Episode 40: The 99-Unit City

00:00 Introduction

Derek We’re here at The Real Estate Roundtable with IPRG. Welcome back. We have Steve Reynolds here, Donal Flaherty is here, and Adam Lobel is back again. This is Derek Bestreich. How’s the summer going, gentlemen?

00:21 How the Summer Went

Donal Summer’s been quite active. In terms of the market, a lot of people are still doing deals. You have some clients who go away and spend August on vacation, but in general the market’s humming through the summer months. Things are closing, deals are happening, citywide.

Derek Steve, how’s the summer going?

Steve Summer’s good. I say it every year — I wish I got away more. To go off what Donal said, the beginning of the year felt a little slower because closings were taking longer. Now it’s a tidal wave: things are closing and we’re getting new business at the same time. Historically people think the summer months are slow, but we typically don’t see that here.

01:15 The Political Uncertainty Settles

Adam Part of that’s the Mamdani effect. It’s reality at this point. Generally there isn’t a big wave of political change throughout New York City in the summertime, so historically it’s a little slower. But because people are settling in and understanding the new reality, the market’s more active than it historically would be.

Derek What’s your read on the new reality?

Adam For the rent-regulated portions of the market, the market shrunk quite a bit. There’s far less upside in any of the rent-stabilized assets. There’s a rent freeze, and demand and liquidity are all going toward the free market side. Those areas are doing great. And with the limitations on rent-regulated apartments, you’re seeing the rental market at historical highs. For certain owners it’s been really good, and for others really bad.

02:12 New All-Time High Rents

Derek In August we’re setting new all-time median high rents in Brooklyn and Manhattan. The free market rental market keeps going up, and meanwhile there’s the rent freeze on the rent-stabilized portion. There’s the whole dichotomy of supply constraint and excess demand — and where’s the demand going to go? That goes to Donal’s point about why it’s been such an active summer: we’re seeing so much free market product that can be renovated, and there’s enormous demand for it. We’ve also been very active on the development side.

03:03 Which Asset Classes Have Buyers

Donal In terms of asset classes, you have rent-stabilized walk-up multifamily buildings, where you have maybe five buyers. It’s slim pickings. Not a lot of people are looking to buy those. So people are paying attention to middle-of-the-fairway, simple investments.

Land is easy. The city is backing any developer looking to build. Instead of finding ways to fix these rent-stabilized apartments, which they should be doing, they’re incentivizing developers to build more. There are more low-income apartments, but at least they’re new — brand new washers and dryers, dishwashers, new kitchens. It’s an easier sell. That’s why you see so many people picking up land and so much competition to buy it. The wind is at their backs and they’re taking advantage of it.

Then with smaller free market buildings and mixed-use multifamily, there’s just as much competition, because there isn’t enough of it and people know it’s easy to manage. The thought process is: let me acquire ten or twelve of these, create a portfolio, and maybe sell in five years.

Derek Nice and clean and turnkey.

Donal A few apartments, very manageable, not going to keep you up at night. The city’s not breathing down your neck. It’s simple stuff, it’s worth a lot of money, and you see the rents go up every month. That’s why it’s so active right now.

Steve Based on the regulations, it’s hard to see a way where rents don’t continue to go up. Those buyers are getting core real estate. For most individuals financing is a little difficult in today’s environment, but the ones who are sophisticated and do this full time see it as a good cost basis that’s going to be worth more in the years to come.

05:16 New York Versus Texas and Florida

Derek You read these articles about what’s going on in Texas and Florida, where rents are down about 20%, operating expenses are up and interest rates are up, and some of these syndicators are getting completely wiped out in those markets.

Donal And in New York there’s a lot of development. A lot going on in Queens, a lot in Brooklyn.

05:41 Why Rents Rise Despite New Supply

Derek A lot of new units keep adding to the market, but our rents keep going up as well. Why do you think that is, when there’s so much new supply coming on?

