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NYC Multifamily Investors Pivot to Find New Opportunities After Rent Reform Laws

In late 2018, Rosewood Realty brokered the sale of 80 Fort Washington Avenue, a 75-unit apartment building located in Washington Heights. The deal closed at a cap rate of 3.38 percent and a price that is nearly 20 times the current rent roll.

On June 14th, the New York State legislature passed a series of stringent rent regulation reforms. The laws damaged property owners’ means of making money by strengthening tenant protections, capping rent increases and keeping units permanently stabilized.

A quick Google search will explain the specifics regarding IAIs, J51s, eviction, buyouts, vacancy bonus and decontrol. In short, landlords will face rising taxes, higher water and sewer bills and elevated construction costs with no mechanism to raise rents to outpace or even match these expenses.

Gloom was in the air until an auspicious turn of events occurred on June 21st, just one week after the new rent laws passed. A Pennsylvania woman won a momentous victory in the U.S. Supreme Court that opened the doors for property owners to go directly to federal court without going to state court first.

Greg Corbin, Rosewood Realty Group

The timing was nothing short of incredible. Essentially, the decision paves the way for New York City landlords to get a fast-track hearing by the Supreme Court, which may view the these new rent laws as going too far and violating owners’ constitutional rights.

In weeks to follow, property owners spoke with each other and with major law firms to get a better understanding of the issues. Many agreed that these rent regulations were unconstitutional and violated the 14th Amendment’s due process clause and the Fifth Amendment’s takings clause, which states that private property shall not be taken for public use without just compensation. The recent victory in the Supreme Court gave many people hope that there are grounds and mechanisms to overturn the laws.

Subsequently, numerous lawsuits have been filed. If and when they get closer to a federal court hearing, some industry professionals believe that New York may be willing to modify the laws. A preemptive compromise on the state’s part by dialing back the severity of the laws could prevent the Supreme Court from overturning these new regulations, and possibly a full reexamination of the constitutionality of rent regulation overall.

The real opportunity that this situation presents is that if cap rates do go up and investors are able to make purchases at “new market” pricing — if and when the laws get modified and cap rates return to a lower number — there will be substantial money to be made.

Approximately 80 percent, if not more of the investors that Rosewood previously sold buildings to were “value-add” and were uninterested in looking at an already baked building where the rents had been maximized. They wanted below average rents so they could put in sweat equity and realize the upside.

Investors have since done a complete turnaround. Those who were previously not open to even hearing about free market buildings are now aggressively pursuing this product type.

Additionally, investors that would have never played outside of the multifamily arena are looking at additional opportunities in the office, retail and land development spaces. People who only purchased in Manhattan and the boroughs are now also looking out of state to achieve higher returns and more landlord-friendly laws.

In addition to increased demand for New Jersey, areas of interest by investors looking outside New York include Florida, Texas, Oklahoma and South Carolina, as consistent wage and job growth in these markets has led to strong rental appreciation over the past decade.

Whereas Rosewood continues to transact in the New York multifamily arena and has closed five deals this past month, our company has pivoted and expanded to accommodate the desire of our clients to move to new asset classes and areas.

We’ve tapped our contacts and have gained access to buildings in and outside our previous sweet spot. We’re currently working on two $100-plus million office deals in prime Manhattan, and are working on the sale of multiple development sites in New Jersey and Florida and even a shopping center in Ohio.

Billions of dollars of properties will still trade every year, and even though it might take some time to acclimate, the show will go on. Going forward we foresee selling deals which span all asset classes and areas. Along with the rest of the real estate community, we eagerly await the potential modification of these new laws, but in the meantime we look forward to our expanded business model yielding fruitful results.

— By Greg Corbin, executive managing director, Rosewood Realty Group. This article first appeared in the August-September issue of Northeast Real Estate Business magazine. 

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