NYC Multifamily - The State of the Market
Significant changes in NYC rent laws passed in June 2019 have had a dramatic effect on investors’ ability to execute on value-add opportunities in the multifamily sector. The typical strategy was to renovate recently vacated rent-stabilized apartments and increase the legal rent of the unit by a percent of what was spent on the renovations.
The former rent stabilization law allowed a monthly rent increase of 2.5% of what you spent on renovations (35 units or less), which is $250 for every $10,000 spent. The new legislation changes two things. First, the rent increase calculation is limited to the first $15,000 spent on improvements with no credit for anything spent above this threshold. Second, the percentage used to calculate the rent increase was decreased to .59%. As a result, the largest allowable rent increase for improvements is $89.
The other significant change is the removal of vacancy increases. Under the old law when a tenant vacated an apartment an owner was granted a vacancy increase by the Rent Guideline Board, which historically has been between 15-20%. This vacancy increase was designed as a catch-up mechanism to compensate landlords for the small rent increases that are typically associated with long standing tenants who have lived in the unit for a decade or more.
It is important to note that only rent-stabilized apartments are subject to the rent laws while free-market units are not subject to such regulation. Unfortunately, many of the value-add investment opportunities are in pre-war buildings located in emerging neighborhoods that are rent-stabilized.
So, what does this all mean for landlords, tenants, investors, and other participants in the NYC real estate industry? To begin with, multifamily investment sales dropped significantly from 2018 to 2019. According to Ariel Property Advisors, New York City had $6.91 billion of multifamily investment sales consisting of 290 transactions and 451 buildings in 2019. This is a significant decline compared to 2018. Overall dollar volume dropped by 40%, transaction volume dropped by 36% and building volume dropped by 47%. New York City's multifamily dollar volume has not been this low since 2011 when the figure was slightly over $5.2 billion.
As investors are faced with the reality that they will not be reasonably compensated for investing in their properties they are rethinking their value-add strategies. The unintended consequences of these changes are that current owners will also be hesitant to invest in their properties for the same reason. The risk to the quality of the NYC housing stock and the fact that these rule changes don’t increase the availability of affordable housing has led the industry to undertake legal action that seeks to overturn the law.
Where do we go from here? The good news is that we see continued growth and opportunity in serving the middle market renter as the demand for rentals in NYC is stable and regularly replenished by recent college graduates coming to live and work throughout the five Boros. Our strategy is to deliver well maintained modern apartments that are close to public transportation and represent value when compared to luxury offerings. As a result, our focus has shifted towards acquiring vacant or distressed properties in addition to ground up developments. Many of these properties are in emerging or gentrifying neighborhoods that provide a significant portion of NYC’s unique version of workforce housing.