Donal Just not enough. It’s never going to be enough.

Adam The new supply historically has been going to the areas that got rezoned in the last five to ten years. Williamsburg fifteen years ago wasn’t a development boom, and then the city rezoned half of Williamsburg.

Donal Gowanus too.

Adam Gowanus. Then you saw the rezoning on Atlantic Avenue and the Crown Heights type of Brooklyn locations. All of a sudden there’s new product coming to market, and the people who held on are really lucky, because the redevelopment potential is far more valuable than the existing structures. Now developers have the ability to build, and there are more units coming to market.

Steve I don’t have the numbers, but my gut tells me the majority of those new units coming to market are condos. So it doesn’t help your supply and demand.

06:48 The 99-Unit Threshold

Derek There’s a lot of 485-x in Downtown Brooklyn and Gowanus, but not enough. There’s never going to be enough. How many articles do you see about 99 units?

Steve I know, but 99 units isn’t that big of a problem.

Derek That’s the thing — the city is almost getting in its own way. They’re tripping over themselves.

Donal It’s the one thing they didn’t think about. Every single time they come up with a new policy and think they’ve solved everything, the developers are smarter than anyone in City Hall. They’re going to work around it and make money off it.

The only way this works is prevailing wage, and that’s anything above 99 units. So what they do is take multiple lots, separate the tax lots, and build five 99-unit buildings on what is effectively one site. They’re separate on paper, but they’ll do one common area, all shared amenities, five towers of 99 units. I see it happening — I speak to our developers.

07:49 Arrow Linen and the Park Slope Site

Derek In the news this week, in Park Slope, there’s a site on Prospect Avenue — the Arrow Linen Supply, an old linen factory. It just sold to Goose Property Management, and as soon as it transferred they filed plans for four ten-story, 99-unit buildings. That’s their way around it.

Donal You’re going to see it all over the place. It’s happening in Downtown Brooklyn too. Multiple short towers, 99 units each. It’s going to happen on the Greenpoint waterfront. Just look at their ZD1 filings — that’s what they have planned.

Derek I also read that because people are limiting projects to 99 units, they’re making bigger apartments. These apartments are roughly 20% larger than they otherwise would have been, which pushes up the rent per apartment in these markets. That’s part of why you continue to see rents setting higher and higher thresholds — the units are being built bigger.

08:48 The Bronx, Queens and Manhattan Pipeline

Adam Are you seeing the same thing in the Bronx, in terms of working around the 99-unit threshold?

Steve In the Bronx it’s more about scale. They’re trying to get the bonus and take as much housing as they can. It’s a whole different play.

Adam Manhattan is all condo development. There’s very little new product coming to market, and if it is, it’s basically all condos. Those developers are also competing with the luxury walk-up buildings, so they need scale. Properties on the avenues with good air rights for future assemblages are great for them to purchase, but they’re very hard to put together, which is why you’re not seeing much of it.

Steve In the Bronx, if there’s a way around it to save money, they’ll do 99 units. But they’re going to make sure they get as many units as possible. They’re not worried about making bigger units or better units. It’s really just how they can squeeze as much profit out of that property.

09:45 Prevailing Wage and Project Economics

Donal A lot of your institutional developers — TF Cornerstone, for example — don’t care about 99 units. They do the prevailing wage. They’re not looking for workarounds. They bought land all cash, they don’t have debt on the site, so they’re playing an entirely different ballgame.

Derek I read an article, and I’m not sure if this is accurate, that theirs is the first prevailing wage building in Brooklyn, or at least the first in the last couple of years. Whereas at a lot of these other sites people are subdividing and keeping it to 99 units.

Donal It’s probably true. I haven’t seen it, but I believe it.

Derek Why is prevailing wage such an issue? What is it, $40 an hour across the construction trades?

Donal Correct.

Derek So it just becomes a cost that’s too high. It doesn’t fit the project economics.

