Author: Josh

The Case for Buying Rent-Stabilized Multi-Family Properties

Published on November 29, 2023

I know, I know…buying multi-family properties comprised of mostly rent-stabilized units with nominal rental upside and increasing expenses in an elevated interest rate environment can’t possibly make any sense. However, I think it is time investors revisit the asset class and here’s why:

Purchasing Below the Cost of Capital

Unlike most properties on the market where there is a wide spread between the bid and ask prices, rent-stabilized properties can be acquired for cap rates in the range of 7.5%-8.5%, or below the cost of capital. Sure, current laws limit ownership’s ability to add any meaningful value through major capital improvements or apartment renovations but that also means no out-of-pocket capital expenditures will be incurred. Like an investment in a business development company or covered call ETF, you can expect limited appreciation but a consistent and healthy yield. At a cap rate in the 8% range with borrowing costs where they are today, these properties can be acquired at an undemanding valuation for investors to jump in.

Future Interest Rates

Owners and operators found out the hard way what Warren Buffet knew all along and that is “everything in valuation gets back to interest rates” and commercial real estate is no exception. The oft-quoted metaphor is that Interest rates are to asset prices what gravity is to an apple. However, if interest rates have peaked or will soon, investors can expect more favorable financing and valuations in the years ahead.

Over the next five to seven years, investors may be able to re-finance at a rate well below current market rates. Furthermore, if asset prices drop with higher interest rates, the inverse is also true. That is, if we move to a 5% interest rate world, it stands to reason that the appropriate cap rate for rent-stabilized buildings could be in the 5.5%-6% range.

To illustrate, imagine an investor buys a 15-unit rent-stabilized building with a $220,000 net operating income at an 8% cap rate in 2023, or $2.75 million. Five years later, assume the net operating income didn’t change (i.e., the rent roll increased nominally as did expenses), but the appropriate cap rate is 6%. The value of the asset increases to $3.67 million with no improvement in the rent roll or net income.

Predictable Income Stream with Long-Term Tenancy

When a tenant receives a favorable regulated rent, they tend to pay on time and stay for a lengthy period of time. Rent stabilized rents are typically nothing to write home about but the arrears and vacancy loss is very manageable making the revenue and income very predictable. Peace of mind has its benefits.

Future Legislative Changes

Hoping that the HSPTA goes away or its impact is substantially diluted by chipping away at the law may be wishful thinking. But there are a few things legislators in Albany would be wise to re-think as we approach the five-year mark since the passing of HSTPA. Any landlord-friendly amendments to the HSPTA law, could result in a surge in the value of rent-stabilized buildings.

The HSTPA is widely perceived as an unmitigated disaster and not just by landlords. Tenants sit in unrenovated units and receive only the bare minimum required of landlords. There are an estimated 40,000-90,000 rent-stabilized units that remain vacant as owners would rather warehouse the units than rent them out for the paltry legal rent they can achieve. For context, there are approximately 88,000 homeless people in NYC, of whom 31,500 are children. Regardless of your politics, this is a failure in policy with heart-wrenching implications.

Final Thoughts

Should you run out and buy as many rent-stabilized properties as you can find? Probably not as not all rent-stabilized buildings are created equally. When performing your due diligence, a few things to be mindful of include (i) the current taxes (is the asset in a protected tax class 2A/2B), (ii) any serious violations and penalties, (iii) the arrears report, (iv) whether any preferential rents exist and perhaps most importantly, (v) the delta between the legal rents in place and market rate. The last point matters as there can be value creation in vacating the property which is more challenging to accomplish when rents are well below market rate.

For those who remain unconvinced, there are risk free federal money market funds yielding 5.25% and for the more adventurous out there, consider the over/under that interest rates decline substantially in the next few years along with inflation and the folks that occupy the Senate and Assembly in Albany come to their senses even if just a bit.

