Landlords are choking on the new rent regulation rules that Governor Cuomo has promised to sign. The current rent-regulation rules expire on Saturday. Legislators are scheduled to vote tomorrow. These changes, which impact the entire state of New York, will affect both rent-controlled and rent-stabilized apartments in New York City.

A quick primer:
A rent-controlled apartment must be occupied by a tenant or family member who has lived in the unit since at least July 1971, and the building had to have been built before 1947. Families can pass the unit to another member and preserve the rent-control status. A unit that falls out of rent control can be leased at market rate. There are approximately 22,000 such apartments in New York City.

A rent-stabilized apartment is in a building with at least six units that were built between 1947 and 1974, as well as newer buildings that receive tax breaks for providing affordable housing. Rent increases on rent-stabilized units are set by the city.  (For example, in 2019, permitted rent increases were 1.5% for 1-year leases and 2.5% for 2-year leases.)  Rent-stabilized apartments comprise >95% of the one million rent-regulated apartments in New York City.

Historically certain rules allowed landlords to legally raise rents on these units, for example when the current tenant voluntarily left or if the tenant's income was $200,000 or higher for multiple years. The new rules basically eliminate those possibilities, cap rent increases, immortalize the rent-regulation rules for all eternity and even add some additional hurdles for landlords like prohibiting certain ways of screening tenants and capping security deposits.

What does the press have to say about all of this?

Naturally, the New York Post claims this is going to be the demise of New York City real estate forever. The Post claims that the “[law’s] proponents would happily embalm the city’s demographics in aspic.”  Ah, the New York Post.

But, even the unfailingly liberal New York Times has a bearish stance on the changes, highlighting that they “will lead to disinvestment in the city’s private sector rental stock, consigning hundreds of thousands of rent-regulated tenants to living in buildings that are likely to fall into disrepair” and warn of “dire consequences” and that “smaller landlords could be run out of business.”

The Wall Street Journal takes a more analytical approach and shows that the people who will actually benefit the most from these new rules are primarily affluent white people who live in rent-regulated apartments in the city’s more expensive neighborhoods, because that’s where the discount between regulated and market-rate rents are biggest (an average discount of 36%.)

For example: “In all of Manhattan, median regulated rents were 53% below median market rates in the borough. In Queens, 8.6% were below market rates; in the Bronx, it was 13.5%; and in Brooklyn it was 16.7%.”

What do we think?

The motives in passing these regulations are purely political. We would be surprised if the legislators deeply understand the macroeconomic impacts. We do not believe these changes will improve housing affordability. What’s worse is that they will likely reduce the quality of life for many tenants since landlords are further disincentivized to improve building conditions.

Rent regulation has always squeezed the middle class, and this will make things a little worse.

An additional unintended consequence is that to the extent that an older or enterprising tenant in a rent-regulated apartment was bargaining for a "buyout" (a cash payment from the landlord which the tenant can use to relocate), landlords will have no incentive to do these buyouts going forward.

The typical rule of thumb is that roughly 10% of rent regulated tenants turn over (typically through aging or dying) in a given year, and while it is difficult to predict, owners mentally “underwrite” this surprise upside--even though banks and buyers may not. Now, that potential upside surprise has been eliminated, so we believe this will lead to some cap rate expansion on multifamily properties with significant portions of rent-regulated units.

In general, these new rules eliminate some of the uncertainty of the last several months which had resulted in a sluggish New York City multifamily sales market. Long term, we’re still very bullish on New York City and so consider this yet another tiny blip in an asset class that we believe is a strong long-term investment. The changes will not increase housing supply and will likely increase the value of free-market units. The changes will certainly create even more (and better!) buying opportunities for highly regulated buildings which we will be watching for with an eagle’s eye.

The most interesting part of the legislation is the impact it will have on the entire state, and not just New York City, where these arcane rules have been in place for decades. Furthermore, New York’s action may inspire other states and local governments to enact similar rent regulation programs which will make real estate investing very interesting all around the country.