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'Complete Reset': After A Rough 2019, NYC's Multifamily Market Still Unsettled

New York City real estate players said all during 2019 that the new era of stricter rent reform would take a bite out of the Big Apple's multifamily market. Now, sales volume numbers are beginning to paint a picture of just how big that bite has been.

Stuyvesant Town, one of the largest apartment complexes in the U.S., is made up heavily of rent-stabilized apartments.

Investment sales volume in New York City had already been sliding since the peak five years ago. Overall, some $26B worth of investment-grade real estate sold last year in New York City, a 31% drop from 2018, according to Avison Young. By comparison, investment sales totaled $68.5B in 2015, per the brokerage. 

While the slowdown in sales activity was felt across all asset classes, the multifamily market has cratered. There were just $2.4B worth of trades across 119 sales in 2019 compared to $12.8B total in 2015, a drop of more than 81%.

While market-rate apartments were said to be well-positioned in the aftermath of rent laws, many investors are simply shying away from any rental property in New York City.

“The reform, overall, not only has it affected the underwriting of the rent-regulated properties, but it’s also affected the psyche of the fair market,” Avison Young Head of Tri-State Investment Sales James Nelson said. “Investors are being very cautious.”

The full impact of the new rent laws is still not clear — they were signed into law just this past summer — and there is building anxiety over what future laws may still be to come, sources said, meaning the multifamily market may continue to be sluggish through 2020.

Real estate brokers and developers began predicting a drop-off well before tighter rent regulations came into effect last June. The first half of 2019 was dampened by questions around exactly what form the new laws would take.

Then, after the Housing Stability and Tenant Protection Act of 2019 was passed during the summer, landlords and brokers began to sift through what it would mean for how their businesses would operate. 

In the months since, some banks have reportedly cut back on lending on rent-regulated apartments, values of rent-stabilized assets are said to be down by between 30% and 50%, and some owners are facing major pain executing their business plans under the new rules.

JLL's Bob Knakal, speaking at Bisnow's 2017 New York State of the Market event.

“It’s a transitional time in the multifamily sector,” JLL Chairman of New York Investment Sales Bob Knakal said. “People are considering if they are in or not in. Are they going to go to different cities? Are they going to go to different property types? Are they going to continue to buy multifamily? It’s a different risk tolerance you have to have.”

Knakal, a numbers hound, said JLL found, in Manhattan multifamily transactions over $10M, dollar volume hit $3.85B last year, a 26% decline from 2018, 68% down from the market peak.

Capitalization rates on those properties went up by 75 basis points between 2018 and 2019 — a sign that the investments were deemed slightly riskier — but Knakal said price-per-SF also increased, suggesting that more free-market and new development properties are selling over rent-regulated properties.

“The real clarity into the market from a value perspective will be determined in the first half of this year,” Knakal said. “We will have enough activity post-June 14 of 2019. That will give us some indicator of what the new rent laws have done to values.”

While not everyone is extolling doom and gloom, most agree the market is grappling with a new set of fundamentals, the impact of which are playing out right now.

“It’s a total paradigm shift. I certainly haven’t seen it before … I don’t think anyone else has either,” Ackman-Ziff Real Estate Group Managing Director Marion Jones said. “It’s really about a complete reset in the marketplace, relative to the regulatory environment.”

She said there are a number of multifamily developers and owners that are becoming much more sophisticated in their use of affordable housing programs as result of the new laws.

JLL's Marion Jones and Greater Jamaica Development Corp.'s Hope Knight at a Bisnow event in 2018

The multifamily deals that are getting done are taking longer and the importance of examining buildings’ backgrounds has increased dramatically, she said.

While Jones expects deal volume in multifamily will pick up a little bit this year, she said she has already spoken to plenty of investors who are looking at directing capital to other parts of the country because of the regulation.

“To a certain extent, irrespective where pricing may be, there are some multifamily owners who are going to be selling and diversifying,” she said. “[They will go to] areas where local economies are strong, there is a demand for rental housing … I think there are some attractive markets in other areas of the country that are attracting New York developers.”

Meanwhile, a big weight on the minds of owners, developers and landlords is what further legislation could lay ahead. Chief among them is what is known as universal rental control, which would limit how much rent could be raised on all units. That idea was on the table last year, but didn’t make it into the final legislation. Many expect it will be back on the agenda in the not-too-distant future.

Meanwhile, a commercial rent control bill at the city level — which would limit rent raises on retail space — has been touted as a way to deal with the empty storefronts that are plaguing the city.

“There’s concern out there about universal rent control through this good-cause eviction," Nelson said. "We’ve been talking to our sources, and we don’t think it’s going to happen in the near-term. But it is a consideration, and that is deterring institutional investment."

Still many brokers, as they often do, are pointing to the silver linings. Other assets, like office, retail and market-rate apartments, could benefit from renewed interest.

“People are cautious about changes that could happen in the future. But the multifamily market fundamentals remain extremely strong and there is an enormous amount of capital to be deployed,” Hodges Ward Elliott Senior Vice President Daniel Parker said. 

“Usually what happens is when you have a slow year and a lot of people are digesting big changes — like we saw in New York — the following year is better," he said. "People are figuring out what their thesis is … They can’t sit on the sidelines forever.”

CORRECTION Jan. 24, 4:30 P.M. ET: A previous version of this story misspelled Hodges Ward Elliott. This story has been updated.