When top players in any field bet against the trend, it’s always worth paying attention.
The Struggling Market for Rent-Stabilized Properties
In the current NYC real estate market, rent-stabilized properties are widely seen as a distressed asset class. Some of the largest owners are net sellers, and it’s easy to see why. Rent rolls have stagnated, while expenses, notably property taxes and insurance, are climbing at an alarming rate—reportedly 1.5 times faster than rents. This trend, if left unchecked, suggests a grim outlook, where rent-stabilized properties could theoretically reach a terminal value of zero.
Hungerford’s $180 Million Contrarian Bet
Enter Peter Hungerford of PH Realty, who is taking a starkly different view of the market with his recent $180 million acquisition of a 1,300-unit portfolio, 85% of which are rent-stabilized. While the 40% discount to the previous owner’s purchase price is noteworthy, it’s tough to say whether the portfolio was acquired at a favorable basis without knowing more.
With around 10% of the portfolio’s units currently vacant—split between market-rate and rent-stabilized apartments—there’s a potential opportunity to renovate and boost revenue, particularly with respect to the market-rate units. However, the rent-stabilized units present much more limited upside due to the unfavorable rules related to individual apartment improvements. The question remains and no doubt Hungerford is well aware of the answer: is there enough room to make these units profitable under the current rules?
Hungerford himself has remarked that this acquisition isn’t “really about increasing revenue, as much as operating the properties as a responsible local landlord.” A noble position for sure, but one has to wonder whether his investors are hoping this is simply politically necessary lip service or a quote taken out of context. As an acquisition of this magnitude must have a value-add component to it.
Betting on Property Tax and Insurance Reform: A Risky Wager?
Hungerford points to two of the largest expense items where he believes change may be afoot: property taxes and insurance. Industry-backed groups are lobbying and even litigating for a change to the tax assessment process (link here), but success if far from guaranteed. As for insurance, Hungerford speculates that rising premiums could push the federal government to intervene. Whilst this is an interesting take, it hinges on factors beyond his control. Can this really be the cornerstone of his strategy?
Other Potential Changes Beneficial to Landlords
Looking ahead, there is some optimism that interest rates may have peaked. If borrowing costs decrease, this could drive down cap rates and boost property values. Additionally, the Rent Guidelines Board could opt to align rent increases with inflation, providing some relief to offset rising expenses. There’s even been a proposal in Albany—though not passed and in legislative limbo—that would allow landlords to charge a “first rent” upon tenant turnover if the previous tenant had lived in the unit continuously for more than ten years (link here) These potential changes, while hopeful, are still speculative at best.
Contrarian or Misguided? Sometimes the Wisdom of the Crowd is Simply Wisdom
As much as NYC landlords may hope for favorable changes in property tax laws or federal intervention to backstop insurance premiums, wishing it doesn’t make it so. Contrarian thinking is appealing, but it doesn’t always lead to success. Though hard to say, Hungerford’s basis in these properties and cost of capital may provide a significant margin of safety. Still, he is betting against market sentiment that has led many seasoned landlords to exit rent-stabilized properties at significant discounts. Sometimes, the wisdom of the crowd isn’t flawed or irrational—it’s simply wisdom.
Sources:
PH Realty Takes Massive Rent-Stabilized Portfolio at 60% Discount (therealdeal.com)
Landlords Say New Law No Help For Vacant Units (therealdeal.com)
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