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Tag: Ariel Property Advisors

  • Behind The Multifamily Numbers: Affordable Housing In New York City Attracts Big Money

    Behind The Multifamily Numbers: Affordable Housing In New York City Attracts Big Money

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    Affordable housing accounted for approximately 43% of New York City’s $3.91 billion in multifamily sales in 2Q 2023, according to Ariel Property Advisors’ Q2 2023 Multifamily Quarter in Review report.

    Major mission-driven investors including Nuveen, The Vistria Group, Tredway and Asland Capital Partners in association with Goldman Sachs made sizable affordable housing acquisitions across the boroughs in the second quarter, which contributed to the significant boost in dollar volume. In addition to preserving and producing affordable housing, investments in this asset class are attractive because they offer access to dedicated capital, value creation opportunities, property tax incentives, agency financing and scale, all of which have contributed to their substantial growth.

    Mission-Driven Investors Step Up

    Nuveen is one of the nation’s largest institutional managers of affordable housing and recently made a strategic decision to buy in New York City. Nuveen oversees more than $1.1 trillion in assets of which $6.4 billion is comprised of 161 affordable housing investments with approximately 32,000 units that primarily serve low-income residents earning 60% of area median income (AMI) or less.

    Nuveen’s partial-interest acquisition of an affordable portfolio from Omni Holding Company for an estimated $956 million was the largest multifamily transaction in New York City in the second quarter and accounted for nearly 60% of the dollar volume invested in affordable housing during this period. The deal included 72 properties (tax lots) spread across 5,900 units in the Bronx (66% of the units), Brooklyn (21% of the units), Queens (10% of the units), and Northern Manhattan (2% of the units).

    “Our goal is to meaningfully invest in the preservation and expansion of high-quality affordable housing to support the well-being of rent-burdened residents within local communities,” said Pamela West, Senior Portfolio Manager of Impact Investing at Nuveen Real Estate in a company announcement. “With the Omni transaction, we can develop and manage properties across the U.S. and achieve the desired outcomes for residents and investors.”

    The Vistria Group, a private investment firm, ventured into New York City’s affordable housing market for the first time in June by making a $174 million investment in a portfolio with 1,290 units across five rent stabilized buildings; four in the Bronx and one in Northern Manhattan. The transaction was financed through a Freddie Mac originated loan by Keybank.

    Eleonora Bershadskaya, Principal, Real Estate, for the Vistria Group, who was a panelist at Ariel Property Advisors’ recent Coffee and Cap Rates event, said the acquisition was appealing because the buildings have undergone significant capital improvements over the last decade and they benefit from an Article 11 tax abatement, which will be in place for the next 30 years.

    “One of the most important factors was the level of affordability that will persist for a long time across the portfolio, especially in the Bronx which has seen pretty significant rent growth in the last five years,” Bershadskaya said. “Also, there are development opportunities in the borough, so having a haven of affordability in that area was important to us both from an impact and financial perspective.”

    The Vistria Group, which expanded its Healthcare, Knowledge & Learning Solutions, and Financial Services sector focus last year to include affordable, mixed-income and workforce multifamily housing nationwide, is taking a long-term view when acquiring affordable housing assets as it seeks to meet a double bottom line.

    “First, it’s incredibly important for us to help address the affordable housing crisis in this country,” Bershadskaya said. “Second, financially it also makes sense because when we provide that level of affordability, we have a sticky renter base with low turnover and high occupancy, which translates into lower cost and better economics for the asset.”

    Tredway, a prominent New York City-based affordable housing owner-operator-developer, partnered with Gilbane Development Company and ELH Mgmt in May to acquire the Sea Park Portfolio, an affordable housing portfolio comprised of three former Mitchell Lama elevator buildings with a total of 818 units and an 89,357 square foot parcel. Ariel Property Advisors arranged the $150 million ($156/SF) sale.

