Detecting rent stabilization shocks in the New York multifamily market

Buried in New York State’s recently enacted housing policy is an update to the Housing Stability and Tenant Protection Act (HSTPA) of 2019 that increases the dollar amount landlords are allowed to spend on improvements to deal with rent stabilized apartments.

The State Legislature slightly amended the HSTPA by increasing the limit for Individual Apartment Improvements (IAI) from $15,000 over a 15-year period to $30,000 or up to $50,000 if the unit was continuously occupied for 25 years or registered as vacant in 20222,20, 2024. Modest rent increases will accompany the renovated units and will be permanent.

“We’re glad the Legislature recognized the problem and recognized that there has to be a long-term ability to recover the investment in the property, but it’s not really substantial enough to move many of these units that are permanently vacant. and to we put them back into long-term housing,” Jay Martin said, Executive Director of the Community Housing Improvement Program (CHIP), noting that the true cost to rehabilitate units vacant by long-term tenants is between $100,000 and $150,000.

2024 cost apartments locked in 1984 rents

CHIP has lobbied the State Legislature for five years since the passage of HSTPA to allow landlords to raise rents in the event of vacancies. Otherwise, rent-stabilized housing is locked into 1984 rents with 2024 costs, Martin said. As a result, it is estimated that over 20,000 units remain vacant today.

The median monthly rent in 2022 for New York City buildings containing rent-stabilized units, excluding Core Manhattan, was $1,220, according to the New York Rent Guidelines Board’s 2024 Income and Expenditure Study. Operating Budgets for rent-stabilized buildings rely on the Rent Guidelines Board, which approves annual rent increases each June. This year the proposed increase is 2%-4.5% for one-year leases and 4%-6.5% for two-year leases.

Meanwhile, expenses are outpacing income as operating and maintenance costs have risen. Between 2020 and 2024, insurance costs increased by 224%, real estate taxes increased by 118%, and water and sewer costs increased by 115%, the RGB’s Operating Cost Price Index shows.

Divestment and distress: Back to the 70s?

Matt Engel, Chairman of CHIP and President of Langsam Property Services Corp., which owns or manages about 300 buildings in the Bronx and Upper Manhattan, said the HSTPA removed incentives to invest in rent-stabilized buildings, creating a situation that reminiscent of the 1970s, when the city saw disinvestment in properties and neighborhoods.

Engel argues that rent-regulated buildings need a capital incentive program, comparable to the new housing policy’s 485x tax incentive designed to spur new development. Such a policy would support the reconstruction and stabilization of 100-year rent-stabilized buildings so that the buildings remain structurally sound and provide housing for another 100 years.

“You can’t build your way out of this (housing shortage),” Engel said. “If we lose the old buildings, fixed year after year, we will never be able to catch up with the new construction.”

The number of buildings with problems is increasing

Annual RGB surveys show that the number of distressed rent-stabilized properties built before 1974 has grown steadily since 2016, more than doubling in 2022 to 1,409, the latest survey year available. RGB defines distressed properties as those with operating and maintenance costs that exceed gross income and excludes financing costs.

“A typical building is either slightly above water, essentially falling apart, or mostly underwater and losing money every month,” Engel said, adding that he believes the number of distressed properties published in the RGB survey is too high. low.

The NYC metro area has the highest percentage of households renting, 18.5%

In the post-Covid world, rental arrears also continue to contribute to concern. An average of 18.5% of households in the New York City metro area were behind on their rent between April 2023 and March 2024, the highest in the country and above the national average of 11.9%, according to the Income and Affordability Study. RGB 2024.

Values ​​and transactions drop

The difficulty is evident in prices with the value of rent stabilized properties falling by 30% to 50%. Sales have declined and the dollar volume of buildings with over 75% rent stabilized units fell to $1.1 billion and approximately 6,500 units in 2023 from $4.8 billion and over 22,500 units in 2015 (based on buildings sold in 2015 that are at least 75+% rent stabilized today). I explored the decline in values ​​and transactions in more detail in a previous Forbes article.

