Building Owners Bailing on Rent-Stabilized Apartments in NYC

New York City’s 2019 rent-control law, which capped annual rent increases on rent-stabilized apartments, may be here to stay—but the list of owners who are bailing out on these multifamily properties due to the untenable cost of maintaining them keeps growing.

This week, Maltz Auctions is auctioning more than 20 apartment buildings in the rent-stabilized portfolio of Food First, a Brooklyn-based nonprofit that provides community services including food pantries and vocational training.

The properties are listed on Islip, Long Island-based Maltz’ website as “non-profit dispositions.” The largest asset for sale is a 17-building, 51-unit portfolio at 575-595 Grand Avenue and 399-413 St. Marks Avenue in Prospect Heights, according to Maltz’ website.

A Food First board member told TheRealDeal that the rising cost of maintaining the apartments—combined with a large backlog of overdue rents from tenants who could not be evicted during the pandemic—has made the properties “a serious liability.”

Real estate firms have been offloading rent-stabilized apartment portfolios in NYC this year for huge discounts.

Last month, Sentinel Real Estate sold 24 properties encompassing 1,300 rent-stabilized apartments in Upper Manhattan, Crown Heights and Brighton Beach for $180M, which represented a 40% discount from the previous sale price.

Sentinel paid almost $300M for the 1.2M SF rent-stabilized portfolio, which it acquired between 2015 and 2019, before the enactment of the 2019 rent-control law.

In February, BentallGreenOak sold rent-stabilized apartment buildings at 120 and 125 Riverside Drive to Aya Acquisitions for $31M, PincusCo reported—a 64% discount from the $85M BGO paid to buy the property in 2013.

Before the 2019 law, owners of rent-stabilized apartments could invoke permanent rent hikes of up to 6%. Now, as they’re being squeezed by rising costs and prevented from significantly raising rents, the value of rent-stabilized properties has dropped by more than 50%.

The owners of rent-stabilized properties in NYC also can’t rely on traditional sources of financing as high interest rates are putting pre-pandemic loans under water. Two of the largest lenders to rent-stabilized building owners in NYC have pulled back from the market, including Signature Bank, which was seized by regulators last year.

The largest lender to rent-stabilized apartments in the city, New York Community Bank—which bought $38B of Signature Bank’s assets from the FDIC—sent shock waves through the financial sector last month by reporting an additional $2.4B in losses on commercial real estate loans.

NYCB, which reported losses in Q4 2023 of $252M, said it had discovered “material weaknesses” in its internal controls. The bank took several emergency steps to stop the bleeding, including increasing a reserve for future credit losses to $552M, taking a $185M charge-off and cutting dividends by 70%.

The Real Estate Board of New York and the Rent Stabilization Association of NYC last month released a survey on the impact of the 2019 rent control law.

REBNY said the survey of 781 residential property owners and managers representing properties encompassing 242,000 units, proved that the 2019 “has wrecked the ability of property owners to pay for the upkeep of their property.”

Last June, the city’s Rent Guidelines Board, in a 5-4 vote, approved a maximum rent increase of 3% on one-year leases, and a maximum rent increase of 2.75% in year one and 3.2% in year-two on two-year leases.

During Q1 2023, the Rent Guidelines Board issued a report that indicated that rents would have to rise by as much as 8.35% for one-year leases and 15.75% on two-year leases to maintain net operating income for landlords on rent-stabilized apartments.

Earlier this year, the US Supreme Court declined to hear an appeal of a lower court’s ruling upholding the 2019 rent-control law.

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