Investor Perspective:  Multifamily Outlook Under the New Rent Laws

New York’s Housing Stability and Tenant Protection Act of 2019 was signed into law less than a month ago.  Since that time, there has been a flurry of articles covering the specifics of the law, some analysis of how the new law might impact rents differently than the old law and the predictable array of opinion pieces condemning and supporting the new laws, as well as litigation from landlord organizations challenging its constitutionality. How, though, is the new legal landscape likely to change the big picture for investors in multifamily properties in the foreseeable future? In this first of two articles, Holm & O’Hara LLP spoke with  Robert Sedaghatpour of Stratco Property Group, a firm providing tenant relation services and building management services to landlords.

What is your general take on the new regulatory environment?

There is a normal cycle in any industry, which can be beneficial. We just went through an 11-year period in which the value of real estate was going in only one direction:  up.  Occasional downturns or adverse conditions encourage more resilient operators and ultimately create a hardier industry.

How has the landscape changed for investors in particular?

Well, obviously, the era of doubling rent rolls is over for now.  So, those that absolutely need to achieve returns like we’ve seen in the high teens and low twenties are not going to be comfortable.  Neither are those who have—or expected to rely on—hard money loans.  The new market is going to be geared towards patient, long term capital.  It’s not going to be so much about growing the top line and rapidly increasing revenue.  As long as people are moving to New York and the job market remains strong, it’s certain that income will be coming in.  It’s still going to be a profitable business, maybe just not as profitable in the short term.

How should owners adjust their spending on their buildings?

Owners need to focus on running lean operations and controlling expenses.  Some of our clients are already working to reduce overhead in management staff and design/construction areas.  People are also going to want to execute robust and regular preventive maintenance on major systems—roofs, boilers, plumbing, etc.—so that there is less likelihood they will need to be replaced.  With the greatly curtailed ability to pass along the cost of major capital improvements (MCIs—now limited to rent increases of 2%, rather than the previous 6%), this is not a good time for owners to be making capital improvements.  For the past ten years, you could make a mistake and rising prices would cover you.  Now, every mistake counts.

Is there still an avenue for owners to accelerate returns from their investments?

There is an opportunity to establish new rents for rent-controlled units when the legal chain of lease succession is broken.  These would be under the rent stabilization system, but no longer subject to the extremely restrictive rules of rent control.  Additionally, the City is actively looking to increase the overall number of regulated units and I’ve spoken with some officials who are promoting Article XI applications.  This would increase the number of affordable apartments in exchange for a tax abatement, usually for a period of 30-40 years. This section has been corrected.

How does the new law change the interaction between landlords and tenants?

In most businesses, customers are viewed as assets and partners in success.  Many landlords in recent years have seen tenants as entirely expendable, and regulated tenants in particular as nuisances and drags on the value of their properties.  Because the new law makes it far more difficult—and a lot less lucrative—to push tenants out, landlords and managers need to focus on creating healthy building communities.  In recent years, much of our practice has shifted to helping owners figure out how to do this by communicating more effectively and by honoring their obligations to tenants.  This has two key impacts:  it keeps paying customers in place, so you your asset produces continuous income, and it keeps tenants from organizing and bringing in outside organizations like Legal Aid, which could rapidly get very expensive.

Any predictions on how the players in the market are going to change?

Initially, I think that we are going to see a waiting period.  The private equity firms that have invested in multifamily over the past several years are going to try to adapt to the market.  Some will probably decide that the returns are too small and come in too slowly.  They will probably look to get out of the NYC market and invest in less regulated places, most likely down south.  This may break the trend of larger landlords who come from other industries and haven’t really had to develop expertise in what it takes to run an NYC apartment building.  I anticipate that there will be a rise of smaller, highly skilled entrepreneurs with know-how creating a new, more resilient class of property owners.  One thing is certain:  with the higher barrier to entering—and remaining in—the market, operators who can survive in this climate will be of an extremely high caliber.  

Is there a final thought that you would like to leave our readers with?

Stay calm and be patient!  Right now, everyone is focused on the hypotheticals.  It’s going to take at least 5 years before we can assess the true impact of the new legislation, as well as any fall-out from the pending litigation.  The Legislature enacted this package not out of spite for building owners, but because of the perception that there were problems.  At some point, if they feel like there’s not enough capital coming in, they will adjust the laws again.

Correction:

A previous version of this interview suggested that combining apartments could allow owners to charge higher rents. Landlord/tenant attorney Michelle Itkowitz of Itkowitz PLLC cautions that this is only rarely the case, for example if you create a duplex apartment. Owners seeking to increase income from their investments in multifamily dwellings covered by rent regulations should consider assembling a team of advisors—including attorneys who practice in this area—as they evaluate strategic options.


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