'We Know It's Going To Be Bad': Rent Regulation Reform Already Hurting Multifamily Market

Rent regulations laws that affect nearly 1 million apartments in New York City are set to be renewed in June. But with the state Senate controlled by Democrats for the first time in nearly a decade, the commercial real estate industry is bracing for broad, profound changes to rent-regulation laws that deeply impact their business.

That reform — and uncertainty about how it will actually look — has spooked some investors, commercial real estate players told Bisnow. Some are predicting a significant drop-off in dollar volume for multifamily assets in the first three quarters of the year, along with sliding prices.

“It won’t be until the beginning of July until [we] will know what the new regulations will look like,” JLL Investment Sales Chairman Bob Knakal said. “People are taking a ‘wait-and-see attitude’ ... Investors really want to see what the new horizon is going to look like.”

There are a slew of potential changes, some of which have made it to bill form. Top of mind for building owners are changes to or elimination of vacancy decontrol — which allows for apartments to be destabilized if the rent hits the luxury deregulation threshold of $2,733 and the unit becomes vacant.

Multifamily owners are also watching closely for new laws that could stop them increasing rents because of capital improvements to buildings or apartments. To that end, state Sen. Michael Gianaris and state Assemblyman Brian Barnwell are pushing a bill that would repeal the Major Capital Improvements Program.

Meanwhile, Gov. Andrew Cuomo has made it clear he is largely backing reforms to rent laws.

“This year we have the opportunity to finally reform the rent regulation program, including eliminating vacancy decontrol, ending preferential rent limits, limiting building apartment improvement charges and strengthening the tenant protection unit so we actually enforce those laws,” Cuomo said in his State of the State speech in January. 

Change is inevitable, sources said, and while it is not year clear exactly what that change will be, some already have dire predictions.

“Values on rent stabilized apartments have fallen, and they will continue to fall further … People who were speculating that they could get tenants out and raise the rents are not going to be able to assume that any more,” Slate Property Group co-founder David Schwartz said. “I think it will change the landscape. There will be a lot of investors that will lose money, there will be lenders and banks that will be caught up in this as well.”

Killing The Golden Goose?

Knakal, who argues that removing an incentive for landlords to fix their buildings could result in vast numbers of buildings falling into disrepair, predicts muted activity in the multifamily sector until October, at the earliest.

“I think there are a number of people who are interested in just getting out of the class all together, because they’ve seen the writing on the wall for a long time,” he said.

Ariel Property Advisors Executive Vice President of Investment Sales Victor Sozio said the ambiguity is making it challenging to underwrite deals right now, leading to an “element of paralysis” among investors.

But he expects there to be more clarity this month as budgets begin to circulate.

“If you are making a big bet on a multifamily asset in which the value is driven by potential upside in the offering, you are making a calculated risk when you decide to proceed today, because things can change very significantly come June,” he said, though he added a New York City investment will always be lucrative.

Until the 1990s, practically the only way landlords could destabilize a unit was to turn it into a co-op and sell it, according to Rosenberg & Estis attorney Jeffrey Turkel.

The laws allowing vacancy decontrol gave building owners greater control on who lives in their buildings, he said. The Rent Guidelines Board estimates around 150,000 units in the city have been destabilized in this way over the last 25 years — though some tenant advocates and politicians argue the figure is far greater.

“Repealing vacancy decontrol is the holy grail,” Assemblywoman Linda Rosenthal told The Wall Street Journal last year before the election. 

“We know it’s going to be bad, we just don’t know how bad it’s going to be,” Turkel, the attorney, told Bisnow.

He argues that depressing real estate values will hurt tenants in other ways — and he is telling his clients to wait and see.

“Real estate is one of the geese that lays golden eggs," he said. "Killing that goose will have its ramifications."

Crisis Response 

The industry’s lobbying group, the Real Estate Board of New York, has argued that proposed legislation to remove the Major Capital Improvements Program “in no way addresses the affordable housing crisis.”

REBNY President John Banks has previously said that he would push against laws that lower the number of market-rate units, arguing that increasing housing supply is the answer to the affordability crisis.

But tenant and affordable housing advocates say stabilized units are a precious resource that must be preserved. 

Senior program officer with Enterprise Community Partners' New York Office Elizabeth Ginsburg said landlords should be able to make enough money to maintain their buildings.

“At the same time, we need to look at all of this in the context of the city’s affordability crisis,” she said. “We need to use all of the tools at our disposal to really solve the affordability and homeless crisis."

Enterprise, a national affordable housing nonprofit that finances affordable housing and provides advocacy around affordable housing and development, is still strategizing how it will approach rent-regulation reform.

Ginsburg said the organization will indeed support removing vacancy decontrol, and push for changes to stop landlords hiking rents under preferential rent rules. While it does not have a formal stance on ending the major capital improvement laws, Ginsburg said Enterprise would not want to stop incentivizing landlords to improve their buildings.

“What the current laws are doing are making it so that lots of those units come out of stabilization,” she said. “These reforms are aiming to preserve this stock so that we still have a resource for low- and middle-income households.”

'Back To Reality'

For some, the resulting market tumult has presented an opportunity.

Meridian Investment Sales Senior Managing Director Adam Hess — who is marketing Parkway Realty Group’s nine-building, 291-unit Parkside Portfolio — said investors will see the proposed regulations as an opportunity to be the contrarian in the market.

“The people who are going to buy are families that are going to hold these for 20 or 30 years,” he said. “[Potential buyers] are saying, ‘Listen we buy real estate, this is what we do. Political environments are a pendulum.’”

James Nelson, the principal and head of Tri-State investment sales at Avison Young, just sold three apartment buildings on 62nd Street, and said the buyers got a good deal because of hesitancy in the market.

“I’m sure they thought, ‘Well this is an opportunity, where right now there is not as much competition for multifamily,’" Nelson said. "I think it is going to lead some opportunities out there.”

Camber Property Group’s Rick Gropper said his firm has already pounced on those opportunities.

Camber’s approach has been to buy stabilized buildings and move them into city affordability programs in exchange for tax abatements — rather than relying on a business plan of buying out tenants and converting regulated units to market-rate.

Camber joined with Belveron Partners and the city’s Department of Housing Preservation and Development to buy an 11-building portfolio in the Bronx in January for $75M. It also paid $13M for 1314 Seneca Ave. in the Bronx last March.

Without the rent regulations uncertainty, Gropper said, the price would have been higher.

“We’ve been able to make a couple of good acquisitions because pricing has come back down and stabilized from where it was a year or two ago … The reset has enabled us to get in the door at a relativity low basis,” he said. “I think some change to rent regulation — it’s definitely a good thing. As buyers, it’s brought the market expectations back to reality.”