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Investors becoming new out-of-towners

By Sabina Mollot

Throughout the month that has gone by since the state legislature enacted the strongest rent regulations New York has ever seen, some owners have been vowing to take their money elsewhere, specifically to markets where there will be less government intervention.

Michael Campbell, CEO of the Carlton Group, a commercial real estate private equity banking firm, told Real Estate Weekly, “A lot of my guys are going west.”


This includes a deal in Denver and he’s also seen a lot of activity in Jersey City.

“Jersey City is more landlord-friendly, pro-landlord and pro-development,” said Campbell. “It was happening before, but I’ve seen an incredible amount of interest in Jersey City. The laws are not as stringent as New York.”

He added that owners investing in Jersey had been doing so because they felt New York was getting too expensive.

Campbell also said there is now a lot of opportunity in California, though this state too has strict rent laws. “But not as strict as what we have in New York,” he added. “It’s pro-tenant there, but it always was.”

As for what will be happening in New York, “They’re not going to do any more deals in New York like before, because it makes no economic sense,” Campbell said. “They’re keeping what they have and doing what they have to do to get through. The law may change again, but it’s going to take years.”

That said, he doesn’t believe multifamily development in New York is going to come to a dead stop because demand is still high. “Everyone wants to be in New York and that’s the end of it,” said Campbell, though he doubts there will be much in the way of new affordable housing.

Enzennio Mallozzi, managing director of investment sales at Colliers, said he is definitely seeing a shift to secondary and tertiary markets “in search of higher yield.” However, he also observed this was happening before the latest change in the housing laws.


Mallozzi said he’d been seeing increased interest in the acquisition of properties in Connecticut in the past couple of years in the $5-15 million range. One newly popular area is Bridgeport, Connecticut, “which had not been on people’s radar for a long time until the last 18 months.”

Stamford and Greenwich are also currently strong secondary markets, while further north are more tertiary markets.

“In Connecticut,” Mallozzi added, “You don’t have any rent stabilization or rent control policies, so it’s a relatively safe place compared to what’s going on in New York right now. What could happen down the road I don’t know.”

That said, he cautioned the same rules that now apply in New York’s multifamily market should also apply in secondary and tertiary markets and that is that owners should base their expectations for returns on the buildings’ current value, not a potential “upside.” Additionally, Mallozzi has also observed an increase in industrial space.

“That has had a tremendous amount of interest and multifamily continues to be hot.”

There is also an increased interest in developing storage space and Mallozzi called that “a relative safe space” to invest in. “The cash flow is similar to multifamily and you don’t have to deal with toilets and trash.”

The Kalikow Group, which offers development as well as joint venture/equity financing services, has been investing in multifamily out of state for 15 years.

The company’s president and CEO Edward Kalikow said areas he’s currently “bullish” on are Raleigh and Durham in North Carolina. (Kalikow’s website currently lists 16 ongoing projects, a few in North and South Carolina as well as a handful in New York City and State.)


As a rule, Kalikow prefers to put his developments, which range from 180-300 units, in areas “where the jobs are.”

Still, he cautioned that any New York developers looking to jump ship shouldn’t think it’s as easy as just picking a location without a legislature set on enacting rent restrictions.

“It’s never as simple as you think,” Kalikow said. “You have to find a local partner in the market where you want to develop. Then you have their boots on the ground. It’s arrogant to think you can just jump into someone else’s market and hit doubles — I won’t even say a home run. Finding a good partner is really key.”

Meanwhile, even if an owner decides New York is no longer a sustainable market, Peter Von Der Ahe, multifamily agent at Marcus & Millichap, said it’s questionable how much talk can realistically turn into a viable business plan.

Von Der Ahe, who also authored a book on multifamily housing in New York, (Family Secrets: Secret Strategies for New York City Multifamily Housing) said, “You can either change geographically or by project type. There’s not one particular place people are going to. It’s not like everybody’s going to New Jersey. I’m not seeing a trend like that.”


But, said Von Der Ahe, whether an owner can simply jump into a new market depends upon their resources.

“If you have a company that owns 25 buildings and those people have relationships and bandwith, it’s going to be easier to go to California and start building,” he said. Meanwhile, smaller owners will face more of a challenge, whether it’s changing location or switching product from multifamily to offices or shopping centers, especially as lenders start getting choosier.

He gave an example of an owner he’d recently met who was a mother of two and also worked a separate job in addition to having ownership of three buildings.

“Is she going to start investing in apartments in Dallas?” asked Von Der Ahe. “Do they (small owners) whose net worth just got cut in half have the ability to do that? Do they have the ability to just pack up and learn something new? A lot of these buildings are owned by immigrants who don’t have money in the stock market.”

But hardships aside, Von Der Ahe, said, “Something has to change” locally lest New Yorkers find themselves living in poorly maintained buildings and facing a housing shortage due to a lack of new development. “The impact of this,” he added, “is going to be seen in a few years.”

Two landlord groups and seven individual owners sued the city last week to stop the new rent laws, but litigation of this type seen in the past hasn’t been successful.

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