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Enough Apartments in NYC To Go Around But NY State Legislators Can’t Seem to Get It Right

Published on September 1, 2022
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Good intentions can often produce bad outcomes and, in NYC, we are beginning to see the unwanted ill effects of the June 2019 Housing Stability and Tenant Protection Act (HSTPA).  The law—noble enough in its pursuit to preserve affordable housing—has proven to be an unmitigated disaster.  In June 2019, we at Invictus Property Advisors wrote an article setting out ten (10) key takeaways from what was then newly enacted legislation.  Two items of concern flagged by us were units falling into disrepair and landlords keeping rent stabilized units vacant after tenants departed, describing the latter as a “perverse and unintended consequence of the new rent laws.”  Three years on, many of our gloomy prognostications came to pass, much of it detailed in the Real Deal article.

Of note:

  • The cost to gut renovate an apartment vs. allowable rent increases: $60,000-$120,000 vs. $89 increases per month
  • The monthly operating costs per unit vs. median monthly rent for a stabilized apartment: $1,548 vs. $1,422
  • The number of homeless New Yorkers vs. number of vacant apartments: 60,000 homeless (of which 15,000 are children) vs. 43,000 vacant stabilized units
  • The percentage of affordable units (i.e., under $1,500 per month): less than 1% of the housing stock, the lowest in three decades
  • The percentage of NY state legislators voluntarily accepting lower pay to share in the pain: zero  

The numbers don’t lie: this law has resulted in disincentives to renovate and rent up very much needed affordable apartments.  A shameful reality is that there are even enough vacant units to house two thirds of NYC’s homeless.  But rather than embrace widely understood market forces and basic economics, legislators blame landlords for creating artificial scarcity (i.e., keeping stabilized units off the market to drive free market rents higher) or painting apartment walls with “gold” paint presumably to inflate renovation costs.  The response from state assembly member Linda Rosenthal (who holds a B.A. in history) was to introduce a bill charging a “warehousing fee” or a penalty on landlords for failing to place tenants in rent stabilized apartments starting three months after a unit becomes vacant.  Unlikely to pass and arguably unconstitutional but demonizing landlords plays well in liberal circles and masks the lack of a real plan.  Ms. Rosenthal and legislators of her ilk are outside their core competence on this issue and should bring experts into the mix—history will treat her well if she does.   

Suzannah Cavanaugh, Sasha Jones. “Vacant, Rent-Stabilized and Locked up: NYC’s Ghost Apartments.” The Real Deal, 1 Sept. 2022, therealdeal.com/magazine/national-july-2022/that-empty-feeling/.
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The Saudis Look to Make an Addition to the Wonders of the World the Line

Published on September 1, 2022
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By NEOM. (n.m.). https://www.neom.com/. https://theconversation.com/what-is-the-line-the-170km-long-mirrored-metropolis-saudi-arabia-is-building-in-the-desert-188639

The world has a handful of wonderful structures that reflect the glorious capability of mankind.  A few that come to mind include the Great Wall of China intended to fend off invasions and raids.  Though it failed miserably with its stated objective, today it serves as an impressive 5,500-mile tourist attraction and a tangible piece of political propaganda.  Let us not forget the Incan site high in the Andes Mountains in Peru known as Machu Picchu and the Colosseum in Rome where gladiators dueled each other and animals were pitted against man in death matches. There are certainly others (i.e., the Taj Mahal and the Khaznah to name a couple) but the Saudis are looking to put their own signature project on the list with The Line.

It is a one-building megacity structure stretching more than 106 miles, house up to 9 million residents, extend 650 feet wide and reach 500 meters above sea level.  The project will cost hundreds of billions of dollars, feature a high speed train running end to end in 20 minutes and re-invent the way people live with vertically layered communities. Words can’t capture the scope of this project but this video link can, check it out.

The Saudi government may have a spotty record on a whole host of things but who am I to judge and despots are known to get stuff done.  The Line is sure to disrupt the 500 million birds that migrate across Saudi Arabia each year and be a decades long punishing slog for migrant workers (a.k.a. construction artists) who are likely to suffer ignominious living conditions and paltry wages building this giga project. That said, sacrifices need to be made and one must suffer for their art so, in the end, I am chomping at the bit to see The Line come online. 

