Rent Stabilized Housing Distress

For 54 years, New York City has been under a state of emergency. The housing “emergency” is the official term used to describe the housing crisis, and it is the legal justification for renewing the rent-regulation scheme every few years that keeps more than a million apartments under some form of rent-control. In reality, its manufactured scarcity, and while mayor after mayor comes up with a newly-named housing plan to build more, maintaining the scarcity is a critical part of keeping the status quo.

Maintaining scarcity means keeping existing housing at crisis levels, despite the rhetoric for change. We see this everywhere. Older rent-regulated buildings outside the core of Manhattan are seeing unprecedented distress with NOI declining more than 5 percent in 2021 and then almost 2 percent in 2022. The vacancy rate hovers at 1.4 percent, and fewer multifamily buildings are being built. Vacant units remain empty because renovation costs are significantly higher than rents, and costs have skyrocketed in the outer boroughs, especially insurance, which increased 9.3 percent from 2021 to 2022, and has continued to rise rapidly since then. Housing court has an unmanageable backlog and rent arrears remain high despite emergency pandemic funding.

Rent-stabilized housing is at a breaking point. And New Yorkers deserve better.

Distress To The Left. Distress To The Right. 

If you ask most elected officials about the current state of rent-stabilized housing you’d probably not hear panic or concern. It still seems like the countless articles about the distress in older rent-stabilized buildings and the after effects of that distress have failed to reach their collective consciousness, even after two regional banks failed due mostly in part to their large investments in these buildings.   

It’s easy to explain how we got here. The buildings have been systematically devalued and defunded for more than a decade as the Rent Guidelines Board failed to adjust rents to stay in line with inflation and nowhere near enough to cover growing expenses like property taxes, which have gone up 5 percent since the start of the pandemic, despite the values of buildings declining. 

Things got worse after the 2019 rent laws dramatically limited investment into apartments on turnover, removing a revenue stream many older buildings relied on to offset the defunding from the RGB. So now the majority of the rent-stabilized housing stock, primarily older buildings outside the core of Manhattan, have seen their net operating income shrink and many owners are struggling to pay their mortgages and property taxes. At the end of the day, this also hurts tenants, as they are left without options for safe, quality and affordable housing.

Plummeting Values

Rent-stabilized buildings have significantly lost value in the past few years, causing a ripple effect that has contributed to recent bank failures at Signature and First National, and contributing to the current fiduciary challenges at New York Community Bancorp, which acquired a significant amount of Signature’s rent-regulated real estate loan book.

When a building loses value, it also loses access to loans for capital improvements, vacant unit turnover or basic maintenance. So if a building is not collecting rents that sufficiently cover operating costs, it has no other options to fall back on and falls into disrepair.

We have seen this most clearly in the Bronx, where buildings are rapidly deteriorating while also facing high property taxes, exorbitant insurance rates and rent adjustments that are far less than inflation, much less increases in operating costs. In 2022, the net operating income or amount leftover to pay the mortgage, declined by nearly 20% in older stabilized buildings. 

Low-income New Yorkers are the most likely to suffer. Rent-regulated housing makes up nearly half the rental market in New York City, and while anyone can luck their way into a rent-regulated apartment, it is low-income tenants that are left with few options.

As values continue to decrease, rent-regulated housing will continue to languish and deteriorate. We’ve seen this in the tens of thousands of apartments sitting vacant waiting for repairs but lacking the funding. And the city, state, and federal government are unlikely to have the means or motivation to step up, as evidenced in public housing’s fiscal woes. Even nonprofits have failed in running these buildings, because no matter who owns the building, the reality is that there is no value and no funding in these buildings.

Fewer buildings means less housing for New Yorkers. Which keeps rent-stabilization in place, but means people still can’t find affordable quality homes. Without regulatory reform, or massive government subsidies, this cycle will continue.