    The multifamily buildings include 589 units that serve households with a maximum yearly income of 60 percent of AMI, 159 units that serve those with a maximum income of 50 percent of AMI and 65 homes that serve households earning up to 80 percent of AMI. The 2023 AMI for the New York City region is $127,100 for a three-person family (100% AMI). The various regulatory agreements placed on each property are a blend of New York City Housing Authority (NYCHA) and New York City Department of Housing Preservation and Development (HPD) voucher units, non-voucher units and market rate units.

    Tredway and its partners plan to embark on a multimillion-dollar rehabilitation of the entire Sea Park complex focused on quality-of-life improvements as well as strengthening its resiliency and improving the property’s energy efficiency. Of the units, 90 apartments will be set aside for formerly homeless residents and three will be reserved for superintendents. The development team also intends to build 250 new units of holistic affordable housing at the site catering to seniors.

    “We are pleased to protect, preserve and produce new affordable homes at Sea Park, a framework that will increase access to opportunity for all current and future residents,” said Will Blodgett, CEO & Founder, Tredway, in the company’s announcement. “The investments we are making will lead to a more affordable, connected, diverse, healthy and vibrant community and foster economic stability for the thousands of New Yorkers who call Sea Park and the wider Coney Island neighborhood home.”

    Asland Capital Partners, a private real estate investment firm specializing in multifamily and mixed-use investments, has partnered with the Urban Investment Group within Goldman Sachs Asset Management to launch the Asland Sustainable Housing Fund. In June, Asland and Goldman Sachs announced the Asland Sustainable Housing Fund’s first acquisition of the Heighliner Portfolio, an affordable housing portfolio located in Upper Manhattan and the Bronx, which includes five assets, 334 residential units, and several community focused retailers spanning nearly 250,000 square feet. Ariel Property Advisors arranged the $45.2 million transaction.

    Asland and Goldman Sachs have developed a comprehensive strategy to ensure the long-term financial and physical sustainability of the Heighliner Portfolio assets that includes addressing deferred maintenance, implementing sustainability upgrades and providing resident services such as free broadband and credit-building technology. In exchange for preserving affordability, the portfolio will benefit from a long-term property tax exemption.

    “We are thrilled to have successfully acquired the Heighliner Portfolio and continue on our mission of preserving affordable housing,” said James H. Simmons, III, Founder and CEO of Asland Capital Partners, in an announcement article in Citybiz. “Through our strategic collaboration with Goldman Sachs, the New York City Department of Housing Preservation and Development (HPD) and New York City Housing Development Corporation (HDC), we are confident in our ability to enhance the quality of living for our residents while ensuring the long-term viability of these valuable properties.”

    This Heighliner Portfolio transaction represents the seed investment in a broader strategy for the Asland Sustainable Housing Fund, which aims to deploy an initial $250 million towards Core Plus acquisitions of Section 8, Low-Income Housing Tax Credit (LIHTC) Preservation, and mixed-income transactions, with a national mandate and an initial emphasis in New York City.

    Affordable Housing Drivers

    The increased demand for affordable housing illustrates how mission-driven capital sources are increasingly drawn to this sector because of its strong underlying fundamentals and incentives which include:

    • Satisfying investors’ double bottom line of integrating financial success with social accountability.
    • Property tax incentives and in some cases subsidies.
    • Value-add opportunities in the way of increasing rents, specifically with vouchered tenants whose rents are tied to the U.S. Department of Housing and Urban Development (HUD) Fair Market Rent schedule for each unit size.
    • The ability to leverage agency lenders (Fannie Mae, Freddie Mac and HUD) and city programs offered by HPD, HDC is a distinct advantage considering the scrutiny regional banks are facing since Signature Bank closed earlier this year. As a result, financing has become challenging for some multifamily deals, especially for rent stabilized assets.

    My partner Victor Sozio summed up the appeal of affordable housing this way, “Not only does affordable housing continue to attract capital for CRA (Community Reinvestment Act) purposes, capital that’s designated for affordable housing, but there are still tools to work with to add value while also achieving the objectives of the respective agencies that govern and restrict these properties.”

