NEW YORK CITY—New York City has enjoyed the highest multifamily pricing in the US and presumably the world. Cushman & Wakefield's 1^st Half 2015 Market Report showed that Manhattan's average capitalization rates for apartment buildings were an astonishing low 3.4% for walk-ups and 3.5% for elevators.

According to Real Capital Analytics, these multifamily cap rates compare to other major cities as follows: Miami 4.4%; Washington, DC 4.5%; Boston 4.5%; Los Angeles 4.6%; and Chicago at 5.7%. In fact, only San Francisco has comparable cap rates at 3.6%. Additionally, in the last four years, Manhattan's cap rates have compressed more than any other major metro market, whereas some markets, such as Washington, DC, and Los Angeles have actually increased.

In an ironic way, New York City's rent stabilization laws have created this low return environment as most investors have competed for these assets with artificially low rents. Traditionally, operators have looked to unlock this upside over time by waiting for vacancies, removing illegal tenants, buying out tenants, or making capital improvements to the building.

Previously, an owner could renovate a vacant rent stabilized apartment and decontrol it to free market status. In a building with less than 35 units, the operator would apply 1/40^th of what he spent to the previous registered rent, plus an 18 percent vacancy allowance (1/60^th for larger buildings). Once that registered rent hit $2,500, they would be free to charge whatever the market could bear.

Now, the foregoing construct could all change based on the 73 page Rent Act of 2015 which will cover the next four years. As if a recent freeze on one year rent stabilized increases wasn't enough, now the State Assembly and Senate implied that a rent regulated unit cannot be decontrolled until another rent stabilized tenant first occupies the space. In addition, the owner cannot increase the rent to market value over $2,700 unless the renovation costs support it. This was probably much to the delight of Mayor de Blasio, who even called for the complete elimination of vacancy decontrol.

Under this current ruling, landlords will not be able to reach market rents for some apartments unless an inordinate and unnecessary amount of renovation cost is spent. For example, if an owner spends $100,000 renovating a two-bedroom unit that was previously renting for $1,000, the rent could only increase to $2,847. If the market for that unit is $6,500, it would lead to a loss of income of $43,836 per year. At a stabilized cap rate of 5%, that is a decrease in value of $876,720.

Just by doing the math, it is clear that the Rent Act of 2015 will have a negative impact on New York City rent-regulated building pricing. Presumably, investors accept low returns in exchange for future upside. However, now a buyer would have to account for the fact that it costs more to raise rents, and the ability to decontrol a unit is taken away until another turnover.

Shockingly, I have not seen buyers push back on pricing yet. They may either be unaware or in denial. They may also hope that this interpretation is overturned. Currently, landlord groups are looking to overturn this ruling in the Court of Appeals. Regardless, I believe that it is only a matter of time before investors factor in the risk of this current ruling. Will investors then begin to shift their attention to other cities which do not have these arcane rent regulation laws?