Website Sources:
Long, C. (2023, April 10). NYC Commercial Real Estate Sales Fell By Over 50% To Start The Year. Bisnow. https://www.bisnow.com/new-york/news/capital-markets/uncertainty-slowed-q1-investment-sales-but-distress-is-only-just-starting-118456

Hall, M. (2023, October 5). “The Worst Market I’ve Seen”: NYC Commercial Real Estate Sales On Pace For Worst Year Since 2009. Bisnow. https://www.bisnow.com/new-york/news/capital-markets/new-york-investment-sales-is-down-65-on-last-year-120975

Basic Facts About Homelessness: New York City - Coalition For The Homeless. (2023, November 8). Coalition for the Homeless. https://www.coalitionforthehomeless.org/basic-facts-about-homelessness-new-york-city/#:~:text=In%20September%202023%2C%20there%20were,each%20night%20in%20September%202023.

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The WeWork Project Comes to an End

Published on November 16, 2023

Every story must ultimately come to an end and this one finishes on Chapter 11. WeWork—the beleaguered co-working space company—filed for bankruptcy in early November after struggling to pay back its debt. This can happen when you own assets worth $15 billion but carry debt obligations of $19 billion. The fall was truly spectacular in economic terms as WeWork’s value fell from $47 billion at its peak to a mere $45 million just before filing for bankruptcy.

The Reasons for WeWork’s Downfall

What explains the mighty downfall? A few things it turns out: first, the company masqueraded as a tech startup but, once disrobed, was revealed to be little more than a “run-of-the-mill” office-space provider to short term renters. Its business model revolved around rental arbitrage whereby the company entered into long term leases with landlords at fixed rents, improved the space, and sub-let it to short term tenants at a premium above the fixed rate. Unfortunately, WeWork entered into long-term leases at the height of the market in the late 2010s only to see the market for office space decline soon thereafter and then fall off a cliff when the pandemic hit in March 2020. It turns out arbitrage only works if you can re-rent space for more than what you are paying.

IPO Attempt in 2019 Reveals Trouble

A failed IPO attempt in 2019 revealed all was not well at WeWork. The filings revealed larger-than-expected losses and potential conflicts of interest with the co-founder and then-CEO Adam Neumann. Neumann was booted the same year but only after negotiating a golden parachute in excess of $1 billion.

One brilliant concession Neumann negotiated as a condition of his departure was a $430 million loan from Softbank, an early and major backer of WeWork, that did not need to be paid back. Instead, Softbank reserved the right to seize Neumann’s WeWork shares held as collateral if he failed to pay back the loan (the shares, worth $500 million at the time of the concession, were worth $4 million at the time of the bankruptcy filing). Think Neumann will be paying back the loan? Me neither, but don’t hate the player, hate the game.

Even after going public at a much reduced valuation of $9 billion, WeWork never truly found its footing. Competitors entered the space as the model was easily replicated and the work-from-home phenomenon turned out to be more permanent than transitory. Add higher interest rates and macroeconomic uncertainty and WeWork’s failure was a foregone conclusion.

Bankruptcy Doesn’t Mean Game Over

The “automatic stay” is a fundamental feature of the bankruptcy process and it offers immediate and powerful protections to debtors like WeWork. For example, most collection efforts, lawsuits and foreclosure actions initiated by creditors are immediately halted giving WeWork time to reorganize its finances and live to see another day. This leaves many of the landlords who have long term leases with WeWork in an unfortunate predicament as WeWork can, subject to certain requirements, cherry pick those leases it wishes to hold onto (the well performing ones) and assign or cancel the underperforming leases. In fact, WeWork said it would begin to renegotiate many of its leases and with hundreds of locations in the US and Canada comprising nearly 20 million sq. ft. of office space, there is much work to be done.

Who Loses in the WeWork Bankruptcy

WeWork will likely emerge from bankruptcy a leaner, more efficient, and scaled down version of itself presumably with the best performing locations intact. Unfortunately, there will be many losers from the fallout, including equity investors, hundreds of landlords, and debtholders. Adam Neumann, however, won’t be one of them. Neumann recently commented that the WeWork bankruptcy filing was “disappointing” and “challenging” for him to watch blaming the company for “failing to take advantage” of its potential. In the end, Adam Neumann may have failed in his stated mission of “elevating the world’s consciousness,” but he managed to make a small fortune at WeWork mostly by starting with a large one.