Donal If you’re going to pay $450 a foot or $500 a foot for the land — which TF Cornerstone didn’t do, but most of these other developers do to stay competitive — you can’t make those numbers pencil. It’s a simple workaround for them to maximize profits. You can’t blame them.

I’m surprised there hasn’t been some sort of agreement or policy where they sit down with developers and say: we don’t want you doing this anymore. There have been fifteen articles about it. We clearly see it’s happening. Let’s come to an agreement that benefits you and also benefits others.

Derek Because the rule just talks about the parcels. So they’re cutting up the parcel.

11:32 Are Units Actually Being Lost

Steve I’d like to see how many units are actually being sidelined. I don’t think it’s dramatic enough to make a change. They’re still getting their unit count. It’s the type of building you’re getting.

Donal And the type of building you’re getting.

Steve How many units are actually not being built because of it?

Derek That’s a good question. You think it’s not much?

Steve Instead of building 120 units they do 99, so you’re talking about 21 units. In the grand scheme of things, I don’t think it matters.

Derek So you don’t think the city or the state is getting in its own way with how the program is being rolled out? You think it’s working?

Steve I don’t think it’s working either. I’m not saying it’s working. Obviously their goal is to get workers paid more, so they have to offer an incentive. I don’t think their incentive is enough for developers to pay those workers. That’s why it’s not working. But developers are still building. I don’t think it matters.

Donal Developers obviously are still building. They have no problem with the 99-unit loophole.

Steve Again, I wish I had the numbers. The Goose Property deal — they just did four 99-unit buildings. How many units could they have done if they’d just done one lot?

Derek Probably the same.

Steve That’s the point I’m trying to make. I don’t think they’re losing that many units, if any. They’re just saving on wages.

Donal They’re definitely saving on wages. I look at it more from the visual aspect of the building. Who knows what these buildings are going to look like. I’ve seen some of the renderings and it just looks crazy.

13:04 What the City Should Do Instead

Steve What the city needs to do is add a bonus. Take 485-x, build more than you otherwise could if you pay these workers. It’s a win-win for everyone: more housing, rent goes down, workers get paid. I don’t see how you go wrong.

13:18 Holdout Tenants and Stalled Assemblages

Adam It would be amazing if they came up with a structure where, if one or two rent-stabilized tenants in an assemblage are holding up a development, they could work with those tenants and relocate them for two years while the property is constructed, and then they come back to a brand new apartment.

Derek There are housing projects with a lot of unused land where the city is building new buildings, and the tenants gave them the hardest time about relocating, even for a short time, even coming back to a brand new apartment.

Adam Those are city-run apartments. What I’m describing is a private owner with, say, thirty apartments, two of them rent-stabilized, holding up a development that would add another hundred units to the area. If they figured out a way to move those two tenants, let the developer build, all of a sudden you have seventy or eighty new apartments, and the two rent-stabilized tenants come back in two years to a brand new apartment. It’s a win-win. But the city isn’t trying to come up with a creative structure like that. And these tenants are protected for having had these apartments in their families for fifty to seventy-five years. It’s really holding back New York City.

Derek And in many cases it’s holding these people back as well, because they hang on to these apartments as long as possible.

I was reading an article recently. You have all this regulation, all these stabilized units and vacant apartments limiting supply within the rent-stabilized segment, which is well documented. But then you also have exclusionary zoning and landmarks. How many neighborhoods have too little zoning density, or landmark designation, where you literally can’t put new supply into the market? That pushes supply out into other markets, and people get upset and say it’s causing gentrification. But it’s not really gentrification — it’s spillover of excess demand. You have all these systems and structures limiting the new supply New York so desperately needs.

