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Sweeping Rent Control Laws Lead to $75 Billion Value Loss in NYC Apartments

Stricter rent control laws are leading to a decrease in property values, affecting both landlords and tenants.

Sweeping Rent Control Laws Lead to $75 Billion Value Loss in NYC Apartments

Stricter rent control laws are leading to a decrease in property values, affecting both landlords and tenants.

Together with

Good morning. NYC's apartment market faces upheaval due to tough rent control laws, slashing property values and impacting landlords and tenants. Meanwhile, a former Blackstone executive is close to raising $1 billion for a first-time property fund.

Today’s issue is brought to you by Pace Loan Group—a national lender offering CRE owners non-recourse, long-term, fixed-rate C-PACE financing.

Market Snapshot

S&P 500
GSPC
4,958.61
Pct Chg:
+1.76%
FTSE NAREIT
FNER
724.86
Pct Chg:
-1.31%
10Y Treasury
TNX
4.085%
Pct Chg:
+0.054
SOFR
1-month
5.34%
Pct Chg:
0.0%

*Data as of 2/02/2024 market close.

ON THE RISE

Sweeping Rent Control Laws Lead to $75 Billion Value Loss in NYC Apartments

New York City's apartment market is undergoing a major change, with stricter rent control laws leading to a decrease in property values, affecting both landlords and tenants.

What happened: The 2019 changes to the rent regulation laws in New York, which drastically reduced the ability of landlords to raise rents post-renovations and kept apartments within the rent stabilization program, regardless of rent levels, have significantly impacted property values. Buildings with rent-stabilized apartments saw their average unit price drop by 34% since 2019, contrasting sharply with a 23% rise in the value of non-regulated apartments.

Market response: Landlords like Douglas Peterson are struggling with financial distress due to these regulatory changes, leading to foreclosure proceedings and massive discounts on property sales. The narrative shifts when seen from the tenants' perspective: many see these changes as a correction to rampant rent hikes and a protection against being priced out of the city. While damaging landlords' profitability, the rent control laws have been celebrated by cash-strapped tenants who can maintain their foothold in NYC.

➥ THE TAKEAWAY

Zoom out: This situation in NYC reflects a broader trend worldwide where governments are implementing rent controls to tackle the housing crisis, often at the expense of private property owners. The debate between tenant rights and landlords' interests continues, with potential long-term consequences on the city's housing market, including a possible decline in property renovations and construction. The current market conditions, influenced by these rent controls, pose significant challenges for both landlords and tenants, shaping the future of NYC's housing landscape.

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✍️ Editor’s Picks

  • Ripple effect: Low occupancy and high interest rates in major cities are hammering global banks more than regional U.S. banks.

  • Beyond AI: While generative AI garners the most attention, other less glamorous but impactful technologies are poised to influence the commercial real estate industry.

  • Investor backlash: Disgruntled investors target CrowdStreet, alleging the platform enabled their losses in Nightingale Properties' failed real estate ventures.

🏘️ MULTIFAMILY

  • Luxury resilience: In six major U.S. markets with high apartment supply, luxury Class A units experienced less severe rent reductions in 2023 compared to Class B and C apartments.

  • Housing revamp: Camden's Northgate high-rise will transform its 321 apartments into affordable housing in a $130 million project by Hudson Valley Property Group.

  • NMHC: Here are 7 observations from the National Multifamily Housing Council’s Annual Meeting last week,

🏭 Industrial

  • Ticking up: Chicago's warehouse vacancies slightly increased from a historic low to 5.25% in Q4, yet the city's industrial sector shows potential for a rebound.

  • Project shift: Related Cos. plans to replace much of the office space in its $8 billion Santa Clara megaproject with light industrial and advanced manufacturing areas.

  • Imbalance: The U.S. industrial sector faces an oversupply, with a record 607 million square feet of new projects in 2023 surpassing occupancy gains, leading to the highest vacancy rate since 2016.

🏬 RETAIL

  • Withdrawn: Brass Mill Commons, initially listed for $30 million, was pulled from the market following its acquisition along with an adjacent mall for $45 million in spring 2022.

  • The future is AI: Commercial real estate, especially retail, is increasingly adopting AI to improve consumer experiences and enhance property revenues.

🏢 OFFICE

  • Writing on the wall: Allied Properties REIT reported a net loss due to a C$500 million markdown in its property values, driven by ongoing remote work trends and a decline in occupancy rates.

  • Finding the upside: Despite prevailing negative views on the office market, Cushman & Wakefield's report, "The Bright Side of Office: Growth Opportunities in the Urban Core," highlights several factors suggesting a potential market recovery.

IN THE SPOTLIGHT

Former Blackstone Partner on Track for $1 Billion Haul With New Real Estate Fund

Tyler Henritze, Blackstone’s former head of real estate acquisitions in the Americas PHOTO: ANDREW BURTON/GETTY IMAGES

An ex-Blackstone real-estate executive is on pace to raise a $1 billion fund for his new venture in what analysts say would be one of the largest hauls ever for a first-time property fund.

Making it happen: Despite the difficulties often faced by first-time property funds in securing investments, especially in a market riddled with economic uncertainties and shifting work habits, Tyler Henritze's new firm is making remarkable strides. Town Lane is expected to raise about $750 million in its initial phase, with a target of reaching $1 billion by the second quarter. This comes as U.S. opportunistic real-estate funds have seen a decline in capital raised, gathering only $10 billion in 2023 compared to higher amounts in previous years.

Blackstone built: Henritze brings a wealth of experience from his nearly two-decade tenure at Blackstone. He played a crucial role in several major deals, such as the $5.65 billion sale of the Cosmopolitan hotel in Las Vegas and the $10 billion acquisition of QTS Realty Trust. His involvement in taking Hilton public in 2013 resulted in Blackstone's most profitable sale, with a $14 billion profit.

➥ THE TAKEAWAY

Zoom out: To support his ambitious goals, Henritze has assembled what he calls the “A-Team” for Town Lane, attracting talent from Wall Street giants such as Goldman Sachs and Morgan Stanley. Among the notable team members is chief operating officer Parker Morse, a former principal at Sycamore Partners and Henritze's younger sister. The firm is securing financial commitments from diverse investors, including Ivy League endowments and family offices, positioning it strongly in the real estate investment world.

CHART OF THE DAY

The U.S. apartment occupancy rate dropped to a 10-year low at the end of 2023 due to an increase in apartment supply not seen since the 1980s.

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