    In contrast, rent stabilized buildings, which only accounted for 10% of the second quarter multifamily sales, are seeing the lowest pricing metrics in almost two decades because the Housing Stability and Tenant Protection Act (HSTPA) of 2019 eliminated the ability to adequately increase rents to cover rising expenses and the renovation of vacant units.

    What to Expect

    Recent legislation, coupled with a city-driven commitment to preserving affordability, has created significant investment opportunities in affordable housing, which will result in steady returns for investors and improved living conditions for low-income housing tenants. We expect this trend to persist as investor demand remains robust for this multifamily sub-segment.

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    Shimon Shkury, Contributor

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  • Three Trends Impacting New York City Commercial Real Estate

    Three Trends Impacting New York City Commercial Real Estate

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    Tenant behavior in the office market, regulation in multifamily and a much higher cost of capital contributed to a 43% drop in New York City investment sales to $12.8 billion in 1H 2023 from 1H 2022, according to research compiled by Ariel Property Advisors.

    However, that drop was expected as we began to see a slow down at the end of 2022 due to rapidly rising interest rates. As a result, while the first quarter was lackluster, the market improved during the second quarter as savvy investors seized the opportunity to invest in repriced assets.

    Office: Letting Go, Holding On, Recapitalizing and Repositioning

    With New York City’s office occupancy rates hovering around 50% of pre-Covid levels, the dollar volume of office transactions fell 48% year-over-year to $2.4 billion in 1H 2023, one of the lowest levels in the past 10 years.

    Mortgage Maturities Force Decisions

    While mortgage maturities are presenting a major challenge in the office market, they are providing insight as to how office landlords and investors view the office world. Owners are essentially choosing which assets to save and which ones to let go. Therefore, when the underlying fundamentals are weak and there’s no immediate hope for the asset, keys are handed back to lenders.

    However, investors with a long-term outlook and the ability to withstand the storm are well-positioned, especially once they’ve shed their lowest performing assets. These owners have managed to successfully refinance, attract new capital, leverage the repriced values of their buildings and should be able to greatly benefit from this strategy in the long run.

    Letting Go

    Examples of major landlords letting go of their assets in the first six months of 2023 include RXR’s 61 Broadway; L&L Holding Company’s Metropolitan Tower at 142 West 57th; Related’s 2100 49th Avenue and 2109 Borden Avenue in Long Island City, Queens; and Blackstone’s 1740 Broadway.

    Holding On

    Some of these same owners, however, are holding onto office properties with strong underlying fundamentals by extending their loans and bringing in new capital. These include newer, well-located, occupied buildings with high rents such as SL Green’s 245 Park Avenue; Tishman Speyer’s 300 Park Avenue; RFR’s 375 Park Avenue; RXR’s 601 West 26th Street; Blackstone’s Willis Tower in Chicago.

    Recapitalizing

    The office tower at 245 Park Avenue is a great example of not only holding on, but also bringing in a new investment at a slight discount to the original 2017 purchase price, which is a great testament to the interest in investing in quality assets.

    Repositioning

    Office assets with weak underlying fundamentals but a strong future, traded nicely at a discount over the past six months either to investors or to user groups who believe in New York City’s office market long-term. These include the acquisitions of 40 Fulton Street, 126 East 56th Street and 529 5th Avenue by David Werner Real Estate Investments, Sovereign Properties and Namdar, respectively. Owner-users stepped up with Hyundai acquiring 15 Laight Street; NYU acquiring 400 Lafayette Street; and Enchanté acquiring 149 Madison Avenue.

    Multifamily: One Asset Class, Three Different Outcomes

    Multifamily dollar volume dipped to $1.1 billion in 1Q 2023 but soared 242% quarter-over-quarter to $3.9 billion in 2Q 2023, according to Ariel Property Advisors’ Q2 2023 Multifamily Quarter in Review New York City. However, each asset behaved differently depending on whether it was free market, rent stabilized or affordable housing.