15:42 Landmark Districts and LPC Approval

Adam With landmark districts in particular, a lot of these sites are contingent on getting LPC approval. We’ll go to contract, and the developer will spend the next year and a half working through Landmarks to make sure the exterior has a certain look and feel so the neighborhood looks the same. It obviously delays construction — if it takes a year and a half to get LPC approval, the property is going to take three years to get built from the time it sells. Sometimes the developer can’t get it done at all, and then the owner is stuck.

Steve I personally like landmarks and preservation. It keeps the character of certain communities and neighborhoods, and I think you can have it both ways: places that don’t have it, build. Give them the density so people can afford to live in New York and continue to be part of a great city.

Derek What’s happening in a lot of these landmark districts is that there’s no new supply coming on, but demand is as strong as ever. So you have people buying four-unit and three-unit townhouses, and guess how many units they’re converting them to? One. They’re going single family. Units are being removed from the market.

We’re a big culprit of this ourselves, because we’re selling so many of these four-unit buildings that get converted to single families.

Adam That wouldn’t be happening if there weren’t demand behind it.

Derek Demand is there. But there’s no supply. That’s the point.

17:26 Does Every Neighborhood Need Supply

Steve I don’t think every neighborhood needs supply. I get that prices are going up in certain neighborhoods, but I also don’t think everyone can live anywhere they want. There’s always going to be competition, and if a neighborhood is where everyone wants to be, it should be the most expensive.

Derek The issue is there’s no alternative. If someone wants to live in one neighborhood, the one down the road is about a hundred dollars cheaper. There isn’t enough housing to create a real discrepancy in pricing.

Steve Certain neighborhoods are going to be more expensive than others. That’s not an issue and you’re not going to change it. What needs to change is that people feel hopeless because there’s nowhere to go. All they have to do is increase supply.

Donal That’s every town. You go to New Canaan, Connecticut, it’s the same thing. Ridgewood, New Jersey, same thing.

18:28 The Suburbs and Single Family Zoning

Derek I was reading an article about the suburbs — New Canaan, Connecticut, for example — where they build big single-family houses. They want low density, and it’s called exclusionary zoning: it excludes higher density and lower-income populations.

The same thing is going on in the good parts of New York City. The West Village, Cobble Hill, Park Slope — you have these historic districts, which essentially create exclusionary zoning. They can’t bring on more density, which would mean a lower-income population, and it becomes a way of preserving the neighborhood by not allowing people into it.

19:12 Underpinning Agreements and Difficult Neighbors

Adam I’m dealing on a property where the developer needs an underpinning agreement with the neighbor, and the neighbor basically says: I don’t want the guy to develop next door, I don’t care. It’s a good western Brooklyn neighborhood, low-rise, brownstone type of location. The neighbor doesn’t care that his own property could sell for three or four million and get converted to a one-family that sells for eight million. He’d rather not deal with construction next door. He doesn’t want the density.

Donal Eventually there will be access agreements, but it could take time. It can be a real pain.

Adam Some people don’t want the density. I’m all for creating an affordable New York and an environment where people can live in good locations. It would benefit everyone if there were more supply in certain areas, because then the rental market would come down.

20:07 How Neighborhoods Change

Derek It’s wild how the city continues to evolve. Some neighborhoods were hot, then they weren’t, and now they’re hot again. Others are brand new neighborhoods coming out of nowhere. Sometimes you drive down a street, and the next time you drive it you think, where did that building come from? The most notable one I’ve seen is Gowanus, and the Bronx as well. The Bronx is really changing, but Gowanus is remarkable — condo units, new construction, rental buildings.

Donal There’s so much supply there that we have developers who won’t build there. They come back and say there’s too much going on. Downtown Brooklyn too. A lot of the time people come back to us when we’re selling land or buildings and say they don’t want to compete with twelve other people. It’s too much.

21:08 Gowanus, Five Years On

Adam Five years ago Gowanus smelled like a canal. Now it basically smells like dirt and cement. There’s a ton of new supply coming to market — it’s nothing but a giant construction site right now.

