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'A Bloodbath': Reckoning For Rent-Stabilized Apartment Owners Starting To Set In

While most of the recent headlines around commercial real estate have focused on distress in the office market, another crisis has been slowly brewing for the owners of the million rent-stabilized apartments across New York City.

The strain of a restricted rent roll that isn’t keeping pace with increased costs is beginning to show. Delinquency rates for loans backed by rent-stabilized buildings are on the rise, some rent-stabilized portfolios have traded for huge discounts, and others have faced foreclosures.

As more loans mature in the coming months and landlord costs keep rising, multifamily market insiders say the worst is yet to come.

“It's going to be a bloodbath,” said Ofer Cohen, founder and president of Brooklyn brokerage TerraCRG. “I'm telling you right now: It's going to be bad.”

New York City apartments

For multifamily properties backed by securitized Freddie Mac debt built in the city before 1974, which are subject to stabilization, 4% are delinquent on their loans as of October, according to Trepp data provided to Bisnow, up from 2.9% at the start of the year.

By contrast, the delinquency rate for buildings built after 1974, which are more likely to contain market-rate apartments, was 0.02% last month.

The pandemic dealt landlords of rent-stabilized buildings a double whammy: their income went down as tenants struggled to pay, and maintenance costs, insurance prices and property taxes went up. And with the 2019 Housing Stability and Tenant Protection Act freshly in place, landlords couldn’t raise rents to cover costs.

Last year, interest rates started to shoot up, making borrowing even trickier for landlords with a restricted rent roll. Rent-stabilized landlords had already been feeling the pinch for some time, Small Property Owners of New York President Ann Korchak told Bisnow

“The concerns I typically keep hearing is the inability for our rents to cover the operating expenses,” she said. “That’s probably the case for a lot of people.”

That pressure is now mounting as lenders lose patience, said Jay Martin, president of landlord lobbying group Community Housing Improvement Program

“I would say over the last year or so the banks have started getting much less patient with owners on payments for mortgages,” he said.

Even government lenders are starting to lose patience. Late last month, Fannie Mae filed pre-foreclosure motions against City Skyline Realty after it stopped making payments on a $72.3M loan secured by an 11-building portfolio in Harlem and the Bronx. 

“I do expect more foreclosures to occur in the next 12 to 24 months on rent-stabilized properties. I think it includes government agencies,” Ariel Property Advisors founding principal Victor Sozio said. “Values have eroded that much and expenses have increased that much that even agency financing that was originated prior to 2019 has had and does have a lot more stress on it.”

Roughly 10% to 15% of loans on New York’s 1.04 million rent-stabilized multifamily units are expected to come due in the near future, Cohen said, adding that the wave of distress headed for NYC’s multifamily market could be far greater than the distress predicted to hit the office market. 

“It’s going to be much worse,” he said. “There are significantly more rent-stabilized buildings in New York City than office buildings.”

The Dunbar Apartments, a 538-unit rent-stabilized Harlem complex sold by Fairstead for just a fraction above the value of the loan taken out against it.

Community banks have historically served as lenders for rent-stabilized properties, but that environment took a shock in March with the failure of Signature Bank, the second-largest multifamily lender in NYC at the time. 

These banks have more motivation to work with borrowers than to offload debt to opportunistic buyers when loans run into trouble, Queens-based Ridgewood Savings Bank Executive Vice President and Chief Lending Officer Anthony Simeone told Bisnow.

“We'll ask for some documentation and we'll say, ‘Listen, how can we work together to make this work?’” he said. “There's ways to recast the loan to give a little bit of short-term relief, in terms of forbearance. There’s a lot of different ways to do it.”

But new lending on rent-stabilized properties just doesn’t seem feasible because of the increased operational costs and the inability to increase rents, Trepp Research Director Stephen Buschbom said.

Loan origination volume for rent-stabilized properties in NYC is down 80% over the first 10 months of 2023 compared to last year, while market-rate origination is down 57%, according to Trepp data.

“If you're, say, a bank, you have to do right by your shareholders, your depositors,” Buschbom said. “If you're an insurance company, you have to do right by your policyholders and the investment mandates, right? So everybody has somebody to answer to.”

But lending options for rent-stabilized owners haven’t completely dried up, Simeone said.

“We still do them. There is a tremendous amount of rent-stabilized buildings in our footprint, and we feel it's our obligation to lend on properties that are in our footprint,” he said. “We certainly do them, but maybe look at them and scrutinize them a little differently than we did prior to the [2019] regulation.” 


The current environment has already led some larger owners to sell. In April Taconic Partners and Clarion Partners took a 40% hit on the price they paid for a 14-building portfolio in the Bronx in 2018, recouping just $60M from the sale, The Real Deal reported at the time.

Faistead managed to sell the Dunbar Apartments, a 538-unit complex in Harlem, for $86.75M in June. But the landlord had previously taken out an $86M adjustable-rate loan on the property, meaning the sale barely covered the loan, according to previous reporting from The Real Deal.

“The people who are selling now, I think, are the ones who are just trying to escape,” Martin said. “Their [net operating income] is just too close to the bone. They're not making enough monthly on the rent rolls.”

With reduced income for rent-stabilized owners, many capital markets players are now expecting to see property values reset once the Federal Deposit Insurance Corp. announces a sale of Signature Bank's loan portfolio. Newmark is in charge of marketing, and bids were due earlier this month.

The FDIC is expected to retain a 95% stake in the loans, while the winning bidder will take a 5% interest in the loans. The FDIC and Newmark didn't respond to Bisnow's requests for comment.

Lenders “have an eye on the Signature note sale process and how that's going to affect the perception of value in our market,” Sozio said.

“I definitely think that's playing into the psyche of these lenders.”

Some capital markets players are waiting to see how property values change once the Signature Bank loan portfolio is sold, TerraCRG’s Cohen said.

“I think it would help to set a new market,” he said. “I think, ultimately, right after it, there's going to be a process of 24 months in which the winning bidder is going to go through the process of figuring out loan by loan what to do.”

Still, the income prospects for rent-stabilized properties will likely remain front of mind in determining property values for lenders, according to Trepp’s Buschbom.

Based on his own back-of-the-envelope math, with restricted rent rolls and increased costs, he said the Signature Bank sale could result in property prices being slashed by anywhere between 15% and 40%. 

“I think the price transparency will be very telling in terms of how much future stress is anticipated. How many losses are expected on this segment of the market?” he said. “It's not looking great.”

If there is no one willing or able to inject capital into these apartments, many could fall into disrepair, which landlord groups say is already happening as they push for repeal of the 2019 rent reform laws.

But tenants are ultimately the ones who lose out if owners are unable to fund repairs to buildings, Association for Neighborhood and Housing Development Senior Campaign Organizer Will Depoo said.

“If it becomes unlivable, that's one less apartment we have in New York, that's one less person in a home,” he said. “We're in a housing crisis. The more apartments we have that are in good condition, the better it is for the housing environment in New York.”