MortgageReal Estate

Fitch: NYC rent regulations a negative for multifamily lenders

New laws could hurt property values and occupancy rates

Last week, New York State Senate and Assembly leaders passed expansive changes to rent control laws that stunned the real estate industry.

The legislation makes it more difficult to evict non-paying tenants and tightens restrictions on the rent increases landlords are allowed to make after improving buildings.

It also repeals provisions allowing removal of units from rent stabilization when the tenant’s income is $200,000 or higher in the preceding two years, and eliminates a provision allowing landlords to raise rents as much as 20% each time a unit becomes vacant.

While it seems no one working in New York’s real estate market is especially thrilled with the new regulations, a recent report from Fitch Ratings details just how damaging they could be.

According to the report, the new regulations have negative credit implications for multifamily lenders that are long on NYC real estate.

“This will translate into lower growth in rental and operating income, less room for capital improvements and potentially result in declining property values,” Fitch states.

Fitch continues, stating that new regulations may reduce investor appetite for rent-stabilized apartments, and this could send property values on a downward spiral.

“If realized, a significant decline in property values, and hence borrower equity, presents refinancing risk for highly leveraged borrowers, which Fitch views as the primary downside credit impact associated with the new law,” the report states, noting that the losses may take time to manifest, as the average tenor of multifamily loans securing rent-stabilized properties is five to seven years.

Further, Fitch says the new regulations could negatively impact occupancy rates by deterring the capital investment required for property upkeep.

Importantly, the new laws curb a landlord’s ability to raise rents after major capital improvements, capping an increase at 2% instead of the old 6%.

“Unlike loans funding rent-stabilized properties, loans that back apartment capital improvements tend to be higher risk,” Fitch states. “Absent significant creditor protections, exposure to such loans is viewed as incrementally credit negative in light of the MCI proposals.”

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