Derek It’s the only place in all of New York City where I’ve ever had owners concerned about rents and oversupply: right there in Downtown Brooklyn and Gowanus. People are worried rents will do what they did in the southern states.

Adam The upzoning of that area was significant. You had old warehouses, and they bumped the FAR on certain avenues to over six. So a hundred-by-a-hundred warehouse with a six FAR on it is suddenly a sizable site, and the entire market is littered with them. That’s why the whole area is a construction site.

That population is going to spill over into Carroll Gardens and Park Slope and create more density. But the retail locations on Seventh Avenue, Fourth Avenue, Smith Street and Court Street are going to benefit from it. People in Gowanus want to go get a nice dinner, and it’s a ten-minute walk to Carroll Gardens and a boutique Italian place in a safe neighborhood.

22:24 Fourth Avenue and the R Train

Donal Fourth Avenue is crazy.

Derek I took the R train last night. I had dinner with my wife in Park Slope and got off at Union Street around 6 p.m. There were so many people getting off the subway — the stairs were full, people everywhere, in all directions. I was looking around thinking, where did all these people come from?

Adam If you take Williamsburg fifteen or twenty years ago, that’s what Gowanus looked like three or four years ago. And Western Williamsburg by Domino is what Gowanus is going to look like two to three years from now when all these projects finish. It’s going to be incredible — for the retailers, for the tenants, for the community. They’re remediating a lot of the sewage and making it safer to live there, which benefits the city. Those people can work in Manhattan or Brooklyn with quick and easy access.

Derek But the rents aren’t going to come down. There isn’t going to be enough supply — not in that location, and not in general.

Adam Not enough supply, because that’s one of the twenty neighborhoods in New York where most people want to live.

23:27 Where the Next Development Goes

Derek So where does all the new construction go from there? These sites are all more or less taken.

Donal You’re seeing a lot of development in Queens, in Eastern Queens. I think those areas pop. The Bronx is developing like crazy. They’re going to go further out east.

I’d look at Red Hook. There’s no subway, but it’s on the waterfront and it’s an amazing location. They should upzone that area and develop it. It’s all about the zoning. It’s got great bones — that’s why Gowanus works. It has the creek. If you visit Chicago and walk the Riverwalk, you could replicate something like that, not to the same degree. When you have tall buildings on both sides of a creek, it feels good walking there. The retail will follow.

24:20 Red Hook, Flood Zones and Sandy

Adam Red Hook’s also in a flood zone. It’s easy to forget.

Donal The Financial District is in a flood zone. All of southern Manhattan is a flood zone.

Adam But Red Hook got rocked in Sandy. A lot of those properties took years to come back. Lower Manhattan was built better than Red Hook.

Donal My condo building was completely flooded during Sandy. It is what it is. They probably have enough technology to make it better. Red Hook is on the waterfront, you have amazing views of Lower Manhattan, the city views are insane. Industry City, that whole area. There are a lot of walk-up rent-stabilized buildings there and you can’t do much with those, but these are opportunities the city should take advantage of by upzoning.

25:06 Nothing Is Going to Change

Steve Listening to this conversation, the number one thing everyone’s forgetting is that nothing’s going to change because of the regulation. Get rid of the regulation and you’ll have no issues.

Donal Same thing with landmarks. If they made that process easier, it wouldn’t be an issue.

Steve You start to think it’s artificially high on purpose, because the minute you take away rent control you see what happens in other states. That’s the only fix, and that’s why all this development will not make a change.

25:40 Vacant Stabilized Apartments

Donal How many rent-stabilized apartments are vacant right now? They say 60,000. How many buildings do you have to build just to hit that number? You’re never going to be able to catch up.

Steve And there’s what, a million rent-stabilized units in general?

Donal A little over, I think.

Derek If they clearly cared, they would have done something by now.

25:59 When a Democrat Says It Out Loud

Donal Mark Levine said something recently, right?

