Rent Stabilization Train Wreck Means No Good Outcome

Jonathan Mines just posted something rarely seen from real estate professionals: a positive outlook for rent-stabilized housing.

No, he wasn’t ignoring the obvious. The commercial real estate adviser dutifully disclosed the punishing terms inflicted upon owners by the Housing Stability and Tenant Protection Act of 2019:

“Vacancy decontrol: gone. Units can no longer be deregulated once rent hits a threshold. They stay stabilized.”

“Preferential rent: frozen. If you charged below the legal rent as a perk, that discount is now locked in for the life of the tenancy.”

“IAI caps: gutted. Renovation-driven rent increases are now capped and amortized over 30 years.”

Then Mines pivoted.

“The good news: NYC multifamily rewards disciplined buyers. Less speculation, more fundamentals. For investors who know how to underwrite the asset class, the opportunity is real.”

Obviously he was trying to drum up business for his firm. Nothing wrong with that.

But even if Mines is correct that opportunity remains for “disciplined” buyers, so do risks. And they are hard to forecast, as recent history shows.

Even if underwriters had known what would be in the 2019 rent law, they could not have foreseen all the other shocks to the system: a Volckeresque rise in interest rates, skyrocketing insurance premiums, a pandemic-triggered plunge in rent collection and a mayor promising a four-year rent freeze.

Water rates (raised 8.5 percent in 2024 alone) and maintenance costs have also risen more than anticipated, evictions were paused during the pandemic, housing court delays are worse than ever and property taxes have somehow gone up.

Given all that, pre-2019 buyers of fully rent-stabilized buildings would have run into the red at some point even without the HSTPA.

As for the risks facing rent-stabilized acquisitions, these are likely to be realized:

The next four to eight annual rent increases will range from 0 percent to a number below inflation.
The Community Opportunity to Purchase Act will pass, making it harder to sell distressed buildings.
Socialists and ultra-progressives will continuously challenge incumbent Democrats, scaring moderate legislators into keeping rent laws as they are, if not making them worse.
Tenants, empowered by Homes and Community Renewal, will file rent-overcharge cases by exploiting paperwork gaps from renovations done long ago.

The potential upsides for rent-stabilized owners, by contrast, are remote possibilities. They include the Supreme Court declaring the HSTPA unconstitutional, owners being allowed to receive the full value of rental vouchers and Albany allowing rent hikes for vacant units. To Mines’ point, no deals should be predicated on these long shots.

More feasible loan workouts are being discussed behind the scenes, but face political and financial obstacles. If they do happen, nonprofit owners will eat first because politicians see them as mission-driven angels and others as profit-driven devils.

The goal for rent-stabilized housing, as panelists from the landlord and tenant sides agreed at a sold-out New York City Bar Association event last week, should be a return to balance and predictability.

In that perfect world, owners get enough revenue to sustain their buildings and earn modest returns, tenants pay their rent, and those who cannot afford it are subsidized by the government, not by the landlord.

Reality check: This scenario is not readily achievable. It might even be impossible.

The consensus among the expert panelists was that the politics that governs rent regulation in New York will continue to result in overcorrections as legislative power swings from one side to the other.

“There is no way that a political process is going to create a good outcome for tenants and buildings over the long run,” said Rafael Cestero, CEO of the Community Preservation Corporation.

Cestero said 36 percent of the huge portfolio of rent-stabilized loans that CPC services have a debt service coverage ratio below 1.0, which means the buildings securing those mortgages lose money every month.

When owners had the upper hand in Albany, “they kept asking for more and more,” he said. “The dynamic has now completely flipped. Tenants have the power in Albany, and continuing to ask for more and more and more is just going to perpetuate the cycle of where we are today.”

And where is that?

“I do think,” said former Rent Guidelines Board chair David Reiss, “we’re in the midst of a slow-moving train wreck.”