Website Sources:
Holman, J., & Moreno, J. E. (2023, November 7). WeWork files for bankruptcy amid glut of empty offices. The New York Times. https://www.nytimes.com/2023/11/06/business/wework-bankruptcy.html

Brown, E. (2023, November 11). WSJ News Exclusive | A possible winner from WeWork’s troubles? Adam Neumann. The Wall Street Journal. https://www.wsj.com/real-estate/commercial/a-possible-winner-from-weworks-troubles-adam-neumann-0144d018

Gladstone, A., Saeedy, A., & Putzier, K. (2023, November 8). WeWork, once valued at $47 billion, files for bankruptcy. The Wall Street Journal. https://www.wsj.com/articles/wework-files-for-bankruptcy-5cd362b5

Plotko, G., & Higgins, M. (2023, September 17). WeWork’s potential bankruptcy raises issues for landlords and member-tenants. New York Law Journal. https://www.law.com/newyorklawjournal/2023/09/17/weworks-potential-bankruptcy-raises-issues-for-landlords-and-member-tenants/?slreturn=20231010192823

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Invisible to the Naked Eye: Apartments are Dissappearing in NYC

Published on October 26, 2023

If you’ve lived in New York City for any period of time, you have seen your fair share of newly constructed buildings and the demolition of countless others. Less apparent are the changes taking place behind the facades of existing residential buildings and how those changes are impacting the well-documented housing shortage. Since 1950, NYC has lost more than 100,000 apartments through apartment combinations and the conversion of multi-unit buildings into single-family homes, according to a recent article in the NY Times. Certainly, the net number of new apartments is greater today than it was in 1950, but the reduction of total unit count through combinations and conversions is an underreported issue exacerbating the lack of sufficient housing in NYC.

Wealthy Neighborhoods with Transit Access Most Affected

The desire for more space is something any city dweller can appreciate but not many can afford. Therefore, it should come as a surprise to no one that the combination of apartments is taking place in wealthier neighborhoods in NYC like the Upper East Side and the West Village in Manhattan and Park Slope in Brooklyn. These neighborhoods enjoy easy access to transit and jobs and the very reason why we need more not fewer homes. We need not begrudge folks seeking more space for growing families or due to greater purchasing power, but it does play a role in the overall insufficient supply of housing.

Take the row houses on 88^th Street between Amsterdam and Columbus Avenues where there are 173 units, compared to more than 400 on the same street in the 1960s. This is the result of the conversion of multi-family buildings into single-family homes.

How Much Space is Enough: Depends Who You Are

Another example of this is 12 East 72^nd Street, owned by a well-known NYC landlord. Twenty years ago, the property (totaling nearly 20,000 sq. ft.) contained 23 apartments before being turned into a single-family home for the owner and his family. Opulent for sure but not illegal.

Brooke Shields (of 1980s Blue Lagoon fame) jumped into the single family conversion game by turning an eight unit Greenwich Village building into a home worthy of an Architectural Digest spread.

From 2010 to 2021, the community district that includes the Upper East Side has seen net zero new housing during that period. Yes, 3,000 units of new housing were added but 1,000 were lost through demolition and 2,000 through consolidation.

One Example Highlights the Economics of a Single-Family Conversion

The economics of these deals make sense as this example highlights:

Purchase Price: $1,500,000
Renovation Cost: $750,000
Re-sale to End User: $3,250,000
Profit: $1,000,000 (excludes carrying costs)

The decline in unit count through the consolidation of apartments and conversion of buildings cannot be blamed on individual households. It is a citywide problem that stems from policy choices made at the local and state levels. Adam Brodheim, a preservationist who conducted much of the research, says the loss of apartments in these ways would not be a problem “if you were building a lot of new housing.” But alas, the number of new developments in the pipeline in NYC is down significantly compared to historical averages with nothing to suggest this will change in the near term.

Website Source:
Zaveri, M. (2023, October 19). How 100,000 apartments in New York City disappeared. The New York Times. https://www.nytimes.com/2023/10/19/nyregion/nyc-apartments-housing-crisis.html

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Sheltering Migrants or Housing Vulnerable New Yorkers? Can’t Do Both!

Published on October 10, 2023

Anyone versed in basic economics will tell you that it is all about the allocation of scarce resources to maximize societal benefits. If we adhere to a budget (and NYC does—it must), a dollar spent on one program is a dollar not available for others. This is the very definition of opportunity cost and the current migrant crisis plaguing NYC highlights the issue.