Derek He made comments about the number of units sitting unused. He’s the Comptroller of the city. I don’t know that he’s going to have much influence on it.

Donal When’s the last time you saw a New York Democrat even mention that? It was because of the 2019 rent law. Call it how it is. It was good to see.

Derek He probably got muzzled pretty quickly. I was on the phone with a landlord who owns a lot of these buildings, and he said all you should expect at this point is a very small vacancy increase. That’s the best-case near-term scenario, and it’s not going to be nearly enough. It’s not like you have a thousand-dollar unit you can rent for four thousand — they’re not going to let you go from a thousand to four thousand.

And then there’s the theory that the goal is to undermine these properties financially and eventually transfer them to community ownership. Who knows. There’s a lot going on there.

Donal But then you have very professional operators buying these rent-stabilized buildings with a lot of violations, and buying them very cheap — pennies on the dollar. Why buy them at all if you really think that’s how it plays out? A lot of these people are very connected, they know what’s going on behind the scenes, and they’re still buying. There are people in the real estate community thinking the other way.

27:38 The Post-2019 Reset

Steve If you bought before 2019, it’s been a big reset. That’s all it is. Buying now is a completely different mindset.

Donal The prices today are what they were twenty years ago. There are people we could bring in here who would say this is the best buying opportunity for these types of buildings ever.

28:01 Hoboken One Bedroom or Park Slope Building

Adam Would you rather own a one-bedroom in a new building in Hoboken, or a twenty-unit fully rented building in Park Slope, if they’re both a million and a half? What’s your preference?

Donal I’d take the building in Park Slope, obviously.

Derek It depends on your risk tolerance. These buildings are full-time jobs. It’s death by a thousand cuts — they’re regulating the market to death with so many small requirements. If you’re not a professionally set up management company, if you’re a small family office, forget about it. They’re pushing the mom-and-pop owners out of the market.

28:55 Rent Stabilized as a Political Target

Steve What scares me is that rent-stabilized buildings have become a political target. It’s not a matter of keeping rents down, it’s getting votes. Until that changes, I don’t see anything happening. It’s a million free votes.

Derek That’s probably enough to win any election.

Steve And they know it’s not keeping anything affordable. They’re getting their votes.

29:25 Will the Buildings Deteriorate

Derek How long until these buildings start to deteriorate to the point where the programs cause the problems for the tenants?

Steve I’ve heard those arguments and I don’t necessarily buy them. The city’s going to fine you, and you’ll have no choice but to repair or sell. Someone’s going to fix that building. With the Summit acquisition, they have to put in millions of dollars.

In the short term housing is going to deteriorate, but then someone’s going to buy it and fix it.

Derek They’ll put violations on the property, liens and emergency repairs. If the landlord doesn’t do the work, the landlord’s equity might be gone, and they hand it over.

Steve The next buyer will fix it.

Derek But if they have equity in there, they’ll potentially do the work and fix up the property, even though tenants may harass them, call 311 and put more violations on the property.

Steve The pricing eventually gets low enough that it makes sense to put the right care into the building, and the tenants will be happy. I think that’s what they’re going for.

30:28 Buying at a Repairable Basis

Derek We recently sold a building in an enforcement program that needed a significant amount of repair work. The buyer bought it at a price point low enough that he can put the money in, repair the property and maintain it.

Steve And he’ll probably have no headaches from those tenants. You might have one or two, but the minute that building is operating efficiently and clean, you’re not going to hear about it.

31:11 Who Actually Gets Hurt

Steve It’s the people who bought on speculation. That’s where it’s going to hurt. They’ll defer maintenance, wipe their equity out, give the keys back, and then someone’s going to come in.

Derek They bought based on the previous laws where there was inherent upside. They were buying at three and four caps based on the low in-place rent, and the bank was financing it, because that was the program. For those people, it’s game over. That equity is gone.

Steve It’s just a new program. Now it’s management and cash flow. You’re parking and praying, hoping the laws change.

