Bloomberg
NYC apartment owners burning in a gentrification disaster
(Bloomberg) – New York apartment investors are suddenly plunged into trouble. In December, they were behind on $ 395 million in mortgage-backed debt, almost 150 times the level of the previous year, according to Trepp data on commercial mortgages. backed securities. Tenants in rented units owe at least $ 1 billion in rent and the wealthiest are fleeing the city, leaving vacancies behind and forcing foreclosure on newly built luxury towers. For years, as crime decreased and rent increased in New York, investors swallowed up apartment buildings. But with the city’s economy and culture crushed by Covid-19, the growing job losses derailed the gentrification boom and put financial pressure on owners. “People who specialize in mortgages are the most busy people in the New York housing market,” said Barry Hersh, an associate clinical professor of real estate at New York University. Developers with more problems pushed hard on Harlem and the modern centers of Crown Heights, Flatbush and Bushwick, expelling working-class residents by building new expensive units. Now they are struggling with eviction bans and new protections for tenants as rent falls in New York. Colony 1209, a steel-gray apartment building, opened six years ago in the heart of Bushwick, an industrial look at urban chic, with billiards room and 24-hour concierge. The site offered a room for $ 2,500 to “settlers with similar interests” in the predominantly black and Hispanic neighborhood, which it called Brooklyn’s “new frontier”. Now Colony, renamed Dekalb 1209, faces foreclosure after owner Spruce Capital Partners failed to pay a $ 46 million mortgage. The five-year interest-only loan expired in October and has not been extended, triggering default, according to monthly records from the loan manager, Wells Fargo & Co. The lender is filing a request to retake the building – as soon as execution mortgage in New York the moratorium expires – while discussing training alternatives with the borrower. Spruce could not be reached for comment. Just before Covid arrived, investors were willing to pay dearly for luxury buildings like Colony. They wanted alternatives to rent-regulated buildings, which saw values limited by a 2019 law that outlawed the tactics that homeowners relied on to convert stabilized rental units into market rates. “That was the bright spot until the pandemic happened,” said Victor Sozio, executive vice president at Ariel Property Advisors, a commercial brokerage in New York City. Plans’ Stymied’Emerald Equities, a specialist in converting fast-growing condominiums, filed for bankruptcy in Harlem in December. In its filing, the company said its “well-designed plans have been thwarted” by the law favorable to the tenant. Residents organized a rental strike, and then collections fell further after the pandemic, prompting Emerald to hand over the property to LoanCore Capital, which lent $ 203 million for the project. Doug Kellner, lawyer for Emerald tenants, attributes the current market problems to the New York eviction ban because it came without any financial support. “Everyone realizes that rent is the green blood that keeps a building operational,” said Kellner. Among neighborhoods, rents are in a downward spiral as homeowners try to fill the empty apartments with sweeter tenant concessions – only to see the number of vacant properties increase further. In Manhattan, available units nearly tripled in December compared to the previous year, and average rent plummeted 17% to $ 2,800, according to data from Miller Samuel Inc. and Douglas Elliman Real Estate. Rents fell 11% in Brooklyn and 18% in Northwest Queens, where bright-eyed developers built glassy apartment forts along the shoreline for young downtown professionals. In a way, investors may be better isolated than after the 2008 financial crisis. Lenders generally demanded large advances and underwritten loans based on current rents, rather than expectations for the future, said Shimon Shkury, president of Ariel. If the vaccine works and college students and office workers start to return, the market will also return, said Shkury. “I don’t think there will be as much suffering as you think,” he said. RentsLenders’ regulations have already invested $ 1.4 billion in commercially secured multifamily debt on watch lists due to issues such as rising vacancies or impending wages. This represents 19% of all outstanding debts, compared with 22% at the nadir of the financial crisis. The problem will filter out of highly leveraged investors who have expanded rapidly to lenders with more aggressive underwriting, says NYU’s Hersh. “There will be banks to sink,” he said. At the same time, the market for multifamily buildings has weakened. The total dollar volume of New York City multifamily sales was $ 4.5 billion in 2020, down 61% from 2018, before the pandemic or new rental laws, according to a report by Ariel. Still, firms like Limekiln Real Estate Investment Management, see opportunities. The company made $ 224 million in multi-family loans in New York in the second half of 2020, compared to $ 9.3 million before the pandemic. It is easier to extract better terms in a “lender market”, said Scott Waynebern, president of Limekiln. “It is difficult to find out where the fund is,” he said. For more articles like this, visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source. © 2021 Bloomberg LP