-Noah Kossoff, Associate Director, Tri-State Investment Sales, Avison Young
Owning and operating properties in New York City presents its own set of unique challenges, especially for owners who live out of state. With a dynamic set of rules, regulations, and market conditions, it’s a challenge for even the most active or largest owners to keep up. To help navigate our complex market, I’ve listed Six Market Factors that out-of-state building property owners should know:
1. Premium Pricing is Still Available Despite Rising Rates and Lower Sales Velocity
It’s no secret that the drastic rise in interest rates over the past year has created a noticeable slowdown in the sales market. Avison Young’s Q4 2022 Manhattan Sales Report shows there were three consecutive quarters of lower sales velocity and activity in Q4 2022 was at a 12% discount from the trailing four-quarter average. Average cap rates for multifamily/mixed-use transactions were up 0.46% and price per square foot is down 11% from the trailing four-quarter average. We often see that when pricing is negatively impacted, transaction velocity follows suit.
That said, we are still finding that there is significant demand for free-market, well-located buildings, especially if there is a value-add component. For example, in the past two weeks, Avison Young has put eight buildings into contract, six of which were 100% free market properties. With a larger, yet more diverse, buyer pool, the team achieved above-market pricing for the free-market buildings due to spirited bidding wars amongst the prospective buyers. The buyer profiles include: one institutional group, two 1031-exchange buyers, two foreign high net-worth individuals, and two first-time NYC buyers.
2. More Stringent Rent Laws are Coming
The Housing Stability and Tenant Protections Act of 2019 (HSTPA) had a drastic impact on the NYC multifamily market. It significantly impacted the values of rent-regulated properties and created an additional set of laws multifamily owners must follow. By removing the ability to meaningfully increase rents with IAI/MCI programs and the elimination of the luxury decontrol threshold, HSTPA left owners with two primary methods to improve the values of their rent- stabilized properties:
· Creation of New Units – By creating a new unit (either through the combination of multiple apartments into one or by separating one larger unit into multiple), owners were legally allowed to establish and charge a first rent. Although the unit would still be rent-stabilized, an owner could charge a new first rent at market. As a result, owners throughout NYC have been combining two (or more) adjacent apartments with low legal rents into a single unit with a new, much higher rent.
· Substantial Rehabilitation – A “substantial rehabilitation” is a process by which an owner can take the entire building out of rent regulation and into fair market status by renovating 75% of the building systems (listed by the Division of Housing and Community Renewal [DHCR]). To qualify, a building must be in a “seriously deteriorated condition” and in need of the renovation. Today, if a building is at least 80% vacant, it is presumed that the building would be eligible to undergo a sub-rehab.
However, both strategies are targeted under newly proposed legislation. The new legislation aims to remove the incentive for creating new units by limiting the new legal rent to a percentage increase or decrease based upon the change in square footage and the current legal regulated rent for the combined (or separated) apartment. For substantial rehabilitations, the proposed bill aims to remove the presumption that a property qualifies for a substantial rehabilitation solely on the basis that the property is 80% vacant. Instead, the bill proposes that a landlord will ultimately need to get approval from the DHCR to justify utilizing the strategy.
3. Good Cause Eviction is Still Being Considered
Good Cause Eviction (GCE) is a proposed policy aimed at protecting tenants from arbitrary evictions by landlords in free-market apartments. If implemented, it would require landlords to provide a “good cause” for not renewing a tenant’s lease, such as failure to pay rent or violation of lease terms. More importantly, the proposal is designed to establish a maximum threshold that landlords can increase rents upon a renewal. By virtually forcing owners to renew leases, and dictating how much they can charge, GCE, if passed, would effectively end up regulating the remaining free-market rental housing stock throughout NYC.
4. Rents in NYC are Still Going Up
Demand for rental housing in New York City heavily outweighs supply. While rents are cooling across the country, NYC’s rental market has not shown any signs of weakness. Miller Samuel reported that January’s median rent reached $4,097/month, a record number for the month of January and 14% higher than pre-pandemic levels.
Recently, New York City Mayor Eric Adams, announced his plan to create 500,000 new units of housing must be created within the next decade in order to address affordability concerns throughout NYC. To put this ambitious number into perspective, NYC added only ~200,000 units of housing over the previous decade, and that was before the 421a program expired, which according to the Real Estate Board of New York (REBNY), was responsible for nearly 70% of NYC’s housing production since its inception.
Until there is a new incentive program for developers to build rental housing, landowners will choose to either build condominium projects or not do anything at all. Yet, lawmakers today are still more focused on creating new regulations for the existing housing stock rather than the creating new supply. Therefore, demand will continue to outpace supply and rents will continue to rise.
5. Environmental Regulations May Require Major Building Upgrades
To reduce carbon emissions, NYC is laws Local Law 97 that will force building owners to upgrade their properties to make them more energy efficient. The scope of required upgrades will vary, depending on building size and class. However, owners would be wise to invest in new, more eco-friendly building systems such as insulations, HVAC upgrades, solar panels, boilers (or removal thereof), etc. While these costs may be at a major expense to the owners, not complying may be an even greater one as most of the new policies will begin to fine owners of properties not in compliance with new regulation.
6. Strategies to Improve Existing Cash-Flow & Property Value from Afar Even if you live out-of-state, or if you are just not a hands-on property owner, there are still multiple ways to improve your property’s net cash-flow, and value, from afar. Finally, here are some ideas to consider:
· Antennas – Some telecom companies are willing to pay for the ability to use your roof for their satellite antennas. In return for providing an easement to your property, these companies are willing to offer a lump sum payment that may be worth over $1M.
· Tax Certiorari – Lowering your property taxes will have a direct, positive impact on your property’s value. An easy first step is consulting with a Tax Certiorari Attorney to see if a building has a case for getting its taxes reduced.
· Cost Segregation Analysis – Through a cost-segregation analysis, you may be able to earn accelerated depreciation deductions for components of your building, adding a significant boost of depreciation benefits owning real estate can provide.