Allan, A. (n.d.). What is The Line, the 170km-long mirrored metropolis Saudi Arabia is building in the desert? The Conversation. https://theconversation.com/what-is-the-line-the-170km-long-mirrored-metropolis-saudi-arabia-is-building-in-the-desert-188639
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Are NYC Properties Falling in Protected Tax Classes 2A/2B on The Chopping Block

Published on September 1, 2022
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Like many things, it starts with a whisper before morphing into a collective roar and this author fears that protected tax class 2A and 2B buildings in New York City may become Albany’s next target. The evidence of a legislative backlash involving the cancellation of protected tax classes is anecdotal at this point but the private equity behemoth, Carlyle Group’s, recent moves into this “mom and pop” space may have put the issue front and center for legislators. Over the past year, Carlyle has spent more than $500 million buying smaller apartment buildings in bite-sized $2 and $3 million checks.

Small potatoes for a group like Carlyle so what’s going on? Protected 2A/2B buildings enjoy the benefit of limited tax increases to no more than 8% annually and 30% over a five year period. And in a city with ever growing expenses, the 2A/2B  properties provide predictability to an owner’s net income and serve as an inflationary hedge against other operating expenses. The end game is to amass a portfolio of these properties and sell them at a premium. Take Highpoint Property Group, led by Drew Popkin, who caught on to the 2A/2B game early and recently put 20 such buildings on the market at an asking price of nearly $300 million. 

In 2018, Michael Shah of Delshah Capital purchased 28 2A/2B properties from Silvershore Properties that had done the heavy lifting of assembling the properties. To be clear, there isn’t anything illegal about this (nor should there be); in fact, it is quite savvy and, put simply, just an example of capitalism at work. But in current times, City Council members and NY senators are bound to start asking whether multi-million and multi-billion dollar owner/investors like the Carlyle Group should be benefitting from the 2A/2B tax class designations.  In a nation of laws, the rules that benefit the “little guy” should and must also benefit the larger players as well.    

Rebong, Kevin. “Carlyle Group Builds Empire of Small Brooklyn Apartment Buildings.” The Real Deal, 28 July 2022, therealdeal.com/new-york/2022/07/28/carlyle-goes-big-on-small-brooklyn-buildings/. Accessed 24 May 2023.
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Manhattan Office Numbers are In and… It’s a Mixed Bag

Published on September 1, 2022
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Maria Gotsch is Partnership Fund for New York City. (n.i.). https://pfnyc.org/. https://web.sichamber.com/Associations/Partnership-for-New-York-City-430

Will they or won’t they…return to the office?  It’s the question employers, office landlords and just about every small and medium sized business reliant on Manhattan workers is asking.  More than 160 employers (mostly located in Midtown and the Financial District) were surveyed between April and May 2022 to gauge the work from home (WFH) trend and how permanent we can expect it to be.  The findings are as follows:

  • A mere 8% of Manhattan office workers report to duty five days a week;
  • On any given workday, you can expect 38% of Manhattan office workers at their office desks (expected to grow to 49% in September 2022);
  • By industry, it is the real estate folks returning in droves with an average daily attendance of 82% with law, tech, media, consulting and financial services firms far behind, all falling in the low to mid 40% range;
  • Larger firms (greater than 5,000 employees) are returning to the office more slowly than smaller firms (fewer than 500) with 53% of employees in the office on an average weekday for smaller firms vs. 31% for the larger companies.

The good news is that the trend suggests Manhattan office workers across all industries and company sizes are expected to return to the office in greater numbers.  In addition, 58% of the companies surveyed expect their headcount in NYC to increase or stay the same over the next five years.  The more troubling metric for all the stakeholders who depend on office worker dollars every day is that 78% of employers envision a hybrid office/work from home model post pandemic.  The bottom line: WFH is an acronym we will all be adopting and we ought to start adapting to this new reality, including the executives in C-suites at REITS like Vornado and SL Green as well as the homeless person living off the kindness of NYC strangers.

Gotsch, Maria. “Partnership for New York City.” The Staten Island Chamber of Commerce, web.sichamber.com/Associations/Partnership-for-New-York-City-430. Accessed 24 May 2023.
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Banning the Russians from the US Real Estate Market Packs More Punch than a Shot of Russian Standard

Published on July 19, 2022

Banning Russian vodka from US liquor stores is small potatoes as a mere 1.3% of vodka imports comes from Russia. Much more fearful and painful than any hangover from a night of binge drinking is Biden’s threat to the Russian oligarchs: “we’re coming for your assets.”

For those not in the know, the oligarchs are the uber-wealthy Russians with yachts the size of small aircraft carriers, personal jets that rival Air Force One and, for one in particular, ownership of the glorious Chelsea football club. With all these pesky sanctions, what is a Russian billionaire to do?

Commercial real estate has historically been a fine option for parking ill-gotten gains and recent data shows Russians accounted for $1.2 billion in U.S. CRE investment. But with the current sanctions on Russia and its oligarchs, transferring funds out of Russia and into American real estate will be difficult, if not downright impossible.

