When Summit Properties bid on a portfolio of 5,100 mostly rent-stabilized apartments in New York, it turned the assumptions of the city’s multifamily market on their heads.
Here was a sophisticated buyer not just interested in the properties at a price of $451 million, but actually fighting with the city for the ability to purchase highly regulated units at a bleak time for the rent-stabilized market. More than 1 million apartments in New York have their rent increases capped by law, even when a tenant moves out or a landlord completes major renovations. Add in expense shocks in insurance and utilities, and a mayor committed to rent freezes, and you have an asset class that doesn’t sound appealing.
And yet Summit isn’t alone. Just on this portfolio, 14 groups showed interest in the first round, and six bidders made qualified offers in the second.
Owners who bought stabilized buildings at the height of the market and feel the pain most acutely might not believe it, but brokers say there’s still a small cadre of investors who are sticking with rent-stabilized for the long haul. Some are experienced landlords looking for long-term cash flow, rather than an opportunity to flip; many are locals; and a few still believe there is value to add.
This small circle of discount shoppers has taken on heightened importance. Despite low prices and slim opportunities for financing, they keep the market alive.
“There are a handful of guys that are doing these deals,” said Lev Mavashev, founder and principal at Alpha Realty. ”If you go out to the market and they say ‘no,’ then there’s no market.”
Experience wanted
In 2019, New York State passed the Housing Stability and Tenant Protection Act, shocking the industry. Rent-stabilized landlords used to be able to raise rents on their units when they renovated them or when units were empty. The law eliminated even these opportunities. Prices for the buildings went into freefall, and most buyers fled.
What unified the small group who remained in the market?
“They have an operation, they have an office,” Mavashev explained. “Maybe they have a super, they have staff already. They know the tenants.”
“Nobody wants to buy a building with headaches.”
Most of the time, these landlords buy in areas they already own property, to build out economies of scale. If they’re already walking their buildings or meeting their supers, they want to be able to visit any new property without making a separate trip, according to Shallini Mehra, managing director at Meridian Investment Sales.
Even before the rent law, buying into the highly regulated sector came with risks, which out-of-state buyers could get tripped up explaining to capital suppliers, said Romain Sinclair, managing director at Sinclair Realty Group. For example, it’s difficult to remove a rent-stabilized tenant from a unit. High-profile landlords have even in rare cases ended up with criminal charges for their alleged treatment of rent-stabilized tenants.
“I still have not sold anything to someone who’s brand new to the industry and ready to take on rent stabilization,” Mehra said. “They think the deal looks really inexpensive. Once they start familiarizing themselves with rent-stabilization laws and realizing that they won’t just be able to put in new tenants, that often scares them away.”
Cash flowing
In other words, the state law changed the financial product buyers were purchasing, even if the buildings looked the same. Investors used to evaluate buildings by thinking about how many units were vacant and how many could be deregulated, according to Sam Moritz, a sales and rental broker at EXR.
Now, they’re looking simply at the income generated after expenses, not forecasting that the property will increase in value.
“These rent-stabilized buildings, realistically, they need to be at like an 8 to 10 percent cap rate for them to sell,” Moritz said. “At a 6 percent cap rate it’s very difficult for a deal to come together.”
These buyers are also looking at the ease of running the building, Mavashev said.
“They’re going to buy a building with good collections, no deferred maintenance, no headaches,” he said. “Nobody wants to buy a building with headaches.”
And if you show them a rundown building in the Bronx with housing code violations and tenants who aren’t paying?
“They don’t want to deal with it, no matter how you price it,” Mavashev said. “There is a lot of product out there. They’re going to move on to the next thing.”
Value left to add?
In some cases, a rent-stabilized building in a high-cost area like Williamsburg might see interest from buyers who believe the current legal landscape for rent-stabilized buildings won’t last forever. They might buy in a bet that the state will amend the rent law at some point.
In others, an experienced operator might try to clean up a building in bad condition and turn it around, projecting that lenders might accept a fixed-up, fully occupied, zero-violation building as collateral in the future, even if the rents don’t go up.
But, lenders have become loath to hand out financing. Flagstar Bank, once a major player in the market, is pushing loans tied to rent-stabilized properties off its books. Signature Bank, another one-time leader, collapsed in 2023. When experienced operators have relationships with banks and do get a loan, it’s typically only between 50 and 60 percent of the property’s value, Mehra said.
Lenders are now getting involved in the sales process more frequently. Where once they were unwilling to take a haircut on unpaid principal, they’re now pushing borrowers — many who bought when the market was high and are struggling to pay their debt — to sell, even at a discount. That can allow the lender to squeeze out whatever liquidity they can and then get the loan off the books.
“They’re not looking to work it out with existing owners anymore, but they are looking to work things out with new buyers that are going to come into the space and take over the asset,” Mavashev said.
Despite the challenges, the small circle of rent-stabilized landlords probably isn’t going anywhere. They won’t be pushed out of the game easily by regulation or difficult lending conditions.
“This is a business. And if this is your business — you didn’t go to med school or you didn’t go to law school — this is just what you do,” Mehra said. “And you continue to do it.”