By Lazer Sternhell
Demand for rent stabilized multi-family buildings in New York City has generally been unaffected by the new rules issued by the Rent Guidelines Board.
The great majority of stabilized properties are in parts of town where market rents and average household incomes are historically far below the parameters set by the Board for deregulation.
Thus, investor and owner interest in adding to their portfolios of stabilized apartment buildings continues to grow for the same reasons they have always been appealing.
Last year, the Board voted rent increases of 2.25% for one-year leases and 4.5% for two-year leases. This year, landlords will be allowed to raise rates by 3.75% for one-year leases and 7.25% for two-year leases.
The new rules also make it more difficult to convert vacant apartments to market rates. It used to be that when rents reached $2,000 per month under stabilization, landlords could put them on the market at prevailing rates. The threshold has been upped to $2,500. And, under the old rules tenants earning more than $200,000 a year could have their apartments removed from stabilization. That limit has been increased to $250,000 a year.
Landlords wanted more favorable treatment, but the tenant lobby prevailed. Not that the folks who live in stabilized apartments were all that pleased, because they objected to the rent increases. So, at the end of the day, no one was terribly happy, which is one definition of a successful negotiation.
However, a quick study of the demographics affecting stabilized apartments shows just how insignificant the guidelines are when it comes to the value of multi-family buildings to those who specialize in that segment of the commercial real estate market.
For example, average household incomes do not even come close to reaching the high-water mark of de-stabilization. At approximately $33,000 per annum, earnings per family in the Bronx, a borough with one of the biggest concentrations of rent stabilized housing in New York, remain well below the threshold.
Manhattan, of course, has its fair share of stabilized apartments. Yet even in the heart of the Big Apple average incomes, at about $68,000 a year, fall far short of the mark.
In the Bronx, tenants pay about $850 per month, on average, for their market rate apartments. The median in Manhattan might approach twice that amount, but it has always been well below the threshold for market rate conversion.
But, most of the people who buy stabilized buildings are not looking for quick conversions. They are attracted by the virtual guarantee of stable and steady incomes due to the exceedingly low vacancy rates in these properties. In good times and in bad, vacancies in New York’s stabilized buildings have consistently remained at the 2% to 3% levels and that’s the kind of statistic bankers like.
Having said that, the right building in the right location at the right time can sometimes offer the potential of a big pay day.
Not long ago, a stabilized five-story, elevator building in the Meatpacking District with eight studio apartments and 11 one bedroom units sold for $3.75 million. The average rent in the building was $1,425.
The transformation of the neighborhood into one of the City’s trendiest locations was just gaining traction. It’s now one of the most desirable destinations in town. And so, with a little patience, the new owners of that property can look forward to substantial rent increases as those apartments begin converting to market rates.
There has always been a sometimes insatiable need for apartments of all types and in all five boroughs of New York City. That has historically made the multi-family sector of the commercial real estate market here one of the most resilient investments one can make. The dependable returns associated with stabilized properties offers important added appeal.
Meanwhile, population growth and new employment opportunities are forecast throughout the region and that signals an ever increasing need for more rental units. It also expands the gentrification process and the emergence of new trend-setting neighborhoods in such parts of town as Washington Heights, Hamilton Heights, Inwood and the Bronx.
It wasn’t long ago that Brooklyn and Long Island City, for example, had the reputation of being undesirable places to live. That’s changed drastically over the years. The Meatpacking District, after all, did not earn its name because it offered luxurious living opportunities.
Lazer Sternhell is CEO of Cignature Realty.