Bottom line: expect fewer condo sales to the Russians in Miami and Manhattan in the months ahead. Life can be tough at the top, but don’t shed a tear for the oligarchs, the elite find ways to preserve their wealth and prosper. Karl Marx must be turning in his grave.

Modi, Priyanka. “Russian Money Wants to Come to the U.S.. It Won’t Be Easy.” The Real Deal, 3 Mar. 2022, therealdeal.com/2022/03/03/as-russians-seek-a-haven-for-assets-access-to-u-s-real-estate-wont-be-easy/.
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The Numbers Don’t Lie: NYC Has a Housing Problem

Published on July 19, 2022
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Mike Petrucci from Unsplash. (n.n.). https://unsplash.com/@mikepetrucci. https://www.bisnow.com/new-york/news/construction-development/new-apartment-construction-is-lagging-in-nyc-worsening-housing-crisis-for-years-to-come-112183

New York City has a problem and it’s not a new one. Simply put, there are too many people and not enough apartments and that’s creating a supply-demand imbalance. By 2024, NYC is expected to have 33,000 new units becoming available which may sound like a lot but it’s not when you consider that the city needs an estimated 560,000 new units by 2030. At the current pace, it would take more than 46 years to hit the number of units needed by 2030. Oops, but it gets worse. The anticipated supply shortage will certainly put pricing pressure on the rental market making it a “rough ride” for many ordinary folks, according to Corcoran’s CEO, Pamela Liebman. Furthermore, higher development costs, impending inflation, and flawed city policies that defy basic economic principles (i.e., keeping one-third of the housing stock priced artificially below market through rent regulation) will undoubtedly extend NYC’s housing crisis well into the future.

The data don’t lie: rent in NYC increased by 33% between January 2021 and January 2022. Oh, Superman, where are you now?

Hall, Miriam. “NYC’s Housing Crisis Set to Worsen amid Lag in Apartment Construction.” Bisnow, 9 Mar. 2022, www.bisnow.com/new-york/news/construction-development/new-apartment-construction-is-lagging-in-nyc-worsening-housing-crisis-for-years-to-come-112183.
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New York State Takes an Unorthodox Path to the Opening of Marijuana Retail Stores: A Friend with Weed is a Friend of Albany

Published on July 19, 2022

Either the craziest idea ever conjured up over an evening of bong hits or the most brilliant proposal to come out of Albany in decades? Time will tell but NY’s Governor has proposed legislation that will give the state’s first licensed marijuana retailers to individuals or family members who have been convicted of a marijuana-related offense. Taxpayer money would be spent to find, secure and renovate storefronts for retailers. 

The first wave of applicants will likely include individuals like Baron Fajado, a real gem who was arrested for smoking marijuana at 16 which was followed by a half dozen other pot arrests as he moved from smoking to dealing. Perhaps there is some nobility in all of this as people with past drug charges have certainly “gone on to do great things,” according to Chris Alexander, the executive director of the state’s Office of Cannabis Management but handing out licenses to convicted felons without legitimate business experience on taxpayer’s dime seems a bit misguided.  

This author couldn’t be more in favor of the legalization of weed and like Hunter S. Thompson who viewed marijuana “as a basic staple of life, along with beer and ice and grapefruits,” I can concur with most of those things but I don’t think he should spearhead a multi-million dollar retail operation.

Mckinley, Jesse, and Grace Ashford. “New Yorkers with Marijuana Convictions Will Get First Retail Licenses.” The New York Times, 9 Mar. 2022, www.nytimes.com/2022/03/09/nyregion/marijuana-sellers-licenses-hochul.html.
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Is a recession upon us? The answer may be hiding in your briefs

Published on July 19, 2022
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Economists, investors, and analysts are always seeking clues that might predict a future market downturn. After all, there are trillions of dollars at stake in getting this correct. Some look at inverted yield curves (when short-term bond rates rise higher than long-term yields) and, rightly so, as this phenomenon has preceded nearly all recessions since the 1970s. But for the less cerebral and economically inclined among us, is there an alternative methodology that provides us the same power of prognostication? There may just be. 

Take the “underwear index” or the sale of men’s nether garments which tends to stay flat regardless of what the economy is doing. When sales droop, however, it suggests households “are so pinched that they are deciding not to replace underpants.” In fact, men’s underwear sales fell significantly from 2007 to 2009 during the Great Recession but inched higher to a more respectable level when the economy recovered in 2010. 