Migrants Flood into NYC

For anyone asleep at the wheel, more than 122,000 migrants have arrived in NYC since April 2022. The cost to shelter a single family is downright jaw-dropping at approximately $380 per night or nearly $35,000 over a three month period. At the current pace, the city is on track to spend $12 billion over the next three years to shelter and support migrants. For some perspective, the budgets of the Fire, Parks, and Sanitation Departments combined are about $5 billion annually.

Mayor Adams was blunt in his assessment of this crisis when he said “This issue will destroy New York City.” And perhaps it will if federal assistance doesn’t arrive in time or falls far short of what is needed. And isn’t just about dollars—there simply isn’t enough housing available. Last week, the city’s lawyers requested the 1981 consent decree—that legally obligates the city to provide shelter to migrants—be suspended whenever the governor or mayor declares a state of emergency. Opposed to the move, the Legal Aid Society and the Coalition for the Homeless said the change would “gut” protections and noted “street homelessness would balloon.” No decision by the NY Supreme Court has been made as of this writing.

Who Should Taxpayer Dollars Help?

In a perfect world, our desire to help all those in need would be bankrolled by an infinite flow of dollars. But that isn’t the case and, therefore, legislators should ask whether we should be subsidizing low income New Yorkers living in rent stabilized apartments or recently arrived migrants?

I recently wrote a piece here about the rent stabilization laws and the burden they put on landlords. Several owners have already experienced—and many more are facing—the loss of their properties through foreclosure as the income from these properties is insufficient to support current debt loads. Meanwhile, buildings are falling into disrepair and we may be headed toward the blight and urban decay that defined certain NYC neighborhoods in the 1970s and 1980s. City, state, and federal programs such as FHEPS, Section 8, and HASA subsidize the rents of certain low income tenants and I think it’s fair to ask why not expand the subsidy to include low income rent stabilized tenants?

The $4 Billion Math Problem: Subsidizing Rent Stabilized Tenants or Sheltering Migrants

Let’s do a bit of math.* According to a city survey in 2021, the median rent for a stabilized apartment was $1,400 compared to $1,825 for an unregulated unit. With approximately 900,000 stabilized units in the city, the rent shortfall amounts to approximately $383 million a month (or $4.6 billion a year)—the required subsidy to make landlords whole. Ironically, this cost is about the same as housing and supporting migrant families. Who deserves those dollars? Both groups of course but in a world of scarce resources, legislators must choose.

_{*This calculation assumes that the cost to subsidize every rent stabilized apartment is the difference between the median stabilized rent and the median unregulated rent multiplied by the total number of stabilized units in NYC, which may not be correct. To undertake a more accurate calculation, we would need to look at each regulated apartment on an individual basis and compare its rent to the market rent for a similarly sized and located unit, and aggregate that amount for all 900,000 stabilized apartments over a monthly and annual basis.}

Website Sources:
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=As%20newcomers%20continue%20to%20arrive,them%20and%20provide%20other%20services.

Fitzsimmons, E. G. (2023, September 7). Eric Adams Asserts Migrant Crisis Will ‘Destroy New York City.’ The New York Times. https://www.nytimes.com/2023/09/07/nyregion/adams-migrants-destroy-nyc.html#:~:text=Mayor%20Eric%20Adams%20said%20that%20New%20York%20City%20was%20not,We’re%20here

Fitzsimmons, E. G. (2023, October 4). NYC Moves to Suspend Right-to-Shelter Mandate Amid Migrant Crisis. The New York Times. https://www.nytimes.com/2023/10/04/nyregion/eric-adams-right-to-shelter-migrant-crisis.html

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US Supreme Court Refuses to Hear Landlords’ Challenge to NY Rent Stabilization Law

Published on October 6, 2023

When all else failed, landlord-friendly groups in NY like the Rent Stabilization Association and Community Housing Improvement Program (better known as RSA and CHIP) turned to the US Supreme Court to hear their challenge to the 2019 rent stabilization law. And why not, the court is stacked with conservative justices and it was reasonable to think they would take this on. Not so, the court declined to hear the case.

