for the worst. With mass foreclosure sales on the horizon, who takes back the buildings, the banks, or the city? Either way, “you end up with a housing stock that does not get attended to, and that has both short- and long-term negative ramifications for the city,” according to Belkin. It’s too early to call whether we return to the urban decay of the 1970s and 1980s—marked by high crime rates and abandoned buildings—but there’s nothing to suggest the situation is improving. A rollback or significant watering down of the 2019 HSTPA law may be the only meaningful salvation for distressed owners but there isn’t even a whisper of that coming from Albany.
Website Credit: Tuturice, V. (2023, September 5). Distress in rent-stabilized buildings rises to surface. The Real Deal. https://therealdeal.com/magazine/national-september-2023/distress-in-rent-stabilized-buildings-rises-to-surface/ Zaveri, M., & Bensimon, O. (2023, June 22). Rents to Rise for 2 Million New Yorkers This Year. The New York Times. https://www.nytimes.com/2023/06/21/nyregion/rent-stabilized-apartment-homes-rise.html Mays, J. C. (2023, August 10). Mayor Adams Said Migrant Influx Will Cost NYC $12 Billion. The New York Times. https://www.nytimes.com/2023/08/09/nyregion/adams-nyc-migrants-cost.html#:~:text=375-,Mayor%20Adams%20Says%20Migrant%20Influx%20Will%20Cost%20New%20York%20City,them%20and%20provide%20other%20services.
