The Real Deal New York

What’s NYC without rent regulations?

Sales pros weigh impact if Supreme Court rules against city in federal lawsuit seeking to overturn World War II-era laws

March 09, 2012 04:00PM

From left: Robert Knakal, chairman of Massey Knakal Realty Services, Peter Hauspurg, chairman and CEO at Eastern Consolidated, Timour Shafran, managing partner at Citicore, Adelaide Polsinelli, associate vice presidenta at Marcus & Millichap, and Timothy King, principal at CPEX Real Estate

Commercial real estate brokers such as Robert Knakal, Peter Hauspurg and Adelaide Polsinelli are keeping a watchful eye on the U.S. Supreme Court as it considers whether it will hear a case that could overturn rent regulation in New York City.

James and Jeanne Harmon, landlords of a rent-regulated Upper West Side brownstone, filed a federal lawsuit seeking to overturn World War II-era laws that limit annual increases in rents for about 1 million apartments, and is getting an unexpectedly thorough review from the U.S. Supreme Court, which is going to decide whether it wants to hear the case. However, lower courts have turned their petition down.

While most real estate insiders don’t believe the current laws, supported by the city in court, will be struck down, this is the first time in a generation that a serious challenge to them has emerged. As a result, brokers are looking at what impact it would have on property prices and volume if the regulations were overturned.

So The Real Deal asked commercial brokers what they expected would happen to multi-family properties and their values if the laws were overturned. They were asked under the assumption that there will be no catastrophic eviction of the million rent-regulated apartments, and that the city or state would create some replacement law that would provide housing for needy residents.

Robert Knakal, chairman of Massey Knakal Realty Services

What would be the impact on multi-family property values in Manhattan south of 96th Street?

You have a situation where regulated units could come to market and all of a sudden go from artificially low to market-[rate]. Both studies from the Wharton School and MIT indicate average rents would go down. I think it would be a very fair assumption that market rents would go down and that would reduce the value of buildings.

What would happen to multi-family financing?

It would change the whole financial structure. Now lenders look favorably at multi-family because it eliminates any downside potential. So it would change the way lenders would underwrite multi-family investments.

Peter Hauspurg, chairman and CEO of Eastern Consolidated

What would be the impact on multi-family property values in Manhattan south of 96th Street?

Values would undoubtedly surge as the prospect of increasing the bottom line of these buildings would become a certainty instead of a guess, as it is now.  Also, there would be the prospect of now converting these buildings to condominiums, which would enhance values further. [Although] I would not be surprised to find a dip in rents already [on the] market, or an increase in vacancies, or both.

What would be the impact on sale volume and on development?

I would guess that sales volume might surge in the early years following deregulation.  Development of new rentals is now being dampened by high taxes and competition from the condo crowd, and if [there is a dip in rents] development of new rentals might decline further if market rents decline across the board and the vacancy rate spikes.

Adelaide Polsinelli, associate vice president, Marcus & Millichap

What would be the impact on multi-family property values in Manhattan south of 96th Street?

In the short run they would rise but in the long run they would level off and most likely not appreciate at the rates we have seen in the past. If rent-regulation were discontinued, property values would be challenged.  The rental market will find equilibrium, which is great for tenants but hurtful to landlords.

Some view rent-regulated apartments as a dependable annuity (with the occasional bonus in value when an apartment vacates). Will the city be hurt with that type of product out of the mix?

The conundrum for real estate owners is that if they support deregulation, they risk rents falling and they stand to lose the appreciation associated with a controlled supply of affordable apartments.

Timour Shafran, managing partner at Citicore

What would be the impact on multi-family property values in Manhattan south of 96th Street?

Most of the Upper West Side would suffer immediately. Rents would come down especially in the 25-footers — the smaller apartment buildings — because there is no real justification for someone paying $3,500 [per month there]. Then [the value would] change as assemblage or development [buyers stepped in].

What would be the impact on the rest of the city, i.e. Northern Manhattan, Queens, etc., where most of the rent-stabilized properties have rents that are market rate even though they are regulated?

I could see neighborhoods in the Bronx coming back. Instead of [below-market rents] you would have a landlord able to charge an appropriate rent for a decent place to live. I could see rents rising in [for example] Upper Manhattan. Manhattan would eventually be an island for the very wealthy and the outer boroughs for the less wealthy.

Timothy King, principal at CPEX Real Estate

What would be the impact on multi-family property values in Manhattan south of 96th Street?

The freeing up of the thousands of regulated apartments in Manhattan south of 96th Street will be a boon for the marketplace. As the market reaches a true equilibrium, there will be lots of turnover, as legacy tenants who have benefited from artificial rents for decades will need to either pay the market rent or seek other quarters.

Could market rate apartments in Manhattan actually decline in value because of the additional supply?

