Two Possibilities for NYC’s Rent-Stabilized Real Estate Market

The rent-stabilized multifamily investment market, there are risks and rewards to consider when it comes to investing in this property sector. For instance, cap rates can be very attractive for investors, as can the relative stability of the multifamily market in a city like New York, but there are also regulatory and political uncertainties to consider, as well as expenses and revenue. The mix of rent-regulated versus free market units in a building is also important, because it impacts the amount of revenue you can raise through rent increases to cover, for instance, property upgrades.

Especially now as Covid-19 brings another layer of uncertainty, it’s crucial to consider a range of forward-looking factors.

• - Pricing

Over the six months ending March 31, 2020, capitalization rates across New York City compressed by nearly 20%, though Brooklyn did remain steady at nearly a 5% cap rate. However, to see what the future holds, you need to look back to June 14, 2019, when pricing for New York City rent-stabilized multifamily real estate changed fundamentally with the passing of the Housing Stabilization and Tenant Protection Act (HSTPA). While investors could previously rely on future rents rising as they renovated units or converted them to free market, that option is no longer available. Now, investors require an immediate cash yield from rents to mitigate the lack of income growth in the foreseeable future. This will impact building maintenance, as owners will potentially defer upgrades and expenses. The reduction of costs can help create higher capitalization rates, even if the building’s market value doesn’t increase as it would with better infrastructure or units. Capitalization rates should continue to rise into the near future, which does also imply lower valuations for this asset class. 

• - Lender Sentiment

Given the extraordinary circumstances, lenders have largely been working with owners, offering forbearance for the first few months of the lockdown. However, if the situation forces many lenders to keep rent forbearance (or take more extreme measures) beyond the first 90 or 180 days, many may reassess their exposure to the rent-stabilized multifamily asset class as a whole, which might lead to discounted note sales over the next 12 months. Once the environment stabilizes, though, I predict lender appetite will return, because this is a safe asset class, especially in relatively stable housing markets such as New York City.

Topics: Real Estate, Investment, COVID-19

Work cited: Shimon Shurry, Forbes, June 18, 2020

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