    Free Market

    Free market multifamily accounted for 51% of the multifamily dollar volume in the first half of the year. Significant transactions included GO Partners purchase of 265 East 66th Street for $402 million; Slate’s acquisition of 600 Columbus Avenue for $120 million; Namdar’s $100 million acquisition of 552 West 54th Street; and Stonehenge and Carlyle’s $114 million investment in 408 East 92nd Street.

    There continues to be a deep bench of institutional, private and international capital available to invest in free market properties. These apartment buildings benefit from New York City’s favorable fundamentals such as job growth and government policies that discourage new development and, therefore, have created a housing shortage that is driving up rents by 10% year-over-year. The City has an estimated deficit of 376,000 units of housing today, a figure that will rise to 560,000 by 2030.

    Rent-Stabilized

    Prices for rent stabilized buildings in 1H 2023 dropped to their lowest level since 1H 2015 because of higher interest rates combined with the significant structural changes created by the Housing Stability and Tenant Protection Act of 2019 (HSTPA), a regulation that eliminated incentives to renovate buildings and vacant units. As a result, we saw buildings originally purchased in 2014, 2015 and 2016 sell in the first six months of 2023 for a discount of close to 30%.

    Lower prices for rent stabilized assets, however, are attracting smart, private money and high net worth individuals and families who understand the product, believe the regulations will be changed because they are unsustainable and are willing to stick it out for the long-term.

    Affordable Housing

    Affordable housing enjoyed 34% of the total multifamily pie in the first six months of the year. Investors in this asset class are mission-driven with a double bottom line; seeking to integrate financial success with social accountability. The opportunity drivers include lower property taxes, value-add opportunities that allow for rent increases over time, specifically for vouchered tenants, and agency financing.

    Several prominent affordable transactions took place in the first half of the year including Nuveen’s purchase of the Omni portfolio for close to $1 billion, and the $150 million sale of Sea Park, an 818-unit former Mitchell Lama building with a land opportunity, which was arranged by Ariel Property Advisors. Additionally, Ariel is currently marketing nearly 5,000 affordable units that will be sold this year or the first quarter of 2024.

    Land of Opportunity

    New York City land sales dropped 30% year-over-year to $2.5 billion in the first half of 2023 compared to the first half of 2022, which can be attributed to a number of factors including the failure of state lawmakers to approve a successor to the 421a tax abatement program, which expired over a year ago; the dramatic rise in construction costs, both hard costs and labor; and slower condominium sales due to higher interest rates.

    However, lower prices presented opportunities for developers such as Rockrose, which acquired the St. Francis College campus in Downtown Brooklyn for $160 million, and other investors that bought sites with the intention of land banking.

    Land that is 421a vested and qualified for the tax abatement before it expired last year also traded at a premium as did affordable housing developments supported by the city and state. Additionally, rezoned locations in the Jamaica, Astoria and Willets Point areas of Queens contributed to that borough enjoying an 80% increase in land transactions year-over-year.

    What to Watch For

    Looking forward, we expect to see:

    • Private lenders step up to fill the void left by the regional banks that are facing greater scrutiny from regulators following the bank failures in the first half of the year.
    • Mortgage maturities contribute to additional repricing for office and rent stabilized multifamily assets, opening the door for investors to acquire properties with strong fundamentals at a discount. The FDIC’s sale of the Signature Bank portfolio later this year also will present an interesting investment opportunity.
    • Although state lawmakers failed to approve a comprehensive housing policy in the last legislative session, the governor announced a new program that will provide some tax relief to developers in the Gowanus section of Brooklyn, which is encouraging because it could be expanded to other parts of the City.

    While there are challenges, economic indicators in New York City are strong. Therefore, we believe smart capital, which is abundant, will return in a big way in the next six to 18 months.

