Warning Signs in Walk-Up Apartments

2115-2119 Hughes Ave, Bronx NY

Albany missed its budget deadline again as counties across the state anxiously await results of the back-room horse trading. Reforming bail reform is getting the headlines while suburbs fight to preserve their bucolic boulevards and Bronx apartment owners sweat out rent control expansion. Gov. Hochul is weighing local interests against a tidal wave of contributions from real estate developers aligned with affordable housing advocates. Independent owners of Walk-Up Apartment buildings are worried about another bull’s eye on their properties.

Most of the pressures explored in our previous post on Elevator Apartments apply to the Walk-Up Apartment sector as well, except of course, the elevator expense. Only about 1,000 of the 4,500 Walk-Up buildings meet the 25ksf threshold for Local Law 97. Although many smaller buildings are free market rentals, The Bronx’s low macro rent level subjects most to various affordability restrictions.

Expenses Leading Income

Inflationary pressures are just as applicable and maybe even worse without the larger scale. That point was driven home last week when the NYC Rent Guidelines Board released their annual Income and Expense study of all buildings with at least one stabilized apartment. This includes almost all Bronx Walk-Up buildings.

Analyzing landlords’ required financial disclosures, the study found that net operating income declined by 9.1% on averge citywide from 2020 to 2021, driven by a 3% increase in expenses. The record annual decline is the third in four years, and most of the troubling trends worsened in 2022.

Being the city’s low-cost alternative for housing, The Bronx had better rent growth than the overheated surrounding counties but worse expense growth. 99% of Bronx Walk-Up Apartments were built prior to 1980 and face higher maintenance and insurance costs. Higher energy expenses also hit older buildings harder.

Chart showing rising level of Distressed NYC Multifamily properties

The report found almost 9% of stabilized apartment buildings citywide were in financial distress in 2021, up from 6% in 2020. The city’s Department of Housing Preservation and Development separately reports that 43,000 rent-stabilized units are currently sitting vacant. Many are offline because the Housing Stability & Tenant Protection Act of 2019 prevents rent increases to cover repairs and upgrades. Pending legislation would make it worse.

The innocuously named “Good Cause Eviction” legislation now under consideration in the budget will make it almost impossible to evict a tenant or raise their rent enough to cover expenses. The proposal limits rent increases to the higher of 3% or 1.5 times the Consumer Price Index, and almost guarantees tenants the right to perpetual lease renewals. Landlords have to bring any disputes to Housing Court and wait out the backlog as they bleed financially.

The legislation‘s key sponsor is Brooklyn Democratic Socialist state Senator Julia Salazar who dismissed concerns about landlords’ viability tweeting “Expropriate them and allow community land trusts to acquire the properties to actually house people.” NYCHA’s dismal record should prevent that from happening.

The power of the free market has made private housing much better for tenants overall. Landlords are more accountable under law than government bureaucracies. Despite a hostile political environment, regulated rents will have to see one of their biggest jumps in a generation when announced in June. Preventing landlords from covering their rising expenses will only worsen New York City’s housing shortage.

A Wounded Market

Q1 2022Q1 2023Change
Number of Deals3211-65.6%
Number of Units Sold591181-69.4%
Average Price/SF$254$180-29.2%
Average Price/Unit$173,668$147,104-15.3%
Average Price/Assessment2.792.23-19.9%

After a strong fourth quarter, the market for Bronx Walk-Up Apartment buildings has weakened considerably. The table above shows that the first quarter came way off 2022’s pace when almost 2% of all Walk-Up units changed ownership in the year. The lower valuations we hoped were anomalies last fall have defined the market this year. Falling values have forced us to lower our Walk-Up Apartment benchmarks again. Our new levels of $200/SF and $175,000/Unit are still above the first quarter averages which only include buildings from 1931 and earlier.

The numbers also suggest the market is freezing up as buyers take shelter from the gathering clouds. The storm has spread from Albany to Wall Street where Signature Bank, the biggest lender to Bronx Walk-Up Apartment investors has failed. Other banks aren’t eager to expand exposure to the weakening sector, so owners should expect difficulty rolling their debt.

When banks retrench, private investors typically step into the valuation gap, but heightened political risks are discouraging all but the bravest.

Bronx Walk-Up Apartment Buildings Currently for Sale

Even if we return to last year’s healthy market, there is an ample supply for anyone looking to take advantage of the falling values. Although most sellers of the current inventory haven’t yet adjusted to the deteriorating fundamentals.

The interactive map above has markers at each Walk-Up Apartment building currently listed for sale on Costar. Clicking on each will bring up details of the listing. The 58 offerings have an average price/sf of $242 and an average price/unit of $218k, far above our lowered benchmarks. The average asking cap rate is 6.34% while the actual market is around 7%. Some of them have been available for many months so deals should be possible.

An offering that stands out to us is two adjoining buildings at 2115-2119 Hughes Ave in Belmont, the featured image on this post. The neighborhood benefits from two value drivers with its proximity to Little Italy and Fordham University. A full gut renovation in 1997 updated the 51 units and removed all lead paint, so no insurance worries on that front. The $6.995 million asking price equates to a cap rate slightly above 7% with discount values of $158/sf and $133,654/unit. Current rents are below legal limits so there is upside on the income. Please contact us if you would like to learn more, or want help finding other reasonable sellers.

New New Yorkers

The US Census reported last week that America’s latest migration wave brought 11,085 immigrants to The Bronx in 2022. They follow in the footsteps of previous immigrants who call The Bronx their home as they try to make it in New York City.

Much of The Bronx Walk-Up Apartment housing stock is owned by immigrants. They came here with next to nothing, invested wisely and worked hard to provide housing for other new arrivals seeking the same opportunities. Rounds of tenant friendly legislation are draining value from their life savings and depriving The Bronx of desperately needed housing for the increasing numbers of new New Yorkers arriving every day.

Unfortunately, the new arrivals were more than offset by 60,368 residents who departed The Bronx in 2022, a worse population decline than all but 4 other American counties, LA, Chicago, Queens and Brooklyn. The New York hassles are outweighing the opportunities and current trends will further discourage investment in Bronx housing.

Forcing small property owners out of business won’t do anything to increase the quantity and quality of housing for New York City’s workforce. Legislation, both enacted and proposed, is taking crucially needed apartments off the market and discouraging redevelopment. The numbers are beginning to echo lessons The Bronx has learned before.

Please contact us for assistance valuing any Bronx property under your consideration.

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