_{Rent Stabilized Multifamily Transactions for Buildings with 75+% Rent Stabilized Units 2010-2023}

Martin noted that some City Council members see distressed buildings as an opportunity to “de-gentrify” housing by eliminating private ownership and helping nonprofits buy buildings through open-door programs and neighborhood pillars.

But if expenses exceed income, it doesn’t matter who runs the buildings, the buildings will not survive. Engel manages at least 2,000 rent-stabilized units on behalf of nonprofits and said those buildings are facing the same financial struggles as privately owned buildings.

In fact, one nonprofit, Food First, was forced to auction off more than 20 rent-stabilized apartment buildings in Brooklyn and the Bronx in April due to high maintenance costs, rent arrears and time spent in housing court. tried to evict non-paying tenants. The agreement was reported.

Economic shocks add to the pain

Homeowners with maturing mortgages will be particularly challenged because interest rates rose by 525 basis points between March 2022 and July 2023 to the highest level in 20 years. Current mortgage rates are around 7%, which is hampering refinancing options.

Rent-stabilized owners are also facing limited refinancing choices, prompting lenders to extend loans and avoid property market devaluations. This “slow burn” trend may continue.

Dried-up real estate loans contributed to last year’s failure of Signature Bank, which had about $15 billion in loans collateralized by rent-stabilized or rent-controlled properties, and hurt the finances of Community Bank of New York, from which is nearly 50% of the bank’s $37 billion multifamily portfolio. is focused on rent-stabilized properties.

Creative solutions to preserve buildings

The State Legislature’s change in HSTPA’s IAI limits this session, while modest, is encouraging. Additionally, there are several other creative solutions being discussed including:

● Converting rent stabilized into affordable housing: Rent-stabilized buildings have no income restrictions, so even a high earner can occupy one. However, getting a tax shelter from the city could change that. The tax shelter comes with a regulatory agreement and obligates the owner to keep rents within a certain area median income (AMI) bracket, effectively turning the asset into an affordable housing building. In addition to reducing property taxes, landlords can rent to Voucher tenants that are established and subsidized by the government, legally bypassing the lowest recorded rent. So this is a win-win for the City of Po: these newly converted assets will be included in the Affordable Housing count, and the landlord can over time operate an affordable housing building with a higher net operating income (NOI). high. As it stands now, the city is very selective in offering these incentives. If the city decides to offer the “right” incentives to rent-stabilized landlords, it could be a smart solution for all stakeholders and create a significant reduction in the city’s affordable housing challenge over the next decade.

● Restoration of the J-51 program. Govt. Kathy Hochul signed a bill last year allowing the city to create an updated version of the J-51 program, which provided incentives for repairs and renovations and expired two years ago. The City Council is considering a bill that targets the tax benefit more narrowly for low-cost housing buildings such as rental buildings where “at least half of the units are rent stabilized between 20% and 80% of the area median income, Crain’s New York reported. The problem here, however, is that landlords are currently not allowed to use means tests for existing rent-stabilized tenants.

● Tax reform: Solving the underlying problem of overtaxing multifamily rental properties relative to other types of properties will ultimately reduce the greater spending on rental-stabilized properties. A lawsuit challenging New York City’s property tax system is currently moving through the court system.

Investors see opportunity

Despite the difficulties, sophisticated buyers with a long-term horizon are buying lease-stabilized assets today. They see opportunity in falling prices and believe that the dramatic changes to the stabilized rental market caused by the HSTPA regulations are unsustainable. Hopefully the worst is behind us. Especially if the Fed cuts rates this year, we can expect gradual, nuanced improvements in the future.

For a full discussion with Shimon Shkury, Jay Martin and Matt Engel, please listen to a recently recorded podcast highlighting the challenges facing rent stabilized buildings available here.