    Content for this article was taken from Ariel Property Advisors’ 2023 Mid-Year Research Reports, which I presented at our firm’s Coffee & Cap Rates event on July 20, 2023. To access Ariel’s research reports and videos from the event, please click here.

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    Shimon Shkury, Contributor

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  • CPACE Lending Is Picking Up The Pace In New York City: What You Need To Know

    CPACE Lending Is Picking Up The Pace In New York City: What You Need To Know

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    As if the turmoil created by sharply higher interest rates and economic uncertainty wasn’t enough, another daunting challenge facing New York City building owners looms on the horizon. Local Law 97, which officially becomes active on Jan. 1, 2024, requires most buildings 25,000 square feet or larger to significantly curb their carbon emissions to meet established targets or else face steep fines. Regardless of how much owners currently have on their plates, now is the time to begin the process of identifying, planning, and implementing steps to reduce the environmental footprint of their buildings.

    A good place to start for many building owners is exploring the CPACE financing opportunities that could significantly reduce their cost of capital on the required building wide renovations. Additionally, CPACE has several successful use cases for being “rescue financing” for undercapitalized projects either mid-way or near the end of a business plan. In this instance, a CPACE loan can either reimburse or future fund all already paid for CPACE eligible items allowing a developer to retroactively cash out of a project that’s already been fully vested.

    CPACE (Commercial Property Assessed Clean Energy) loans have been approved and used in 40 states in recent years but had been unavailable in New York City until recently. City officials voted to allow CPACE financing in late 2019, around the same time Local Law 97 was passed, which was no coincidence. However, CPACE’s launch in New York City was delayed until the revised guidelines were released in the last few months of 2022.

    I introduced CPACE in a previous Forbes article published in 2021 and recently discussed the latest developments with Matt Swerdlow, Senior Director in Capital Services at Ariel Property Advisors, and YuhTyng Patka, Partner at Duval & Stachenfeld LLP. Patka is co-chair of her firm’s NYC Climate Mobilization Act Task Force and PACE Financing Practice, and chair of the NYC Real Estate Tax and Incentives Practice Group.

    “CPACE financing was designed to pay for energy efficient retrofits and to help offset the cost of compliance that Local Law 97 created,” Patka said. “Unfortunately, in New York City, new construction CPACE is not yet available.”

    With 60% of overall carbon emissions in the largest U.S. city attributed to buildings, Local Law 97 requires most buildings 25,000 square feet or larger to meet new energy efficiency and carbon emission limits by 2024, with more stringent requirements coming in 2030. New York City’s goal is to reduce emissions 40% by 2030. By excluding new construction, officials presumably reasoned that new buildings would be designed with energy efficiency in mind and would have less impact in meeting emissions reduction targets.

    Regardless of the rationale, the current CPACE guidelines limit the favorable financing to pre-existing buildings. For owners that have invested in environmental enhancements – from energy efficient windows to renewable energy utilization to HVAC component retrofits – CPACE loans can be utilized to finance new improvements or to recoup dollars spent on green upgrades made over the past three years.

    Why CPACE Financing Can Be a Great Option

    According to Swerdlow, CPACE provides 100% financing of all eligible hard and soft costs associated with improving energy efficiency and reducing emissions.

    CPACE financing generally covers but is not limited to:

    • Window Replacements
    • Roof Efficiencies
    • HVAC Systems
    • Boiler, Chiller, & Furnace Systems
    • Smart Building Controls
    • LED Lighting
    • Green Roofs
    • Solar Panels & Energy Storage
    • All Associated Soft Costs

    CPACE capital stack and pricing:

    • CPACE is allowed to go up to 85%-90% of the stabilized value of the asset
    • Cost-efficient weighted average cost of capital for the new cap stack
    • Fixed rate, non-recourse and freely repayable
    • Up to 30-year self-amortizing terms with interest only periods
    • Pricing: Interest rates around 6%-7%, making the financing a particularly attractive option given the cost of the most similar supplemental capital. Mezzanine debt or preferred equity can replicate the same amount of proceeds as CPACE but will often cost 2x+ more in annual recurring debt service and is typically not fixed for terms longer than 10-years.

