New York Faces Consequences of Rent Control Changes

Multifamily analysts say New York City’s new rent control law could have several unintended consequences.

Credifi, New York, noted high tenant demand and predictable cash flows made owning New York housing a lucrative market for decades. “[But] new laws brought uncertainty to this asset class, and uncertainty for any kind of real estate market is a bad thing,” the company’s Is The Sun Setting on Multifamily? report said. “Although New York real estate investors were prepared for a change, the entire industry was caught off guard by the depth and breadth of the tenant-friendly legislation from the New York State Senate and Assembly.”

The new rent control law ended a prior rule that de-regulated an apartment from rent price controls if its rent exceeded $2,774 per month or if the occupant’s income exceeded $200,000. It also ended vacancy bonuses that had allowed 20 percent rent increases on vacant units.

In addition, rents below the legally permitted rate are now frozen as long as existing tenants occupy the unit and rent increases due to major improvements are capped at two percent annually, Credifi said.

“These rule changes translate into lower rent growth, reduced operating income [and] less room for capital improvements, the Credifi report said. “They also make it extremely difficult to remove units from state rent control regulation.”

Yardi Matrix, Santa Barbara, Calif., said the new law has pushed property prices lower and could lead to the deterioration of housing stock and shrink the supply of rental apartments in New York.

“Legislators crafted the laws to address the lack of affordable housing in New York, but it could have the opposite effect by incentivizing owners of stabilized properties to take units out of stock,” said Yardi Matrix Director of Research Paul Fiorilla in the report, New York Rent Control: Paved With Good Intentions. “Owners also have less incentive to upgrade older buildings that need renovations [because they will not be able to increase rents commensurately].”

The Yardi Matrix report said New York multifamily sales activity “ground to a near-halt” as the market is still processing the new law’s effects.

“The unfortunate upshot is that rent control almost guarantees that the net income of stabilized properties will decline on an annual basis,” Fiorilla said. “Owners face a situation in which expenses–utilities, wages, property taxes and capital improvements–almost certainly will rise more than one to two percent annual rent increases. That was true before, but until now owners could make up for that with the rent increases from units that had new tenants or were otherwise deregulated. It’s hard to imagine how many companies want to own a property with deteriorating net income, unless they can buy it for a distressed price.”

Though housing affordability affecting so many New Yorkers and the state legislature had every right to address the issue, “the specifics of the law will create as many problems as it solves and could will exacerbate the affordability problem by decreasing and/or reducing the quality of apartment stock,” Fiorilla said.