NYC Apartment Rents Blow Past Records Again, But Owners Aren't Immune From Looming Distress

Soaring apartment rents in New York have allowed the city's market-rate multifamily owners to escape much of the real estate gloom of the last year, but prices only paint part of the picture. 

Rents are staggeringly high. In both Queens and Manhattan, the median and net effective rent reached all-time highs for the third time in four months in July, according to Miller Samuel data released Thursday. In Brooklyn, effective and median rents hit a record for the fourth month in a row.

In Manhattan, the median rent for a one-bedroom apartment is $4,295, a 7% year-over-year jump. However, the number of new leases dropped across the city, by as much as 38% in Brooklyn and more than 50% in Queens. 

Miller Samuel CEO Jonathan Miller said while rents are now at record highs, the slowdown in leasing of apartments represents a shift in the market.

“We're hitting some sort of affordability threshold,” he said. “The drop in leasing activity probably means that landlords are being more aggressive on renewals to retain their tenants.”

July's drop in leases happened during what is typically the busiest time of year for rentals, he said.

“In early 2023, I was describing 2023 as the year of disappointment … even if rents top out — there are signs that are getting close — it doesn't mean that rents are gonna fall significantly to see a big increase in affordability,” Miller said. “The opposite of rising rents isn't falling rates, it's stabilizing rents, and I suspect that we're going to plateau, move sideways over the near term.”

The office sector has captured headlines for years now, as owners are dealt a double blow of waning leasing and a pile of maturing debts. Distress in U.S. office real estate jumped to $24.8B at the end of the second quarter, up $6.7B from the previous three-month period, according to the latest MSCI U.S. Distress Tracker. Office is now the most distressed commercial real estate asset type for the first time since 2018, surpassing retail and hotels.

But the spotlight has begun to shift toward the debt secured by multifamily, the biggest asset class in the country. Last month, Morningstar released a report pointing to an “$8B tsunami” of multifamily commercial mortgage-backed securities that are coming due in the second half of 2023 — creating what it calls a “red October.”

It is a “hydrogen-bomb scenario” for multifamily landlords, Peter Sotoloff, a former managing partner at Mack Real Estate Credit Strategies and former head of U.S. originations at Blackstone, told The Wall Street Journal this week.

Trepp Senior Managing Director Manus Clancy said the “epicenter of concern” are those who bought value-add properties with floating rate debt at the peak of the market in 2021 and the first half of 2022. Largely in places like Arizona, South Carolina and North Carolina, those buyers are now being buffeted by high interest rates, operating costs driven up by inflation and a leveling-off in rents.

The unsavory cocktail has threatened the business of multifamily syndicators, who bought properties aggressively at their peak and put short-term debt on them, hoping to flip for a profit. Five multifamily syndicators — Tides Equities, GVA Investments, Nitya Capital, ZMR Capital and Rise48 Equity — have $3.7B combined in multifamily loans coming due in the next 30 months, according to Trepp. 

Tides Equities has asked its investors to put in more cash to help stabilize its portfolio, saying as many as 20% of its properties could be in distress. 

New York is an entirely different story.

"The market rents in places like Chelsea, the Upper West Side and Midtown West, Midtown East, sure they’re doing fine — very few defaults, they push through rent increases every year, and demand remains very high," Clancy said. "So that's a market nobody's going to pull out their violin for."

The luxury condo market has seen a sharp slowdown; just last week, Apollo Commercial Real Estate Finance wrote off a piece of the debt it has on the luxury supertall at 111 West 57th St. due to slow sales at the building, chalking up an $82M loss.

 Cracks are also showing in the rent-stabilized market. Flagstar, a subsidiary of New York Community Bank — the largest lender to rent-stabilized landlords in the city — filed to foreclose on eight rent-stabilized properties, The Real Deal reported last week.

“On the rent control side, nobody wants that product anymore,” Clancy said. “You're seeing people saying, 'We're kind of giving these properties away.'"  

Buildings with rent-regulated apartments have seen their values drop by between 25% and 60%, according to a Maverick Real Estate Partners analysis earlier this year, after the 2019 Housing Stability and Tenant Protection Act made it more difficult for landlords to remove units from regulation or raise rents after major repairs.

“The capping of rent increases has just made that part of the market very unloved,” Clancy said.

In some cases, rent-stabilized multifamily buildings in New York aren't worth the debt they are carrying, Meridian Investment Sales Managing Director Shallini Mehra said — a scenario that is also playing out for roughly 15M SF of office buildings in New York, per JLL. Landlords in that situation are faced with few good options, Mehra said in an interview.

“People need to decide, do they have that cash? Do they want to hang onto the building? Do they want to sell something else? Do they want to stay in the New York market?” she said. “The change in the rent laws combined with the [interest] rates, it's like a double-whammy.”

Landlord experiences run the gamut, she noted. Some bought their buildings long ago and are willing to sit it out. Some people are willing to sell at a loss in order to maintain their relationship with their banks. The most difficult task is finding buyers for sellers who need to cash out.

Undoubtedly, sales volume has been dead quiet. The total dollar volume for multifamily sales in New York in the second quarter was $899M, a 42% drop from the trailing four-quarter average, per Avison Young data.

“I hunt for buyers like I’ve never hunted before,” Mehra said. “It used to be that I could sort of send a deal out to my universe of buyers and I would get offers right away. And now I have to pick up the phone and hunt. And I think everyone does.”