The Case Made by Landlord-Friendly Groups

The case was largely premised on the idea that the rent law was so onerous and, therefore, amounted to a “taking” under the Fifth Amendment to the Constitution (a.k.a. eminent domain). And that requires proper compensation to the landlords.

Eminent Domain in NYC: Physical “Takings” Nothing New

In New York City’s history, there have been instances of legal government “takings” using eminent domain, such as the redevelopment of Times Square in the 1990s and the transformation of Central Park more than 150 years ago. In Times Square, it was pornographic theaters that were shut down, while Central Park was converted from rocky swampland dotted with small farms into the 843-acre oasis of greenery it is today. These were both constitutional “physical” takings as the property owners were fairly compensated for their lost land.

2019 Rent Law Case: Regulatory Taking?

The case brought by RSA and CHIP is a bit more nuanced and arguably a tougher case to make as landlords weren’t stripped of their assets. Instead, the new law imposed financial burdens on property owners and significantly restricted their ability to optimize the value of their properties. Landlords contend that the unfair burden placed on them involves providing “public assistance” to tenants at the owners’ expense through mechanisms like low rents, mandatory lease renewals, and succession rights. A role more suited for government than the private sector the argument goes.

The Law is Nonsensical and Hurts NYC’s Housing Stock, but Is it Unconstitutional?

CHIP’s executive director, Jay Martin, slams the law as “irrational” and claims that it is “destroying New York’s housing.” While there is merit in these claims, it does not necessarily render the law unconstitutional. After all, states and cities often impose onerous property restrictions that, although cumbersome, are still lawful—examples include zoning laws, building height restrictions and parking requirements, to name a few). Had the case been heard, the Supreme Court would have had to decide whether the 2019 rent law effectively deprived owners of all economically reasonable use or value of their properties. I’m not so sure that it does but it is certainly causing a lot of hurt for landlords.

The Lawsuit was a Hail Mary

The truth is the lawsuit was a long shot to begin with, in part, because the Supreme Court hears so few cases each year (about 70-80 out of 7,000-8,000 petitions each term). Furthermore, rent regulation issues have been covered by the court in the past with existing precedent (little of it favorable to landlords). In 1988 and, again in 1992, the Supreme Court determined that rent control, on its face, does not constitute a taking. Perhaps the case survives on appeals but I think owners of rent regulated properties in NYC are stuck contending with the status quo.

Website Source:
Rebong, K. (2023, October 2). End of the road? Supreme Court declines to take up challenge to New York’s rent law. The Real Deal. https://therealdeal.com/new-york/2023/10/02/supreme-court-rejects-ny-rent-law-challenge/

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A Storm is Brewing for Rent Stabilized Owners

Published on September 20, 2023

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.

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Local Law 97 Adds to Already Burdened Landlords in NYC

Published on September 18, 2023

Going Green in NYC Don’t Come Cheap

Going green in NYC is turning into red ink for property owners. For those unfamiliar, Local Law 97 requires buildings larger than 25,000 square feet to meet emissions (with stricter limits in 2030). Failure to comply means a $268 fine for every metric ton of CO2 emitted, a jaw-dropping amount when considering all eligible buildings.

To illustrate, the Wall Street Journal analyzed 128 properties that would be subject to $50 million in tax liabilities (for failure to comply) for the first enforcement period (and $214 million for the following period). To appreciate the scale and scope of the law, some 50,000 properties fall under the purview of local law 97.

The law lands at a particularly challenging moment for office landlords who are already navigating a trifecta of woes, including stubbornly elevated vacancy rates, plummeting property values, and less optionality in the debt markets. As buildings represent 68% of CO2 emissions in NYC, a path towards a cleaner city inevitably must focus on the largest polluters but the timing couldn’t come at a less opportune moment for owners.

227 Park Avenue Epitomizes the Troubles Ahead

Perhaps the 51-story office skyscraper located at 277 Park Avenue best illustrates the challenges landlords currently face and how the law adds to their troubles. The property has a vacancy rate of 25% (up from 2% in 2014), according to Trepp. Worse still, the largest tenant occupies 50% of the building and plans to relocate to newly built 270 Park Avenue when their lease expires in 2026.