Derek And if not, what are you praying for? You have no rent growth either. You have a rent freeze.

Steve I get it, but they’re still trading at yields and cap rates high enough that you’re covered for the short term.

31:58 Eight to Ten Percent Yields

Derek What are those yields and cap rates?

Steve Eight to ten percent at least. Most people will buy a free market building hoping to even sniff that.

Derek Are you talking about tax class two, 2A, 2B?

Steve Class two is harder just because your taxes keep going up. But if you buy a 2B tax-protected rent-stabilized deal in today’s environment, I don’t hear anyone losing money.

Derek We don’t know how this plays out over time, but it makes sense.

Steve There’s an opportunity cost for everything. I’d prefer to put my money in a free market asset where rents are going up 15 to 20% year over year.

Derek It’s a hedge against inflation.

Steve It’s a hedge. If you’re buying a rent-stabilized deal, it’s really just a cost basis. It’s cash flow day one without being management intensive in some respects — you put a management company on it, you keep the violations clean, and you more or less forget about it. Whereas the other ones involve renovations and dealing with tenants who are most likely paying under market. You have to get them out, renovate, reposition.

Derek You also have to collect the rent.

Steve You’ve got to collect the rent, which is also hard.

33:15 Not Bullish, But It Makes Sense

Steve I am not bullish on rent stabilization, but I get why people will park their money there.

Donal I have no problem buying a 40- or 50-unit building at a nine and a half cap that’s very clean in a good location. That’s an opportunity a lot of people are exploiting right now.

33:32 Cap Rates, Violations and Clean Buildings

Derek A lot of those aren’t very clean. A lot of these rent-stabilized buildings are selling at steep discounts and high cap rates.

Donal I don’t know what areas you’re looking in, but I just saw one in Forest Hills that traded. It was an eight and a half or nine cap, a gorgeous Tudor building, about 55 apartments. No violations on it. A super clean building. Forest Hills is a very nice area — I picked that building because I know the area and I really like it.

Derek What about price per unit? A lot of these are selling at 50 or 60 thousand a door.

Donal That’s with really bad violations. In the Bronx, at $49,000 a door. But we sold at 65 a door in Park Slope.

Derek Messy deal.

Donal That was a messy deal. I’m not talking about messy deals. I’m talking about very clean walk-up buildings — clean, well managed, probably mom and pop, pride of ownership. There’s so much blood in the water that we’re able to get that.

34:35 Why Owners Are Finally Selling

Derek Why do you think those owners are selling? Is it a debt maturity issue, or do they just not want to sit around for the rent freeze?

Steve For the first time in my career doing this, there’s no story of “I’m going to hold on because it’s going to get better.” Could things get worse? People may even be anticipating it getting worse. But you’re at the bottom, where there’s no hope that I’m going to get a million dollars more for my property in two or three years. Your property’s worth what it is. Take it while you can, if you want to move on to something else.

Adam There’s no light at the end of the tunnel for certain people.

Steve You could convince yourself in 2020 that the rent laws weren’t that bad and we’d still get our increases.

Adam I got a rent roll last night — a seven- or eight-unit building, a gorgeous landmarked building on the Upper West Side. Two-thirds rent stabilized, and half of that is vacant. So you have two or three vacants, two rent stabilized and two free market. What do you do with that? The in-place legal rents are around $1,100. You’re not going to combine the units. You can’t renovate them. You can’t rent them out, because it’s below the operating cost for that building — the taxes are probably $100,000. People don’t see the light at the end of the tunnel. His family was holding out for a vacancy increase or some kind of IAI replacement, and it never came.

35:59 Property Taxes and the Alt-1 Reset

Derek They’ve been managing these things for thirty years and they’re tired.

The city makes so much of its income off property taxes, and it’s putting landlords in the position of being the tax collecting agency. You have these buildings where taxes are 100, 200, 300 thousand. The landlord has to maintain the property, collect the rent, collect the tax on the city’s behalf, hand it over, and then hope to squeeze out a few dollars for all their efforts.