    How Building Owners Can Get Started

    Complying with Local Law 97 and evaluating potential CPACE financing options both begin with assessing current building efficiency levels and identifying critical areas that need to be addressed to reduce carbon emissions. Except for certain government-subsidized affordable housing properties and buildings with more than 35% rent-stabilized apartments, which have different rules and thresholds for compliance, most other existing building owners face complying with the law in about 12 months. Now is the time to act, experts agree.

    “Multifamily, office, hotel, and other building owners must figure out how they can comply or face very large fines,” Patka noted.

    “It’s a mistake to assume you’re good because you’re close to compliance for 2024, because the ceiling gets progressively lower as we move toward 2030 and beyond,” she added. “Building owners really need to step back and take a long view on this, because even if you believe you will comply for a couple of years, it is highly likely that 5-to-10 years from now you won’t.”

    Swerdlow said, “We are advising owners to start game planning now on how they are going to adapt their properties to avoid fines, which could be up to five or six figures in perpetuity. We start by organizing a team which includes mechanical engineers that specialize in energy savings, contractors, and environmental consultants to conduct a full assessment to help identify the size of the issue in each building.”

    Once our Capital Services team understands the scope of the work, procuring senior lender consent is the next step. Since CPACE is billed as an assessment which has priority to all first liens, not all senior lenders have consented to CPACE – although the list of consenting lenders grows exponentially every year. Educating a senior lender to the benefits of CPACE financing can be a nuanced process and is not guaranteed to succeed. In the event that a senior lender does not consent, the Ariel team will simultaneously run a refinance process among our list of 400+ consenting senior lenders.

    “The CPACE underwriting and approval process often mimics that of a traditional commercial loan with the exception of some unique steps,” Swerdlow said. “Specifically, clients need to get energy audits, talk to engineers, talk to contractors to itemize a budget, and understand which specific items are eligible for CPACE. A lot of planning will be required and the quicker a client has conversations with appropriate parties, the easier it will be to comply with these laws to avoid fines.”

    To listen to my podcast with Patka and Swerdlow on CPACE and Local Law 97, please click on the link below.

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    Shimon Shkury, Contributor

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  • NYC’s Perfect Storm: Rent Stabilized Opportunities In The Face Of Mortgage Resets And Maturities

    NYC’s Perfect Storm: Rent Stabilized Opportunities In The Face Of Mortgage Resets And Maturities

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    New York City owners of rent-stabilized apartment buildings are facing a perfect storm as a tidal wave of mortgage maturities and resets is fast approaching for properties purchased before the passage of the Housing Stability and Tenant Protection Act (HSTPA) of 2019.

    The Most Vulnerable Properties

    Sharply higher interest rates combined with the impact of the regulation have resulted in a decline in valuations. Most vulnerable are the approximately 795 rent stabilized buildings with 41,000 units acquired between 2016 to 2019 before HSTPA was passed, according to an Ariel Property Advisors analysis of sales of New York City buildings with over 10 units. The HSTPA regulations (summarized at the end of this article) essentially pulled the rug out from under the owners of these buildings, who had counted on the ability to renovate and improve often long-neglected apartments and buildings and offset their investments with appropriate rent increases. Those unable to weather the storm may be left with no alternative other than to get out in any way possible.

    Lower Valuations Attract New Money

    For owners seeking to refinance, the majority of these deals will require additional equity to move forward, even at the higher rates. Risk standards will dictate this reality in most cases, with bank regulators keeping a close eye on all lending activities.

    The silver lining is that these ‘cash-in’ refinances will enable rescue capital to participate, specifically in bigger transactions, and enjoy a lower-basis and more secure position compared to equity.

    Victor Sozio, my partner at Ariel Property Advisors, said in a recent Q&A in the Commercial Observer, “The active investor profile for rent stabilized buildings has shifted more so to private high net worth individuals and family office investors with patient capital. Institutional investors are shunning rent stabilized assets due to the stringent regulations plus rising interest rates and expenses that can’t be offset by higher rents.”

