Bronx Multifamily Meltdown

Noble Mansion at 1500 Noble Ave, Bronx NY

The timeless advice to invest in middle class housing has lost relevancy in The Bronx apartment market. Landlords are facing rising expenses while new regulations have halted revenue growth. Banks are reluctant to refinance, even if the loans could perform at current rates. Valuations of $100,000 per unit have become common among the few properties being sold. Those brave enough to buy need to wait for stable prices, lower interest rates and a rational regulatory environment. They may have a better shot of hitting a trifecta at Yonkers Raceway.

Professionals lament

Some of the industry’s most important operators spoke at a recent Hudson Gateway Association of Realtors conference about challenges confronting the multifamily property market.

Matt Engel, President of Langsam Property Services with 10,000 mostly rent regulated units, said his insurance expense went up by 45% last year. Placing much of the blame on out of control lawsuits and crazy courts, he said carriers are unwilling to write policies on some buildings.

Brian McCarthy, Executive Vice President of Samson Management, with wide commercial holdings, echoed the sentiments. Their insurance expenses rose by over 30% in each of the last three years.

Higher energy costs and compliance with Local Law 97 are also eating away at net income. Thinning margins are forcing landlords to comply with an avalanche of new regulations by doing only what they must.

Danielle Noak, Vice President of Sandra Erickson Real Estate with 700 regulated units, warned about lead paint compliance coming in 2025. That will create another round of major capital requirements.

All the participants pointed to the Housing Stability and Tenant Protection Act of 2019 (HSTPA) as the primary culprit in their struggles. Landlords can no longer raise rents after a vacancy, so it doesn’t make sense to invest in a unit and bring it back to market.

A unit vacated after a long term tenant would need significant renovations and could only be rented for the same previous rent which may be a fraction of the current market. The law has resulted in over 40,000 units currently being “warehoused” in New York City.

Noak said non-payment of rent is becoming a very big problem and court backlogs can take over six months. Tenants know that third-party social welfare agencies will ultimately pay the rent.

Alana Ciuffetelli, Owner of 3C Realty Inc. and Chair of the Building & Realty Institute Apartment Owners Advisory Committee said the new standards are unachievable. She pointed to the impact the regulatory regime is forcing on the financial system after the failure of Signature Bank. Rising concerns about New York Community Bank are also centered on their exposure to New York City subsidized housing.

Seeking Relief

Watching the value of their assets fall, a group of landlords went to federal court arguing the new regulations represent a “taking” under the Fifth Amendment. One plaintiff complained that they couldn’t use an apartment for their own family.

Other federal court rulings gave them optimism, but they lost their case and the US Supreme Court declined to hear it last week. Justice Thomas acknowledged the “constitutionality of regimes like New York is an important and pressing question” but this was not a suitable case to answer that question.

With justice delayed, creative owners are finding ways to make the best of a difficult situation. Noak and Engel told the Realtors conference how they use Regulatory Agreements with HPD to raise Section 8 rents up to market values and even take buildings off the tax rolls.

Eliezer Rodriguez, Bronx Regional Director of Government Affairs for the Hudson Gateway Association of Realtors spoke about the vacancy reset bill making its way through Albany. This proposed corrective to HSTPA would make it possible to raise rents to area market rates after a vacancy and full code upgrades. It would only apply to buildings held for at least two years and tenants would be protected by other exclusions to mitigate common abuses.

Pegging Values

Hope springs eternal with real estate investors. As valuations fall to levels unseen in several years, recent transactions will probably be looked back on more fondly by buyers than sellers. The following charts depict the quarterly average price per unit and total market value for Elevator Apartments and Walk Up Apartments in the BuyTheBronx.com database.

Quarterly depiction of The Bronx elevator apartment market
Quarterly depiction of The Bronx walk upapartment market

The falling orange lines depict the quarterly total value traded of each sector for the past five years. Only desperate sellers want to execute at current valuations, and only a few buyers are able to see through the dire outlook.

The blue bars are the average quarterly price per unit for each sector. The stability that comes from new construction offsetting the falling values of legacy buildings has deteriorated since the economy emerged from the pandemic.

The featured image atop this post is Noble Mansion at 1500 Noble Ave, at the crossing of The Bronx River Parkway and Cross Bronx Expressway in Parkchester. The well maintained building comprising 237 modern units with panoramic views sold for $26 million in January. That’s less than $110,000 per unit, and $100 per square foot.

It was among other recent sales by Related Companies who may be freeing up capital for their recently announced Hudson Yards casino project. The buyer was investor Yechiel Newhouse who has made other similarly sized acquisitions in recent years.

2740 Sexton Place in Laconia
8 unit gut renovation project at 2740 Sexton Place in Laconia sold for $700k on January 16, 2024.

The Noble Mansion valuation is almost as low as the eight-unit Sexton Ave rehab project shown above in Laconia. This one will be modern after the new owners complete a total gut renovation. Acquiring the property for $87,500 per unit and almost $200/sf may not leave much profit from the finished product.

An example of that appears below at 873 East 228TH Street where sixteen newly constructed units sold for $4.7 million in January, almost $300,000 per unit. That property was acquired for only $521,000 in 2018. The remaining $4.2 million works out to almost $500 per square foot to finish the development and get everyone paid.

A subsidized portfolio sold as the first deal of the year when Lemle & Wolff parted with 6 mostly Walk Up buildings west of Fordham on January 4th. Comprised of 206 total units, the $15 million transaction worked out to $72,864 per unit. 

New Construction at 873 East 228th Street
16 newly constructed units at 873 East 228th Street in Wakefield sold for $4.7 million, $294k/unit, on January 30, 2024.

Current Offerings

Costar lists almost 100 Bronx apartment buildings currently for sale at wide ranges of size, quality and valuations. We are also aware of other owners willing to entertain offers. Developers have several opportunities that should pencil out, and investors can choose from newly constructed fully compliant buildings that will rent easily.

Offered cap rates are advertised near 7% although realized rents may be lower and expenses higher than last year. So, your actual cap rates may vary but patient investors will look back fondly at this market downturn, as long as it turns back up someday.

Historically low interest rates may never return, and owners might have to get used to steadily rising prices. The low inflation and free money in recent years were departures from normalcy. However, if New York City is to solve its housing shortage, a more rational regulatory environment will be needed.

Owners of Bronx workforce housing can deal with a highly regulated market, but they require reasonable prospects to profit from their endeavors. As do the banks that finance the properties. It can’t be a long shot bet.

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