Another fun, albeit less meaty, measure of the economic downturn is the “Skyscraper Index” concocted by a former real estate analyst, who suggested an increase in very tall buildings happens as we are approaching a bust with a recession or economic crisis all but certain after a record-breaking tallest building is completed. History suggests this is true…we can point to the Empire State Building which was completed in 1930 just as the Great Depression hit, or the Sears Tower (now Willis Tower) and the World Trade Center’s Twin Towers completed in the 1970s during the infamous Jimmy Carter era plagued by rampant stagflation. Tall buildings are symbolic grandiose gestures that suggest a time of lofty ambitions tied to cheap credit, over-investment, and rampant speculation. 

Another silly, sexy non-scientific approach to predicting recessions is to look at dating site traffic as it tends to increase during economic busts as unemployed people have plenty of time to swipe left and right. During the Great Recession, the site Match enjoyed its best quarter ever and, not to scare you, but Bumble (another site for those with a robust libido but more flimsy finances) had better than expected earnings this quarter.  Inverted yield curve? Check. Cheap credit and rampant speculation? Hmmm…crypto, meme stocks, and NFTs anyone? I own them all…Yikes!

Goodkind, Nicole. “Is a Recession Coming? Alan Greenspan Says the Answer Is in Men’s Underwear | CNN Business.” CNN, 26 Mar. 2022, edition.cnn.com/2022/03/26/economy/recession-underwear-alan-greenspan/index.html.
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Move over Miami and Austin, Canada’s Toronto is Quietly Becoming the Next Big Tech Hub

Published on July 19, 2022
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A shout out to our brothers and sisters North of the border in Toronto. Turns out, it isn’t all hockey and maple syrup up there; in fact, there is a burgeoning tech expansion in Canada’s largest city. Microsoft, Apple, Twitter, Amazon and Meta (formerly Facebook) all have a presence but others are following, including, Pinterest, Stripe and Klarna (a Scandinavian payments company and shame on you if you don’t know the others). With local university and government money and Canada’s lenient immigration policy, Toronto has become the third-largest tech hub in North America behind Silicon Valley and New York. And to some in the US who may not know, Toronto isn’t a fly-by-night city with nothing to do: nearly 50% of Toronto’s residents were born outside the country making it a culturally diverse city with a potpourri of splendid cuisine. It is the fourth largest city by population on the continent (with about 3 million people) behind only Mexico City, NY and LA with a deep pool of talented tech researchers and engineers.

For tech workers in Toronto, the government is on your side recently passing a law that explicitly bars companies from enforcing noncompete clauses in employment contracts. Take that Silicon Valley—Toronto is run by a bevy of promiscuous tech workers free to mingle with whatever company tickles their fancy. Is it working though? Simply put, yes. There is some cool tech stuff happening in Toronto like work on “neural networks” to power self-driving cars and digital assistants. Or the cutting-edge AI work that specializes in technology that helps machines understand the natural way people write and talk. There are some concerns about salary creep which may price companies out of the market and, despite all the positives, it’s worth keeping the numbers in perspective. In 2021 and 2022, investors pumped $132 billion into Silicon Valley tech start-ups compared to $5.4 billion in Toronto. Baby steps Toronto, baby steps…

Metz, Cade. “Toronto, the Quietly Booming Tech Town.” The New York Times, 21 Mar. 2022, www.nytimes.com/2022/03/21/technology/toronto-tech-boom.html?smtyp=cur.
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New York City is Back Baby! Not Quite but the Hotel Chelsea Is

Published on July 19, 2022

Longing for the days of celebrity sightings, illicit drugs and carnal pleasure in the heart of New York City’s Chelsea neighborhood? Turns out the historic Hotel Chelsea—a previous magnet for painters, actors, dancers, novelists, playwrights and musicians and a whole lot of debauchery—is opening its doors again after a rough decade of contentious renovation, developer turnover, countless lawsuits, a stop-work order and a pandemic. Current ownership took a “gentle and…respectable” approach to the restoration filling the lobby with the artwork of current and former tenants. There will be a new lounge with a brass-railed bar, a grand piano, as well as an updated version of the Spanish-themed restaurant El-Quijote that’s been “tuned up” a bit.

The hotel will be a blend of 155 rentable rooms and more than 40 permanent residents, who have been “allowed” to remain because ownership likes “the mix” of guests and full-time residents (i.e., owners could not get around NYC’s rent stabilization rules). Described by one famous resident as a place “haunted by dark creative forces” but also a place with “romanticism,” we look forward to what the next century has in store for the Chelsea. Don’t let us down.

Cheshes, Jay. “How the Historic Hotel Chelsea Has Kept Its New York Cool.” The Wall Street Journal, 26 Apr. 2022, www.wsj.com/articles/hotel-chelsea-new-york-11650976217?mod=hp_listc_pos1.
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