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Multifamily values ʻsucker punchedʼ

New York City’s new rent regulation laws have shaved nearly half the value off multifamily properties, according to investment sales brokers.

Sales for the second half of the year are down seven percent compared to the same time last year, according to Property Shark, which is set to release detailed figures later this week.

And there are fears that a pull-back by banks could decimate the sector further.


“Deals are getting done, but it feels a little like 2010-2012, post-Lehman collapse,” said Marco Lala, senior vice president with RM Friedland. “If the banks pull back in any drastic fashion, that will be the other shoe to drop.”

“Real sellers are lowering their prices as much as 50 percent from pre rent-reg laws,” added Steven Westreich, president Westbridge Realty Group. “The bottom line is there is a new reality, and it’s taking time for everyone to adjust. The entire business has been completely turned on its head, but I’m encouraged to see many people begin to change their strategy and mindset.”

Lala, who specializes in Bronx multifamily, said that the multifamily sector has been hemorrhaging for the past four years with velocity and dollar volume on a downward trajectory.

“This steady drop, year over year, for the past three-plus years tells me that we were already in an overheated market by at least 10-20 percent. Add to that, the draconian law change, it’s probably closer to 30-50 percent.

“If you were asking $6.5 million for a property that was really worth $5.5 million before the law changed, and then you reduced the property to $5 million after the law changed, but it’s now worth $4 million that’s a 37-42 percent drop in value.”


In its 2019 Investment Outlook for the sector, Marcus & Millichap said high employment and low vacancy has kept business percolating, albeit at a more sluggish rate.

“Now we know what the rules are and the values are going to be, it has created more certainty in the market. They may not like the rules, but they know they how should be acting,” said Peter von der Ahe, senior managing director with Marcus & Millichap in Manhattan.

Von der Ahe has put some 17 properties under contract since the new regs went into effect, more than half of which contained regulated apartments.


“From an operational standpoint, we’ve gone from a futures market to what can be made today,” said the broker. “When you evaluate those changes, you still have a solid investment and people still want to play even though the rules have changed.”

According to Adelaide Polsinelli, vice chairman at Compass, multifamily prices are down at least 30 percent from last year while retail properties are down by 35 percent over 2016. “I am selling retail condos at a 5-5.7 percent cap rates, multifamily at $500-$700 psf. That was unheard of two years ago,” she said. “The new rent laws have sucker punched the value of multifamily properties.”

The veteran investment sales broker believes that the record-breaking 10-year up cycle has finally hit bottom – or as close to it as it will get – and that new investment plans need to be based on good old- fashioned brick and mortar.


“Cap rates and GRM are no longer the keystones to valuing a good deal. It is all about price per square foot, as in cheap bricks. And you can’t over-think the market – is it going to go lower, what if it does? It’s like cost averaging stocks – you buy as much as you can at the low end of the cycle and you sell at the high. Anything you buy now will be worth more in 10 years’ time.”

While actual transactions have fallen amidst a re-pricing, von der Ahe said Manhattan’s fundamentals remain attractive whatever the product.

“In the face of a recession, rent regulated properties are a big defensive play, so if I was a new investor coming into the market and I was concerned about recession, I would look at rent regulated properties,” he said. “On the other hand, you could be looking at free market units because now there is less supply.”


Josh Lipton, co-founder of Invictus Property Advisors called today’s valuations “brutal.” Citing the Orbach Group’s recent trade of a 43,000 s/f multi-family property at 50 Manhattan Avenue on the Upper West Side as a prime example, Lipton noted, “An experienced large institutional owner purchased the 49-unit elevator property (of which at least 43 units were rent stabilized) in 2016 for $25.8 million and sold it in September 2019 for $15.7 million (a 40 percent loss in value). Today’s valuations are tough to witness, but the fact that buildings with a large percentage of stabilized units are beginning to trade may be the impetus the market needs for a reset in valuations.”

Jake Blatter, president of KFIR Capital, agreed. “There are some multifamily sellers out there, but we don’t think they have adjusted their price to entice investors,” he said, noting that development, office and Industrial assets continue to trade but, “For now, the rent regulated multi market is essentially dead.”


Deputy Mayor for Housing and Economic Development Vicki Been told an audience of real estate professionals at a Crain’s New York Business breakfast event that the city is aware of the concerns about deterioration.

“We have programs like J-51 to ensure we don’t see deterioration,” she said.
Been added, “I think the reforms we achieved helped stem what was a lot of abuse, a lot of overreaching, and that is the key thing to keep in mind.

“We had a pendulum that had gone too far in one direction [and finding balance] is always the challenge. Did the legislature go too far on clamping down on MCIs, IAIs? Is it dissuading investment? When the pendulum swings too far in one direction, it takes a while for it to balance out.

“We need stability for renters, but at the same time, we need safe, habitable housing and investment. Will there be deterioration? It’s a lesson to us. Don’t swing too far in one direction, because it’s going to swing back and you won’t like it when it’s in the other direction.”

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