By Lev Mavashev
THE COVID pandemic has many New York City property owners feeling like a deer in headlights: Should I push forward? Take a step back? Or should I just freeze and brace for impact from the worst disaster to strike the world in living memory?
While little is certain in these uncertain times, New York will never move forward unless its real estate industry moves forward. Next to finance and big tech, the industry is the biggest driver of the state economy and its 12-month enforced hiatus has cost the state $1.6 billion in lost tax revenue.
The state can’t just print money to make up that shortfall, so it is doing one of the only things that is certain in life: taxing. And it has the real estate industry in its crosshairs.
From hikes in property taxes to capital gains, personal income to corporate tax, the state is creating a clear roadmap to recouping what’s been lost. At the Federal level, the new Biden Administration is looking to abolish 1031 tax exchanges and the banks are jittery over fears of inflation that could drive up interest rates.
As gloomy as this all sounds, real estate has always been a glass half full kind of business and, for all of the reasons above, 2021 will be a transformative year for New York City real estate as both sellers and buyers position themselves to maximize the value of their assets and hedge their investments against any prolonged slump.
Already, 2021’s quarterly investment sales numbers are showing that the players are getting back in the game and, while the numbers are a little different, the rules are still the same. Even after the upheaval of a global pandemic, New York City continues to be viewed as stable and secure real estate opportunity by investors, with multifamily the most coveted asset class beyond the current COVID darling of industrial real estate.
For New York’s multifamily owners considering their future, a number of factors currently play to their favor should they consider a sale while 1031 exchanges are still a possibility.
First, we are more than a year into the Housing Stability and Tenant Protection Act of 2019 (HSTPA) that re-wrote the rules for how owners of the city’s one million stabilized units could raise rents. While there has undoubtedly been a contraction in values, the market has adjusted both in terms of operating expenses and unwriting.
Pre-HSTPA, rent regulated apartment buildings that were trading at sub-4% cap rates are now trading at 6% caps. Multifamily owners who have been holding off on moving forward should consider this a window of opportunity before the slew of tax changes coming down the pipe deals another negative blow to valuation dynamics.
Right now, unregulated multifamily assets, particularly those with a protected tax class (eg 2A or 2B tax classes), are generating a great deal of interest among investors eager to lock into a stable investment with a long-term upside strategy. Newly constructed 70/30 properties built under the Affordable Housing NY Tax Program are also catching the eye of investors who see plenty of upside in the free market units, while enjoying a 35-year tax abatement. With COVID causing a contraction in free market rents, no short-term fix to income stagnation and the prospect of crippling tax hikes, it makes sense for those owners to cash in now, too.
To maximize value of your assets in the current environment, it pays to consult an expert who is well informed about a market where what you know is just as important as who you know. We have completed numerous deals throughout the COVID pandemic that demonstrate not just the resiliency of the New York multifamily market, but the underlying value that can produce outsize results for both seller and buyer.
Most recently, we were able to secure a $25 million buyer for a portfolio of 115-units, all rent regulated apartments across five buildings in Queens. We helped a landlord with a negative cash flow and regulatory red tape liquidate a 255-unit portfolio, by working with local housing agencies and canvassing qualified operators who ultimately bid up the closing price to $22 million. Furthermore, we recently signed up a contract on a package of tax class 2B buildings in Brooklyn at a price of over $1000/ft achieving a post-COVID record on behalf of a seller looking to capitalize on his asset and a buyer looking to grow his portfolio of stable multifamily properties in prime neighborhoods with potential for future growth.
Each of these deals is representative of our philosophy of working with both sellers and buyers to broker a trade that exceeds their expectations with the kind of insider insight that creates options for building capital. While COVID may have caused a temporary paralysis akin to the deer in headlights, there is no doubt in our minds that the bricks and mortar of the Big Apple will always present a pathway forward.
Lev Mavashev is the founder and principal of Alpha Realty