Thursday, July 18, 2019

NYC Apartment Building Sales Crashing Because of New Anti-Free Market Rent Regulations

The 1970s Bronx
Are we about to see a recurrence of crushing rent regulations that once resulted in the abandonment of many multi-family apartment buildings in parts of New York City and the collapse in the upkeep of most other New York City multi-family rental apartments in the 1970s and early 1980s?

Bloomberg sets the scene:
Things looked promising for the sellers of a collection of Harlem apartment buildings, listed in April for $260 million. Almost immediately, 150 would-be buyers requested financial details on the 789 units, nearly all rent stabilized. About a dozen investors made offers.

Then the New York state legislature rewrote the rules on stabilized rents, capping the potential for increases, and slashing the property values overnight. Suddenly the suitors of the 28-building “Harlem Ensemble” disappeared faster than they came.

“They called us every day -- and then we couldn’t reach them,” said David Chase, partner at B6 Real Estate Advisors, whose team marketed the portfolio. The listing, still unsold, will expire at the end of the month, he said.

Multifamily deals came to a standstill as investors got scared away by New York’s new tenants-take-all regulations. The rules, governing about 1 million apartments in the city [which account for more than 40 percent of the city’s rental stock], take direct aim at landlords’ income -- and investment returns -- by making it almost impossible to raise rents, remove units from state regulation, or even recoup the costs of capital improvements.

In the first half of 2019, New York City apartment building sales fell 48% from the same period a year earlier, B6 said in a report. It was the biggest decline for any six-month period in data going back to 2009. In northern Manhattan, which includes Harlem, the drop in multifamily purchases led to a 61% slide in all commercial-property transactions, the firm said.

For the full year, the total of all commercial deals citywide -- a figure usually led by apartment buildings -- is on course to fall below 2,000 for the first time since 2011.
Landlord groups are challenging the rules in court but who is going to buy or build multi-family apartments with this legislation hanging over the head of landlords?

Here's Dr. Walter Block on rent controls:
Economists are virtually unanimous in concluding that rent controls are destructive. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available.”...

The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the “right” to their fellow Nobel laureate Gunnar Myrdal, an important architect of the Swedish Labor Party’s welfare state, on the “left.” Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” His fellow Swedish economist (and socialist) Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”...

Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, fewer repairs, and less maintenance. For example, Paul Niebanck found that 29 percent of rent-controlled housing in the United States was deteriorated, but only 8 percent of the uncontrolled units were in such a state of disrepair. Joel Brenner and Herbert Franklin cited similar statistics for England and France...

The economic reasons are straightforward. One effect of government oversight is to retard investment in residential rental units. Imagine that you have five million dollars to invest and can place the funds in any industry you wish. In most businesses, governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing?...

Rent control has destroyed entire sections of sound housing in New York’s South Bronx and has led to decay and abandonment throughout the entire five boroughs of the city. Although hard statistics on abandonments are not available, William Tucker estimates that about 30,000 New York apartments were abandoned annually from 1972 to 1982, a loss of almost a third of a million units in this eleven-year period. Thanks to rent control, and to potential investors’ all-too-rational fear that rent control will become even more stringent, no sensible investor will build rental housing unsubsidized by government.
It boggles the mind that in the 21st century New York government legislators would impose such multi-family apartment building rent legislation that will destroy rather than nourish the stock of multi-family rental apartments.

Do they not know any basic economics? Do they not know any history of New York City when rent controls destroyed?



  1. I "house-sat" an apartment in the North Bronx (by the old NYU campus) back in 1971 or so. In the evening, I would go up on the roof and watch the "fire line" move north block by block every night. Kinda like the fall of Berlin, I thought.

  2. Sure! Let’s reinstitute rent controls - because it worked so well in the 1970s and 1980s.

    NY state legislators: were you born stupid or did you take lessons to get that way?

  3. Commenting here using the bride's account.....Never a fan of controls but comparing current regulation to absolutely set in stone intransigent 1942-72 law (no increases except 15% on vacancy) is insane. I cannot tell you how many folks I met in my two careers, one in housing enforcement and one in private management who never had an increase for 30 years and used their savings to ultimately buy their little suburban dream home. THAT rent control destroyed the Bronx! Boy, did it ever. Now today we have this "tulip frenzy" in apartment buildings in the city. Your "example" which shows a $ 330,000 per apartment price for Harlem property (always distressed) is an insane figure. 30 years back, when there were the same controls that are now being changed, those building would have sold for 5% of that figure, at best! Eventually NYC will experience an explosion which will make the 1990 and 2007 meltdowns seem like a hiccup. At a third of a million per unit there is NO bottom line, thee can never be a bottom line. As the late great psychologist/sociologist Dr Kenneth Clark once said, "There are a limited number of white poker chips (gentrifiers) in this game".

  4. Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward greener pastures—greener in terms of consumer need.@living guides