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NYC Multifamily Market Slows Ahead of June 2019 Uncertainty

The overwhelming success of Democratic candidates in New York’s midterm elections places the party in its strongest state-level position in decades, perhaps the strongest since the 1930s.  This has led some real estate professionals to wonder if calls for more regulations, such as increased rent stabilization, will lead to uncertainty in The Empire State’s property markets. High on the agenda is an overhaul of the current rent regulations, which are set to expire in June 2019. The winning party has already put together a proposal of 18 bills targeting the treatment of tenants by landlords by increasing oversight and making penalties more severe. More bills are likely to be on the horizon.

Many investors and managers in New York’s real estate industry view these legislative changes with some concern, as they are likely to depress prices on multifamily properties as potential investors may be hesitant to buy at current prices if rents are likely to be further regulated.

To get a clearer picture of the post-election sentiment in the multifamily real estate market in NYC, PropertyShark posed questions to several leading industry professionals.  Here is their take:

 

What could this shift mean for the NYC multifamily market?

The slowdown in investment sales transactions has been a product of the perfect storm: rising interest rates, concern about new rent regulation laws, and fear that the near decade long bull market has reversed. Although people can underwrite for higher interest rates in their property valuations, the uncertainty surrounding rent regulation laws is much harder to account for in a pro forma.”  -Greg Corbin, Executive Managing Director at Besen Associates.

The outlook for investors and landlords seems bleak, at least in the short-term. Multifamily properties went from trading at 15 times rents to around 12 times – a 20% decline almost overnight. Multifamily as an asset class has typically traded at lower cap rates relative to other asset classes because there was an inherent “vacate and increase rent” methodology used by investors. In past years when people bought a low cap rate deal, it was because they were counting on vacating a certain percentage of units, raising rents, and achieving a higher return.”

 

How are leading industry professionals reacting?

Adelaide Polsinelli, Vice Chair at Compass, had this to say, The market is expecting the landscape to become extremely onerous towards landlords. This is putting downward pressure on pricing. Many seasoned owners are selling and considering other asset classes. The buyers of Multifamily today are realizing that they are buying for a very long hold period and betting on workforce housing stock to be insulated from inflation therefore worth the risk.”

With lower expected returns and cap rates that will stagnate, rather than increase, the NYC multifamily market seems to be frozen for the time being. Those who bought properties years ago don’t appear to be affected as severely as those who have made more recent purchases. Smaller individual owners with 50% or more stabilized units appear to be at a worse disadvantage should these measures be put in place. Lowered prospective margins, rising interest rates and increased complexity in loan underwriting could make it more difficult for these owners to update and maintain their properties.

“With buildings where 50% of the units or more are rent stabilized in prime areas or strong growth area … we see that buyers are more in a holding pattern as it is unclear how to underwrite turnover in rent stabilized units.” – President at leading commercial real estate services company.

 

Law of Unintended Consequences

Should dramatic changes take place, some industry leaders believe this could lead to drop in property values, and thereby taxes, due to abandoned and neglected buildings and investors looking to other asset classes or multifamily buildings outside of New York state. Indeed, this could dramatically affect tax contributions which have implications for not just NYC but for upstate New York as well. Either way, market rate rents are likely to increase. With less units coming to market rate, restricted supply alone will drive rents up.

Some types of rent controls can lead to unintended consequences, such as underinvestment and housing shortages. The hope among most real estate professionals is that this blue wave will not be too extreme and that new lawmakers will balance their desire to represent the majority that elected them with the need for consistency and certainty in property markets.

Patrick McGregor

Patrick McGregor

Patrick McGregor is a senior writer covering the real estate industry and overall economic trends in the United States for several Yardi product publications. He also holds an MBA from Thunderbird School of Global Management. Patrick was previously a commercial real estate analyst at Yardi Matrix for five years. His work has appeared in Bisnow, GlobeSt, The Real Deal, Business Insider, The Denver Post, The Motley Fool.