Adam The city should wake up. You file the Alt-1 if you’re doing a major renovation, and the taxes get reset — the city makes more money that way too.

36:38 Why Landlords Do Not Push Back

Donal Landlords should wake up. These landlords just take it. We get smacked in the face constantly by the city and we do nothing about it. We have little meetings and nothing ever comes of it. There should be aggressive action taken — the city took aggressive action to get to this point. They own so many buildings and they just take it. Pay your taxes, do all this. They don’t fight it at all.

Derek Landlords want to be under the radar.

Donal That’s the problem.

Adam You have the New York Apartment Association, you have CHIP, you have advocacy groups, but they’re not able to get anything approved and pushed through.

Donal I’m not saying I know the answer, but something has to happen. If there’s a scoreboard, it’s a lot to a little, and it’s not in the landlords’ favor.

37:35 The Game Is Over

Derek The game is over.

Donal The game is over.

Derek They won the game. Now, will there be a new game? Of course there’ll be a new game. There’s always a different game. But that game was lost, badly.

37:49 What Walk-Up Portfolios Are Worth Now

Donal An assignment that would once have been the pitch of a career is now a completely different conversation. You’re starting by explaining that it isn’t pretty out there.

Derek What do you think the price difference is on stabilized walk-up product? Two years ago that would have been a three or three and a half cap.

Donal Now it’s an eight or eight and a half cap.

Derek So what’s that difference in value for these owners?

Donal At least 60%. I think it’s closer to 75%. It blows my mind sometimes.

38:42 What Other Cities Get Right

Adam It’s honestly very sad. You travel, you go to Hong Kong or Singapore, cities with phenomenal development, and the city looks incredible. Clean, everything’s brand new. What if New York changed? But it’s obviously not changing, for a reason.

Donal It’s still humming. People are still working here, still walking all over the place. Ken Griffin isn’t moving his office building — he’s definitely building that. It’s still New York City.

39:10 What Everyday New Yorkers See

Derek For the everyday person who isn’t in real estate, not in the trenches where real estate gets pitted against policy, everyday New Yorkers think Mamdani’s doing great, the city’s doing great, everything is going great. They don’t see the intricacies, or how all of this plays out through these policies and programs within the building stock of the city.

Adam None of my friends see it. They all just say rent is so high. And I say, you have no idea what’s behind it.

Donal It’s not only rent. A coffee is expensive, everything is expensive, and that’s why so many people are upset. That’s the environment the DSA grew in — everything is so expensive.

40:02 The Commie Corridor

Derek Have you guys heard this term, the Commie Corridor? I didn’t come up with it — I believe Crain’s is where it came from. It runs from Brooklyn into Queens, where Mamdani won most of the votes. They’re describing a dichotomy: the Commie Corridor is where developers built all this new construction product, and all these people ended up moving into those neighborhoods — Williamsburg, Fourth Avenue in Brooklyn, Downtown Brooklyn, Greenpoint, Queens.

Adam So the Fourth Avenue people moved out to the Commie Corridor?

Derek No — that is the Commie Corridor. What I’m saying is that all these new renovated units are attracting the type of residents who are voting for socialist candidates. The developers are creating the units that house the population in the Commie Corridor.

Donal They’re creating their own ecosystem.

Derek Exactly.

Donal I don’t know how you control that. You’re never going to be able to stop it. It’s a scary time.

41:17 Closing

Derek Anything else you guys want to go over? Any recent deals of interest, any comps?

Adam I think we’re humming along. We’ve sold over 70 properties this year. We’re continuing to sell two buildings a week, and our retail leasing team is doing three to four leases a week. Things seem to be very active on our front.

Derek Let’s leave it there. Thanks, gentlemen, and thanks for listening. We’ll see you next time.