Lenders in New York City’s Multifamily Market Should Lean Into Short Sales
By Yosef Katz July 4, 2024 10:00 am
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Soaring interest rates have placed tremendous stress on real estate values spanning asset types. With many assets still underwater due to the impact of COVID, real estate’s day of reckoning is upon us. According to Trepp data, the wall of maturities is looming with an estimated $528.7 billion of commercial mortgages maturing this year.
Yet, as we close in on the election cycle and with the Federal Reserve hinting at the possibility of rate relief, many landlords in major markets across the U.S. are still holding onto a small glimmer of hope.
Unfortunately, for New York City multifamily owners, a perfect storm is brewing, and this glimmer of hope has quickly dwindled. Sky-high rates, inflation, soaring costs and decreased values are just the beginning. Without the ability to raise rents due to the Housing Stability & Tenant Protection Act of 2019, coupled with restrictive management rules and hefty fines from the city, landlords are finding themselves between a rock and a very hard place.
Consider this: Multifamily properties going back on the market this year compared to five to 10 years ago are seeing, in some cases, an almost 60 percent drop in value. A multifamily property in Brooklyn that we sold back in 2018 for $30 million sold this year for $13.7 million, a whopping 54 percent decrease. This particular buyer had purchased the property without a mortgage allowing him the flexibility to liquidate, unlike most current owners who do not have that luxury.
With ownership equity completely wiped out due to values across the city sinking either below or on par with current debt, owners are faced with a difficult ultimatum that has no right answers. However, the decision is no longer theirs. While many are focusing on the actions that landlords must take in this extremely difficult environment, it’s truly now up to the lenders to decide the future and fate of New York City’s rent-stabilized portfolios.
So what options exist? There really are only a few avenues for lenders to consider. The first option is to extend the loan at a minimal interest rate with the hope that the market will change and better days are ahead for all. This requires a borrower with a strong will to carry the property through and a belief that the market will turn prior to the end of the extension. But in New York City, even with rates decreasing, the landlord is still faced with an impossible situation.
The other options are equally as bleak. The bank could sell the debt or take control of the asset through a deed in lieu of foreclosure (a long and arduous process). From there, they can either choose to sell it that way or keep it on the bank’s balance sheet.
The bad news: These options are also quickly becoming unfeasible. Buyers for nonperforming paper have been repricing debt at a considerable discount. And with New York City’s exhausting and slow-moving judicial system delaying access to the asset for years at a time, trying to resell the property with limited to no building records will take a large bite out of the property’s final value.
The final and only option worth considering is the short sale. The challenge here is navigating the banks’ regulatory system to allow them to sell a sub-performing loan at a discount, and even more difficult is getting both the sellers and banks on the same page. While this option does have many hurdles, if done properly this option can save significant future write-downs and a ton of costs for both sides. The banks hold the cards, but this just might be the best solution for all to an unsolvable problem.
Yosef Katz is a principal and founding partner of Atlas Realty Group, an investment brokerage and advisory firm specializing in the sale and finance of multifamily and mixed-use properties and development sites across New York City.
