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

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