For years, investing in rent-stabilized buildings was a slow, but sure, game.
“There’s little downside,” said Steven Kohn, president of Cushman & Wakefield Sonnenblick Goldman. “It’s low yield, but you have significant upside — it’s just a question of how long it takes to realize it.”
In the past year, however, prices of such buildings and the volume of trades have been stagnant. And going forward, some real estate pros are predicting that rent-stabilized landlords will face their worst market in years — a confluence of skyrocketing fuel prices, the credit crunch and a possible revision of regulations from Albany after the upcoming state elections.
“There’s been a 37.4 percent increase in fuel costs this year,” said Jacky Monterosso, a spokesperson for the Rent Stabilization Association, the trade group that represents thousands of New York City property owners. “That one operating cost alone wipes out savings. We have owners that are taking out a line of equity just to make the ends meet.”
Monterosso said this year’s financial pressure was the worst for landlords since “the 1970s, when the Bronx was burning.”
After numerous hearings, late last month, the Rent Guidelines Board voted to increase rents 4.5 percent on one-year leases and 8.5 percent on two-year leases for the city’s 1 million rent-stabilized apartments. And, in an unusual move, it also approved an additional concession for landlords: A supplemental monthly rent increase of $45 for one-year leases or $85 for two-year leases for tenants who have lived in stabilized units for more than six years.
But even though the hearings’ outcome, on its face, favored landlords, rent-stabilized investors and the commercial brokers who work with them say there’s still pressure to sell.
The landlords won’t see the rent hikes they’ll be able to charge on lease renewals as being big enough to justify increases in fuel and maintenance costs, said Tom Gammino, a broker for Massey Knakal and former real estate attorney who specializes in rent-stabilized sales. Gammino notes that landlords had been pushing for increases of between 10 and 15 percent.
He added, “When fall starts, the onset of winter and its higher fuel costs are going to make a lot of owners want to sell.”
Another factor that will put pressure on owners to sell before the end of the year is the fall elections, Gammino noted. “If there’s a Democratic groundswell in Albany, the $2,000 vacancy decontrol limit is probably going to be increased to $2,500 or $3,000.”
In addition, the credit crunch has taken a toll on the rent-stabilized investment landscape.
“It’s just more difficult” for investors to secure financing for purchases nowadays, said Kohn. The banks, pension funds and other entities ponying up money for rent-stabilized buys “want to lend on current cash, not on projected increases.”
As an example of how the ratios have changed, “in the past year or so, financers have only been willing to lend investors between 60 to 65 percent of the money they need to buy rent-stabilized properties,” said Kohn, whereas 12 months ago, a buyer could count on getting 75 to 80 percent of their purchase covered by debt.
“More equity is required,” he said.
Kohn’s firm, Cushman & Wakefield Sonnenblick Goldman, was recently hired by the Dermot Company to raise equity for the $60 million purchase of three adjoining rent-stabilized buildings in Morningside Heights that contain a total of 180 units. Henderson Global Investors, a pension fund, put up the cash for Dermot’s buy, said Kohn. The debt was provided by Prudential.
The deal became a reality, in part, said Kohn, because of the buildings’ location. Rent-stabilized deals in neighborhoods like Morningside Heights, he said, have been “much less affected” by the credit crunch than would-be sales in “more marginal” areas.
“We’ll see a lot more activity before the year is up,” predicted Gammino, who noted that even though sales have languished, the trend on the horizon is for the balance of power to “move in favor of the buyers.”
Other real estate executives still have a fairly bullish view of the market.
“The availability of debt is affecting purchases,” said Eric Anton, executive managing director at commercial brokerage Eastern Consolidated. However, he notes, rent-stabilized investments are the segment of the city’s real estate market that’s “changed the least” in the past year or so.
“You’re buying apartments that remain way below market,” Anton said. “You’ve got so much upside, so much distance to go, that it’s not a matter of the market. In many ways, it’s one of the safest bets out there, because it’s all based on your ability to be a good manager.”
But tenant advocates, who argue that middle-income New Yorkers are getting financially squeezed, aren’t shedding a tear for rent-stabilized owners.
“Investors and owners have feasted at tenants’ expenses for a decade,” said Brad Lander, director of the Pratt Center for Community Development, a Brooklyn-based organization that advocates tenants’ rights. He noted that the recently released 2008 study of income and expenses found that “growth in income outpaced growth in expenses for rent-stabilized owners in 13 of the past 15 years.” At the same time, he said, “predatory investors have bid up the value of rent-stabilized properties assuming they could evict rent-stabilized tenants and move toward vacancy decontrol.”
When asked whether sales prices for rent-stabilized buildings will moderate with the current economic climate, Lander said, “We can only hope so.”