Market-rate apartments will stay at market, whatever that adjusts to. Not likely to see significant declines in value.

Some view rent-regulated apartments are a dependable annuity (with the occasional bonus in value when an apartment vacates). Will the city be hurt with that type of product out of the mix?

Those owners who see rent-stabilized rents as a reliable increase in annual rents will not suffer, but will instead prosper, [because] the typical annual increases in rents barely pay for the annual increases in operating expenses. Compiled by Adam Pincus

  • Raging Realtor

    I would invest in companies that make tents….

  • ann

    It is clear that landlords will not behave with a conscience. for example in my building a tenant recently moved out after living in the building for several years and had a 2 bed apt. she moved out thursday morning by thursday afternoon the maintenance people were in the apartment tearing it apart and the following day the construction crew arrived tearing down walls and bathroom fixtures. None of it was needed but now landlords can “renovate” apartments whether or not the renovation is really worth the increase. i understand the landlord expects to ask more than six thousand dollars per month. the elevators are consistently broken. not one month goes by that the repairman is not in the building two and three times. when you call the management office they say if you don’t like it you can move. this landlord takes no responsibility for running a lousy building as he gouges on the rent and pushes the older tenants out of the building so that he can rent gouge. greed is a major problem when it comes to housing in this city. unfortunately politicians will need to step in and do something drastic because if anyone is looking the housing problem is a huge problem more and more seniors are on the streets while brokers stuff their pockets with huge commissions without any conscience. something is drastically wrong with rents in this city.

  • ann

    the thing is that rent regulations do not affect these brokers and these landlords. most of them live outside the city and so do the judges.

  • ann

    the suggestion that rents will level off is a clear indication that this person knows nothing about what is really going on. rents have not at all leveled off. they have increased drastically.

  • ann

    what other city can you rent an apartment where the bedroom is no larger than ten feet wide by twelve feet and the bathroom and closet space is so tiny and the living room and dining room are so tiny the sofa can hardly fit and dining table? what dining table? there is no place for a dining table. and then the rent is more than fifty percent of a years salary. a one bedroom apartment is more than three thousand five hundred dollars per month? in many other cities you can rent an entire house with three bedrooms and two bathrooms and a back yard and garage and have neighbors and a family life. there is a major problem with this city and not just with housing!

  • ann

    it will become a ghost town as it was when Beame was Mayor!

  • ann

    no one will want to work in this city because they will not have any money left to pay for food

  • ann

    professionals will begin to demand companies pay for their housing causing companies to move out of the city and possibly the state.

  • ann

    companies will find the city unacceptable to do business because no one will be able to afford living there.

  • kcrail

    Pointless assumption that there won’t be mass evictions. This will throw millions of people into homelessness. Is that what we want? Many of these residents are elderly and/or disabled. Not working, therefore cannot afford rent. Cannot afford to move, cannot afford 3 months of rent up-front.

    And where are all the workers supposed to live, now that commuting costs run into the hundreds weekly.

    Get real. Of course, with the Supremes dominated by judges who think corporations are people, I fear that such a catastrophe might happen.

  • mikegre

    If you cannot afford the rents in New York City, you can move to Queens or Brooklyn or the Bronx.

  • henricaf

    Calm down guys, rent regulations as it is now DONT make any sense. Who can explain a single person being allowed to live in a 5 bedroom mansion? Or would you be able to explain why in the world there is no rent MINIMUM someone should have to pay depending on the apt size? Is it reasonable for someone to pay $60 rent in NY? it doesn’t even cover the heating and repair costs for the landlord… I understand the concerns about the real poor people and about the elderly, the solution to that should be that it should stay stabelised/controled till the original tenant moves out or passes away. this will bring the apts SLOWLY out of the rent regulation system

  • kristahinkle

    Not all rent controlled apartments are rented at market rate, many of them are in fact far below. These apartments are grandfathered to new tenants, and they basically never go on the market. Making it difficult to gauge the impact of bringing these units to the general public. I don’t think its fair for some people to benefit from significantly low rental rates for great property especially when said units neighbor apartments demanding market value. These same apartments are inhabited by people who take advantage of the system, stay in rent controlled apartments far longer than necessary. While paying low housing rates they are over spending in other aspects – buying fine clothing, fine home electronics. Now if you have to live in a rent controlled apartment, you probably should not buy a brand new 50 inch plasma and wear second hand Fendi. That’s a separate argument altogether but it just really irks me to see virtually no regulation (for example why are there not shortened terms for living in rent regulated homes – aren’t they designed to provide housing for the needy? shouldn’t the needy aspire to something greater so that they don’t need government assistance forever? shouldn’t we implement some rule that minimizes the length of time they can take advantage of deep discounts at tax payers and everyone else’s expense?). I could go on but I’ll stop there.

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