Property investors have spent billions of dollars on apartment buildings for what has been one of the most reliably profitable bets in New York City real estate: converting rent-regulated apartments to market-rate units.
But New York’s new rent law may be putting an end to that business, causing financial stress for the companies that own these buildings.
The new laws could cause the values of rent-stabilized apartment buildings to drop 20% to 45%, depending on their current rent rolls, several brokers and investors said. That would leave many properties worth less than their mortgages and put building owners at risk of default.
“It’s all over,” said Lazer Sternhell, a real-estate investor and broker of rent-regulated properties in New York. “You can’t raise the rents. You can’t deregulate.”
Exceptions to the city’s longstanding rent-stabilization system enabled landlords to get bigger rent boosts than the small annual increases that the city set at typically less than 5%. With these exceptions, landlords could raise rents by up to 20% after a vacancy, and factor the cost of any improvements made to the apartment into the new rent.
In some cases, landlords were able to remove apartments from price regulation altogether and get market rate for the units—enabling them in some cases to charge hundreds or even thousands of dollars a month more in rent. New York building owners have removed some 300,000 apartments from rent regulation since 1994.
Most of those exceptions are either drastically limited or no longer legal under the new rental law, which went into effect last week.
Asking prices for the sale of regulated buildings are already falling. In one example, a brokerage had previously pitched a partially vacant, 22-unit building in the East Village on the premise that a buyer could eventually double the monthly income from $26,300 to $52,600.
After the rent law passed, the company notified potential investors that they were lowering income expectations and cutting the asking price by 17%, the first of what could be many cuts.
“Every spreadsheet in New York just changed,” said Steven Vegh, a real-estate broker who sells buildings to investors.
Sales of rental buildings in New York reached a peak in 2015 with $19 billion in recorded sales, after which deals eventually declined as interest rates for multifamily loans rose and rents grew more modestly, according to reports from Ariel Property Advisors.
Many investors feared tenant-friendly policy measures would one day mean diminished returns. A few investors bucked this trend and embarked on buying sprees of mostly rent-regulated buildings.
Sugar Hill Capital Partners and A&E Real Estate have both bought large portfolios in Upper Manhattan. One of the most prolific buyers is 36-year-old Isaac Kassirer, chief executive of Emerald EquityGroup . He has acquired more than 3,500 apartments in the past three years, mostly in Upper Manhattan and the Bronx and many of them rent-stabilized.
A building Mr. Kassirer bought in December 2017 contained rent-stabilized units priced 77% under market rates, providing “ample future upside,” according to an investor prospectus circulated at the time.
Some housing advocates say the pursuit of profit through conversion to market rate can come at the expense of existing tenants. Legal Services attorney Marika Dias brought a housing-court action against Mr. Kassirer’s management company on behalf of several tenants in East Harlem. She said she believes a pattern of unsafe and unpermitted interior construction, with large amounts of debris and dust accumulating in common areas, constitutes harassment and intends to drive tenants out to produce vacancies.
“To the extent that Emerald Equity had a business model that was predicated on pushing people out…that business model is no longer supported in the law,” she said.
Mr. Kassirer said most of his apartments are in neighborhoods where free-market rents aren’t meaningfully higher than stabilized rents, and that deregulating units isn’t part of his business model. “I do not harass tenants, ever,” he said.
Some landlords say that the new law will cause buildings to deteriorate. Rent increases based on apartment renovations are now capped at less than $90 a month. Previously, it wasn’t uncommon for a landlord to double the legal rent through these improvements. Many in the real-estate industry now say they simply won’t make substantial repairs and updates to their buildings absent these incentives.
At least one landlord has already said that it would make some major business changes. On Thursday, Sugar Hill, which bought more than 900 apartments just last year, sent out an email explaining that due to new regulations the company “[has] no choice but to effectuate a staff reduction in the immediate future.”
Others are already lining up to buy cheap apartment buildings from desperate investors no longer able to pay off their loans.
“This event will cause foreclosures, which will devalue properties,” Joseph Ficalora, the CEO of
a major financier of rent-stabilized apartments, said at a conference last week. “Those devalued properties represent opportunities for our owners to actually buy into the market at a discount.”
This, he argued, could bring the bank more business.
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