By Lazer Sternhell
Despite the recession and its lingering aftermath and adverse regulatory rulings, the market for stabilized multi-family buildings in New York City has managed to hold up.
Multi-family properties have two important advantages. First, by their nature they offer stable, bankable returns on investment because of their consistently low vacancy rates in good times and in bad.
Also, the demand for affordable housing throughout the five boroughs transcends economic conditions.
The financial crisis of the past several years certainly had a negative impact across the board and the commercial real estate market did, indeed, crash. But transactional activity and prices in the multi-family sector proved resilient. The downturn in affordable housing was significantly less severe than it was for free market apartment buildings and for office and retail properties.
By 2009, vacancy rates across the country were rising sharply, as high as 10.5% and higher in some local markets. Even in New York City, the largest apartment market in the country where demand for rental units rarely sags, free market rental vacancies rose sharply, causing owners to resort to incentives. including rent cuts and parking concessions, to attract tenants, some even offered sports cars to brokers in order to get a deal closed.
Meanwhile, vacancies in rent stabilized apartment buildings remained decidedly low. But the multi-family sector is fraught with pitfalls, requiring brokers to do their homework before trying to guide buyers and sellers into this territory. The Stuyvesant Town/Peter Cooper Village fiasco is a good example of what can happen if you don’t tread carefully.
The landlord, Tishman Speyer, paid a record $5.4 billion for the two complexes on Manhattan’s East Side. They justified the high price by projecting an aggressive plan to deregulate thousands of rent stabilized apartments and bring them to free market rents.
Under state law, apartments can be deregulated if rents reach $2,000 a month and if they meet various other benchmarks.
However, the courts ruled that because Stuyvesant Town and Peter Cooper Village took part in New York City’s J-51 program, which offers tax breaks to owners who upgrade their properties, all units, including apartments that have met the deregulation criteria, must remain under the rent regulation guidelines as long as the owners continue to benefit from the tax relief program.
After years of legal battles, in order to avoid the huge financial liabilities these properties presented, Tishman just walked away, leaving feuding lenders, and confused tenants in limbo.
The court’s decision has had a distressing effect on landlords who received J-51 tax breaks. As Crain’s reported recently, owners are trying to muster support for legislation that would allow them to, instead, repay the tax breaks they received with a 9% percent per annum penalty.
Passage of such a law is uncertain, however. Not a single democrat in the state legislature has voiced support.
Notwithstanding J-51 concerns and other pitfalls that may emerge from time to time, prices for rent stabilized multi-family properties stand their ground, and the inventory of properties available for sale remains tight even in a down market.
For one thing, many investors believe that apartment buildings are an important part of a well-balanced commercial real estate portfolio because they offer consistency.
Additionally, in the long term, they can provide excellent profit potential. It’s all about finding the right product. There are plenty of investors and buyers out there willing to pay a fair price for the right property in any market.
Ownership of any rental property is all about vacancies and income and, while free market units offer the promise of higher returns, they also are subject to much higher vacancy rates than stabilized apartments, and empty apartments provide no income.
That’s the secret of the stabilized market.
It sounds simple enough, but complicating matters is the fact that, in New York, good multifamily product is hard to find, in the best and worst of times.
Thus, for commercial brokers seeking to focus on the stabilized multi-family segment of the market, first and foremost they must establish trust among sellers and buyers, which in turn requires an investment of time and effort to create special relationships with the key players in the marketplace.
This provides a means of offering their clients a pipeline of off-market, quiet deals that are not widely known. In addition, they need to be thoroughly familiar with the intricacies of the market and able to authoritatively analyze the properties in order to discover where the values are for the seller and the buyer.
Lazer Sternhell is chairman of Cignature Realty Associates. http://cignaturerealty.com/index.html