More troubling, the $750 million mortgage originated in 2014 matures in August 2024 when rates will be much higher than they were in 2014. Add the cost upgrades required under local law 97 and one wonders if the cost to carry for ownership is sustainable. This all spells trouble for The Stahl Organization, the owners of 277 Park Avenue, and other NYC landlords in a similar predicament. Local Law 97 could end up being the tipping point that pushes owners over the edge.

Website Source:
Shifflett, S. (2023, September 2). Buildings are empty, now they have to go green. The Wall Street Journal. https://www.wsj.com/real-estate/commercial/buildings-are-empty-now-they-have-to-go-green-7739f6c5?mod=hp_major_pos1#cxrecs_s

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Developers Rejoice as NYC’s Sliver Law may be on the Chopping Block

Published on September 13, 2023

The emaciated heroin chic look may have been a thing among the fashionistas in the early 1990s but NYC officials were having none of it when it came to the look it wanted for its buildings. I am referring to the zoning resolution that included the so-called “sliver law,” limiting building heights on lots less than 45 feet wide. In short, the city decided in 1983 that tall and narrow, or sliver, buildings sprouting from small lots didn’t “blend in with the surrounding buildings” and were therefore prohibited. The oft-cited example is 211 Madison Avenue which rises 32 stories on a 33-foot-wide lot and towers above nearby four and eight-story buildings on the block. Today, a building like 211 Madison Avenue could never be built, as long buildings are only okay if they have the girth to match under the sliver law (and 33 feet of width simply doesn’t measure up under current rules).

Careful observers, including attorney Frank Chaney of law firm Rosenberg & Estis, P.C. (a.k.a. The Zoning Guy) wrote a convincing essay last year with the unambiguous title, “The Sliver Law Must Die,” where he asks why a 45-foot-wide lot could go up 120 feet but a 44 foot wide in the same zoning district (on the same city block even) would be contextually inappropriate and be limited to a much lower height restriction. As he puts it, a building should be considered “too tall regardless of whether it is wide or narrow. If it’s too tall, it’s too tall.” Of course he is right in pointing out the absurdity of the rule, which has now been in place for four decades. Ironically, the sliver law often mandates the construction of short narrow buildings on city blocks filled with high-rise skyscrapers creating a significantly “out of context” development. Foolish rules that miss the mark are nothing new in NYC of course, but repealing them is often a challenge. That said, the city—more than ever—needs more apartments as developers have shelved new projects and more than 100,000 migrants (who have a legal right to shelter) have flooded the city putting immeasurable pressure on an already limited housing stock. The Adams administration is therefore looking to repeal the sliver law, which could pave the way for up to 65 million square feet of development, or 95,000 housing units, according to a study conducted by Rosenberg & Estis. If repealed, expect those long skinny buildings to be back in vogue.

Website Source:
Brenzel, Kathryn. “The Daily Dirt Delves into NYC’s Sliver Law.” The Real Deal, 7 Sept. 2023, therealdeal.com/new-york/2023/09/08/the-daily-dirt-delves-into-nycs-sliver-law/.

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Warning! If You Own Commercial Real Estate, Wall Street is Coming for You

Published on August 23, 2023

Wall Street isn’t always right, but when a trend emerges on the street, it pays to take notice. And the latest trend should send chills down your back if you own commercial real estate in the United States. Firms such as Cohen & Steers, Goldman Sachs, and EQT Exeter, among others, are raising billions of dollars to target distressed assets and those slumping in value. The volume of distressed commercial real estate grew by $8 billion in the second quarter, according to data provider MSCI Real Assets. Commercial property values have fallen by 10%-15% from their peak in the third quarter of 2022 and are expected to drop another 10%, according to Rich Hill, head of real-estate strategy for Cohen & Steers. And it isn’t just the well-documented office market suffering steep declines: multi-family and mall operators have seen their properties decline in value and are now more vulnerable than ever as they face refinancing at much higher rates.

