The city’s multifamily market has had a very slow year so far, and brokers say they expect that to continue for at least another few months while buyers and sellers try to figure out how much of an impact the state’s new rent regulation proposals will have on the properties.
“There’s going to be a period where buyers and sellers pause and reevaluate where these things are and see how it impacts their long-term cash flow, and that will take some time to digest,” said Ariel Property Advisors executive vice president Michael Tortorici, “so I think we may be in for a period of slower transaction volume while the market digests it and sees how to interpret it.”
A recent report from Ariel Property Advisors found that there were just 75 multifamily deals in the city during the first quarter of the year, the smallest number since the third quarter of 2010. The company largely attributed this to uncertainty over how the state government planned to change rent regulation rules.
Multifamily brokers echoed this point, describing the slowdown as temporary and expressing confidence that activity would pick up again once buyers and sellers knew what the new laws would look like.
But the deal the Senate and Assembly just reached on Monday night does not look good for the industry, even though it was not as liberal as some brokers feared. The package proposes to eliminate vacancy decontrol, limit the Individual Apartment Improvement and Major Capital Improvement programs and end “luxury decontrol,” which let landlords begin charging market-rate rents for an apartment if the tenant’s income hit at least $200,000. The package did not include the good cause eviction proposal, one of the more controversial bills that would have further limited rent increases.
JLL’s Robert Knakal said the new proposals will likely drive prices down by reducing the incentives for multifamily investors to buy rent-controlled buildings in the first place.
“Nobody buys real estate wanting to get a 3 percent return on your money, but you’re willing to do that on multifamily because you knew over time you’d be able to improve the quality of the building, increase the rents, and get your return level,” he said, adding that the state’s proposals “reduce the incentives for the private sector to invest in properties.”
Daniel Parker of Hodges Ward Elliott said that some of the bills were what he expected. However, he was surprised by how the legislature handled IAIs, namely its decision to limit the cost of renovations through the program to $15,000 and cap the number permitted to one every 10 years.
“You’re going to have a lot of apartments that are being rented in poor condition,” he said, “because $15,000 every 10 years will not maintain a typical prewar apartment.”
Robert Nelson, president of multifamily landlord Nelson Management Group, was similarly critical of the IAI restrictions. He said he will not be able to renovate his properties the way he has been, and they will be in worse shape because of it.
“For my portfolio, it costs me anywhere from $25,000 to $60,000 to renovate an apartment,” he said. “If the cap on the new law is $15,000, what am I going to do? I’m going to be preparing vacant apartments in a substandard way.”
Tortorici predicted that the laws could lead to multiple companies scaling back on renovation plans if they determine that the math no longer adds up. He also said the proposals’ impact on the multifamily market would not be felt the same across all parts of the city.
“An area of the Bronx where the disparity between the rent-stabilized and the free-market rents isn’t as extreme as somewhere like Manhattan may be more insulated,” he said.
But overall, brokers did not view these proposals as a disaster for the multifamily market. They noted that the economy and the need for housing in New York were both still strong and that a continued slowdown in the multifamily market could simply lead to more activity taking place in other segments of the market, such as development sites or commercial properties.
David Schechtman of Meridian Capital said the proposals weren’t as bad as he feared they might be, and he thinks the slowdown in the multifamily market will end sooner rather than later. The lack of activity was more due to not knowing what the new laws would be, and now that the laws themselves are out in the open, a summertime spike for the market is likely in the cards, he said.
“It’s like being in a fender bender,” he said of the proposals. “You get out of your car. You look at it. There’s some damage, but it’s not as bad as you thought it was, and you keep on driving.”