NEW YORK CITY- The coronavirus pandemic, also known as COVID-19, has put a spotlight on New York City’s economy and the vulnerabilities of its financial sectors, which none are immune to the impacts brought on from the present health and economic crises.
New York City currently leads with the highest number of coronavirus cases in the country, calling attention to how public and private entities will work together to alleviate the economic strain the city is under as social isolation guidelines prevail. With uncertainty clouding the economy, real estate owners are asking how the current market reset can finally bring real estate professionals and politicians together and resolve battles about the bills and regulations that impacted the sector before the pandemic.
GlobeSt.com caught up with Brandon Polakoff, senior director of Tri-State Investment Sales at Avison Young, to discuss real estate owners’ interests in how the coronavirus will change the dynamic between public and private entities and what regulatory bills will have the biggest impact on the market.
How do you think COVID-19 will play into the different types of legislation and regulation being proposed?
Ultimately, I am hopeful that this reset brings everyone together. This really sheds light on the fact that real estate owners, private lenders and banks are just as susceptible to economic challenges as small businesses, independent contractors and other working-class tenants. In addition, I think we are seeing now more than ever, that we as a city rely on real estate more than we realize.
We are leaning on property owners for shelter and health care, and these same property owners are working around the clock to determine ways to assist both residential and commercial tenants in times of need. This is the ideal setting for everyone to come together and best map out the future for our city and I am going to remain optimistic.
There are a number of proposed bills and regulations in the New York State Assembly that will impact the real estate market if enacted, which two do you believe will have the most substantial effect?
Real estate owners across New York City are facing a number of headwinds. While all will have a negative impact on their bottom line, there are two that stick out to me that will have the most substantial effect.
The first is most definitely Good Cause Eviction, which has also been referred to as Universal Rent Control, which offers every tenant in New York a renewal lease at a set increase (the lesser of 3 percent or 1.5 percent over the consumer price index). There is certainly a case to be made on the ownership level in which expense growth will outweigh rental growth, leading to equity erosion. However, we must also recognize that more regulation in the multifamily sector will lead to further declines in investor demand and fewer transactions. Fewer transactions mean fewer transfer tax dollars, which the city needs to fund its programs.
In addition, we would likely see far fewer rental developments, which will push up fair market rents. If more tenants stay put and fewer units are built, rents for available units will become extremely expensive. Those forced to move for a variety of reasons (growing family, moving in with a significant other, job relocation, etc.) as well as newcomers to the marketplace- did you see how much space Google and Facebook just leased?! – will be faced with fewer, more expensive options. Talk about an affordability crisis…
The other proposal that is very concerning to me is Commercial Rent Stabilization Act. The city has proposed legislation that would allow a City Council-appointed board to set initial rents and then calculate yearly increases for retail and office tenants under 10,000 square feet, and for manufacturing tenants under 25,000 square feet. In addition, a vacancy tax has been proposed for empty spaces. My first concern is that retail spaces cannot be compared apples to apples. No two spaces, blocks, or neighborhoods are alike. Determining appropriate rates is a function of supply and demand, not a figure set by government officials who are not fit to make these decisions. I also believe that some retail turnover due to consumer preferences or poor management is essential. We need natural turnover to allow entrepreneurs to thrive.
If fewer spaces are made available, we are again faced with a supply issue that leads to increased rents for newcomers and those who choose to move. I also believe that we need to take the effect e-commerce is having on consumer spending habits, which makes a vacancy tax extremely unwarranted. We live in an evolving world and cannot always look to make changes during transition periods that are not sustainable in the long term.
What are the status and timing of these bills? What is the likelihood they will pass?
With regard to Good Cause Eviction the bill can move forward without any sponsors. In addition, it can be called to the floor for a vote at any time- not a single designated time during the year – but needs 32 votes in the Senate to pass. Typically, you do not need to count the number of votes in the New York State assembly because the speaker will not bring a bill to the floor unless it will clearly pass. Currently, 24 senate members have signed on and the bill is gaining support. If they get to 32 votes, and the bill passes, it will then be left on Governor Cuomo’s desk to sign it into law or reject. I have to imagine he would sign off on the bill.
With regard to the Commercial Rent Stabilization Act, a Storefront Tracker Bill has already passed to gather information on vacancy throughout the city. In addition, a bill expanding the definition of commercial tenant harassment has passed. In 2018, City Council member Ydanis Rodriguez (D-Manhattan) introduced a Small Business Job Survival Act that would set conditions and requirements for commercial lease renewal negotiations, including requirements for lease renewal terms, arbitration-triggering conditions, limits on security deposits, and prohibitions on landlord retaliation. In November, council members Steven Levin (D-Brooklyn) and Brad Lander (D-Brooklyn) introduced the Commercial Rent Stabilization Act.
However, according to the Department of City Planning Director Marisa Lago in an August study, “the reasons for storefront vacancies are complex and varied and that solutions must be nuanced and targeted – or we may do more harm than good,” she said. This suggests to me that we are still in the evaluation phase but must continue tracking vigilantly.
What can landlords and CRE stakeholders do until the bills are decided?
First and foremost, it is very important for landlords and CRE stakeholders to stay informed. This is exactly why we have decided to put together a real estate issues tracker where we will update status regularly and offer to the real estate community. From there, property owners and CRE stakeholders need to work with groups like CHIP, REBNY, and RSA to spread the word and advocate on their behalf. Action is key and our team certainly wants to be part of that solution.
How have current regulations impacted the market as it pertains to investment sales and the data Avison Young has tracked over recent months?
There were 248 Manhattan multifamily/mixed-use sales in 2019, or an average of 21 sales per month, which was the lowest total since 2010. This was of course due to the Housing Stability and Tenant Protection Act of 2019 that passed in June. In January, we saw 14 multifamily and mixed-use sales in Manhattan – if annualized would equate to 168. Even more, of the 14 sales that took place, there were only three sales that consisted of 20 percent rent-stabilized or more (20 percent, 33 percent, 50 percent – which has a nuance). The buildings with 33 percent and 50 percent rent-stabilized tenancy were 1031 buyers and the property with 20 percent rent-stabilized tenancy sold for a 5 percent cap. With buyers remaining concerned about further regulation coming down the pike, we can expect even fewer multifamily and mixed-use sales to take place this year unless pricing drops quickly.