Landlords, investors and CRE professionals in New York City predict that the state’s new rent control law will have a disastrous impact on valuations for assets that have a high concentration of rent-stabilized units – and especially those with revenues very close to their operating expense levels. The new regulations dictate the rents of about 1 million apartments, amounting to about half of the apartments in New York City.
Older assets are subject to substantial rent regulations. According to valuation experts from RERC, a SitusAMC company, properties with below-market rents will be affected the most; valuers expect 1% to 2% income increases into perpetuity. Cap rates for some New York City apartments, which have been as low as the 3% to 4% range, are expected to rise into the 4% to 5% range; this could cause a decline in values of up to 40%.
Gov. Andrew Cuomo signed the rent control bill, known as the Housing Stability and Protection Act of 2019, on June 14. The law makes it harder for apartment owners to increase rents and eliminates rules that allowed units to become free of any rent control.
Here are some of the provisions of the 2019 law:
During protracted negotiations, CRE investors did not expect that such sweeping changes would make it into the final law. These are some of expected effects of the new law, according to RERC’s valuation experts:
Appraisers and investors will have to look at properties on a case-by-case basis, and sometimes a unit-by-unit basis. The fear is that regulated stock will deteriorate and tenants will move to market-rate projects that continue to maintain their properties.
In July 2019, landlord groups challenged the latest New York rent regulations in federal district court in Brooklyn, alleging that the new restrictions violate their constitutional protections against the taking of private property without just compensation. The lawsuit was filed in part against New York City; the Rent Guidelines Board, the nine-member board that decides rent ceilings; and the state agency that administers and oversees rent-regulated apartments.
Tenant groups and state officials vowed to fight the lawsuit and said they expect to prevail. They said landlords were exaggerating about their lost profits. In the past, apartment owners have challenged rent control laws, but courts have generally supported the government’s right to regulate rents. The plaintiffs, however, pointed to a federal appeals court ruling in 2015 that found that rent regulation was a “public assistance benefit” for tenants.
The state was already grappling with changes to the state and local tax (SALT) deduction that was part of the 2017 Tax Cut and Jobs Act. Investors say the new $10,000 annual limit on the federal deduction for state and local taxes has hit the market hard and widened the gap in the cost of living between so-called high-tax states such as New York, New Jersey and Illinois, and low-tax states like Florida and Texas.
Amid all these changes, perhaps the most important question is whether rent control accomplishes its goal of helping make housing more affordable. Many critics believe that not only does it not accomplish that goal, but that in many cases it does more harm than good – or, at best, provides a negligible benefit.
A recent study of all San Francisco residents between 1980 and 2016 by economists Rebecca Diamond, Timothy McQuade and Franklin Qia supports this view. They studied the effects of a change in San Francisco rent control policy enacted in 1995. Previously, all small multifamily buildings were exempt from rent control, but since 1995, only buildings built after 1980 are exempt.
Among their findings:
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