    Sozio said the shift is showing up in the numbers. Investor interest in rent stabilized assets fell from 27% of $2.87 billion in multifamily sales in 1Q 2022 to 11% of the $3.57 billion in multifamily buildings that traded in 3Q 2022, according to our firm’s quarterly multifamily research reports.

    “While rent stabilized assets didn’t account for a significant portion of the transactional volume last quarter, we are of the opinion that a deep buyer pool for these properties still exists,” Sozio continued. “However, the price points at which we see that depth in the market have decreased substantially as investors require strong going-in yields and cushion for rising expenses and deferred maintenance.”

    Throughout 2022, New York City still saw some significant transactions in the rent stabilized sector. For example, A&E Real Estate Holdings acquired rent stabilized buildings valued at $394 million including a Queens Village multifamily portfolio for $130 million in the first quarter; Chestnut Holdings of New York purchased about 27 rent stabilized buildings valued at $140 million; and Elysee Investment Corporation invested in 19 rent stabilized buildings valued at $124 million.

    Unintended Consequences Should Lead to Change in Regulations

    No doubt the rent-stabilized multifamily market will also need significant legislative changes in order to create a new, more viable business model moving forward. Until owners have a better way to recapture their investments to properly maintain and renovate their buildings, both tenants and investors will continue to suffer as building conditions and values deteriorate further.

    Over time, tenant advocates and regulators are starting to realize that the unintended consequences of HSTPA are actually hurting tenants. Renovating and upgrading a rent-stabilized apartment after a long-term resident moves out can cost as much as $100,000, but the low rents permitted under HSTPA barely cover basic operating costs. The result is that neglected buildings with long-term deferred maintenance purchased prior to 2019 by investors hoping to improve them and share in the positive results, will become further worn and unsafe. This is a major reason over 40,000 rent stabilized units remain vacant because owners have no incentive to invest capital in them.

    There are some clear and immediate solutions proposed by the Community Housing Improvement Program (CHIP), a trade association for owners of over 400,000 rent-stabilized rental properties across New York City’s five boroughs. For example, HSTPA could be modified with a Vacancy Reset to encourage the rehabilitation of vacant units by providing a meaningful increase in rent. Clearly, this provides some hope for current landlords who have suffered the consequences and some upside potential for the new capital coming in. The question is always when?

    Outlook for the Multifamily Sector

    Around 45.5 percent of the 2.2 million rental units in New York City are rent stabilized or rent controlled and about 11.7 percent are subsidized by another government entity. That leaves less than 43 percent of the city’s rental apartments free market, and with demand for housing far outstripping supply, rents for these units have skyrocketed. But the fact remains that the city will need an estimated 560,000 new housing units by 2030 simply to keep up with anticipated population growth.

    Long-term opportunities will continue to exist in the multifamily market, as evidenced by the interest of institutional investors in this sector, albeit mostly in free market properties. The next 18 to 24 months will likely see a substantial financial restructuring in rent-stabilized buildings and an uptick in sales. Fortunately, the New York City real estate market is resilient and has a pocket of capital for every type of asset, and rent-stabilized buildings are no exception.

    It is New York City After All

    While institutional investors are pivoting, new (and old) long-term investors with patient capital, mostly private high net worth individuals and family office investors, are staying with rent-stabilized assets. This capital is attracted to the much lower basis compared to pre-HSTPA and replacement costs, the current positive cash on cash return and the future potential. Lastly, although the regulatory environment (HSTPA) has eliminated economic incentives to invest in existing units, a positive regulatory change that will further align interests is inevitable. In our opinion, this is not a question of will it happen, but when, which presents a great value proposition for patient capital.

    Summary of Key Regulations in the Housing Stability and Tenant Protection Act (HSTPA) of 2019

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    Shimon Shkury, Contributor

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