Rent Regulation Outlook
The investment sales market for multifamily properties in New York City is at a historically strong point. There are more buyers of apartment buildings than any other type of building. More lenders are willing to make loans on these properties than any other type. Until now, New York’s rent regulation system, which dictates what rents can be charged for apartments covered by the program, has not dissuaded the overwhelming demand to purchase and finance these assets. However, that may change over the next several months as the present set of rent regulation laws is up for renewal on June 15, 2015.
When the rent guidelines board recently set rental increases for stabilized apartments at all-time low levels, it sent tremors through the city’s multifamily sector. While not surprising given that Mayor DeBlasio campaigned on a rent freeze, it was still disquieting to multifamily building owners to have these extraordinarily low rental increases approved. As we head into election season there are growing concerns within the industry that a Democratic victory in the state Senate could throw the multifamily housing market into turmoil. (Please note that this is not a piece advocating for one party or the other but merely my interpretation of what multifamily owners anticipate.)
Changes that would likely be implemented should Democrats prevail in Albany (particularly given the political climate within the city these days) could include the elimination of the vacancy allowance and significant changes to preferential rents and major capital improvements. Let’s look at each of these.
The elimination of the vacancy allowance, under which owners of rent-regulated units may increase the legally registered rent by 20 percent before applying the one- or two-year rent increase for new tenants, would suppress the rent increases that owners could charge.
The elimination of preferential rents, in their present form, is another item that would likely be implemented. Therefore, once a lower rent has been charged to a tenant than was previously charged, that new rent would become the stabilized threshold without an opportunity to recover to the previously charged level if market conditions improved. This would also limit the rents that could be charged in some circumstances.
Repealing the major capital improvement (MCI) pass through as a permanent charge would also likely be implemented. This could have a devastating impact on the quality of the housing stock. In the mid 1970s when “the Bronx was burning” as owners found it more profitable to abandon or burn down their properties than operate them, laws were changed to allow for the pass through of investments in building wide improvements. This created a tremendous motivation for the private sector to invest tens of billions of dollars into New York City housing stock to improve conditions for residents. Recent proposals are seeking to make the MCI increases temporary surcharges that would be rolled back after the owner recoups that apartment’s pro rata share of the money spent on the improvements. This would eliminate a major incentive to make building wide improvements.
While these items would be in jeopardy, perhaps the biggest concern for multifamily property owners is the potential repeal of the Urstadt law. This law effectively gave control of the rent regulation system to New York State as opposed to the city. The New York State Assembly routinely proposes a slate of bills when rent regulation laws come up for renewal that would negatively affect owner’s rights. Upstate politicians have served as a counterbalance to the more tenant-friendly elected officials in the city. A repeal of the Urstadt law would give control of rent programs to New York City. Here, the city council would have tremendous influence over the direction of rent regulation.
The specter of these changes has put fear in the hearts of many multifamily property owners. Several have already sold properties in anticipation of an even more inhospitable environment for multifamily property owners trying to make profits on their buildings.
Presently, there are 63 Senate seats in New York State. Twenty-five of these seats are safe or likely Republican and 24 are safe or likely Democrat. Six seats are safe or likely for the Independent Democratic Caucus or are unaligned and there appear to be eight Senate seats that are a toss-up. Thirty-two seats are necessary for control of the Senate.
Multifamily market participants will be watching the November elections very carefully as the outcome could have a dramatic effect on the future of our rent regulation system and, therefore, our housing market.
Bob Knakal is the chairman of Massey Knakal Realty Services and has brokered the sale of nearly 1,600 properties having a market value of approximately $11.5 billion.