Given current market conditions, Wall Street expects owners to capitulate on pricing and an uptick in sales activity in the months and years ahead. In what may be a harbinger of things to come, Clarion Partners recently unloaded a downtown San Francisco office tower for $41 million—a painful discount from the $107 million they paid in 2014. Certain assets are so underwater that a restructuring of the capital stack isn’t worth the professional and other transactional costs to even try. In those cases, owners are handing—or more likely throwing—the keys back to their lenders. Also, expect regional banks—seeing the pending carnage if interest rates remain stubbornly high relative to where they were just a few years ago—to begin to unload much of their commercial loan portfolios at discounted prices. Wall Street investors will be ready, willing, and able to scoop up these under and non-performing assets.

Still, a world of distressed asset sales is not a foregone conclusion. It is possible the Fed tames inflation without tipping the economy into a recession but I wouldn’t count on it. Even if the so-called soft landing is accomplished, interest rates may remain high and the Fed funds rate doesn’t always correlate with 10-year treasuries (at least in the short term) which is a better predictor of commercial mortgage rates. This isn’t a Gamestop short squeeze situation where Wall Street got beat at its own game; this time around the sharks smell blood and the feeding frenzy is inevitable. For those who still can, heed the words of Amazon founder Jeff Bezos and “batten down the hatches.”

Website Source:
Grant, Peter. “Wall Street Is Ready to Scoop up Commercial Real Estate&nbsp;on the Cheap.” The Wall Street Journal, Dow Jones &amp; Company, 16 Aug. 2023, www.wsj.com/articles/wall-street-is-ready-to-scoop-up-commercial-real-estateon-the-cheap-6edac64f.

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A Roadmap for Re-Igniting Development for American Cities in Decline

A Roadmap for Re-Igniting Development for American Cities in Decline

Published on August 21, 2023

They say one vacant lot represents an opportunity, hundreds are a worry, and tens of thousands make for a crisis. With a national housing shortage, it is shameful and a grand failure of local governments to address thousands of undeveloped vacant lots perpetuating all that is bad with our cities: crime, drugs, and homelessness. In Detroit, Pittsburg, and Chicago (three former industrial hubs), the populations have fallen by roughly two-thirds, more than half, and about a quarter, respectively, since their heyday in the 1950s. The mass exodus over the decades decimated the housing market and the decay has been further exacerbated by outdated government policies. That is starting to change finally and, if successful, other struggling cities across the country should take note.

A vacant lot may look promising to the untrained developer eager to erect a multi-family property on the land but, dig a bit, and it isn’t so simple. More often than not, there are back taxes, unpaid water bills, demolition liens and unpaid fees making it an obstacle course of insurmountable hurdles to obtain clean title. And clean title is what developers need in order to build and without it, they won’t touch the land.

Decades of legislative neglect has resulted in more than 90,000 vacant lots in Detroit, 13,000 or so city-owned vacant lots in Pittsburgh, and roughly 26,000 in Chicago, some of which are caught in a limbo of back taxes and unpaid fees. What can be done? A few things it turns out: Detroit officials want to triple property tax bills to disincentivize owners from allowing lots to remain undeveloped. In Chicago, the Cook County land bank controls hundreds of vacant lots and, through the land bank, the city can more efficiently clear title on these encumbered lots and transfer them to developers or nonprofits more or less shovel-ready. The city often excuses the land banks from paying any back taxes, making it easier to move the land in a sale. Still, before land banks can transfer the lots with clean title, landowners are entitled to due process (it’s America after all) and must be given the chance to pay the taxes owed, settle demolition liens, water bills, and other outstanding fees. In Chicago, the chair of the Cook County land bank, Bridget Grainer, said the process of clearing title through the land bank has “eliminate[d] a market-killing impediment, and the market worked as it should” in the development of several projects. But, due process isn’t swift as it took years in Chicago before the land was transferred and the lots developed. And such victories in Chicago are counted in the hundreds compared with a supply of vacant lots in the thousands. But Rome wasn’t built in a day and neither will the resurrection of these beaten-down cities.

Website Source:
Barrett, Joe. “Too Many Vacant Lots, Not Enough Housing: The U.S. Real-Estate Puzzle.” The Wall Street Journal, Dow Jones &amp; Company, 20 Aug. 2023, www.wsj.com/real-estate/too-many-vacant-lots-not-enough-housing-the-u-s-real-estate-puzzle-2aa19733?mod=hp_lead_pos7.

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