4 Crucial Market Events that will Impact Your NYC Multifamily Sale in 2022
BY SETH GLASSER
Are you thinking of selling but don’t know when? I’m going to review four upcoming milestones in 2022 that sellers should consider before deciding when to put a building on the market. What I’ve learned from speaking to a wide variety of clients is that the positions investors take on each of these issues are highly personal based on their outlook and assumptions of how the market will shake out – until there is hindsight, there is no right or wrong answer!
Before the Federal Reserve met in March 2022, the 10-year treasury was hovering around 1.75%. After they raised their benchmark rate 25 basis points the treasuries have gone upward. In the 90 days from the beginning of March to the beginning of May, treasuries have gone from 1.75% to 3.0%! The Fed has made it very clear they will continue to raise rates aggressively. These rapid rate hikes are happening faster than borrowers can process and make decisions. It’s apparent to us that many clients want to sell but the question will be, can they get deals done fast enough before rate hikes price out buyers?
Will the local lenders tighten their spreads enough for borrowers to continue to make deals? Or will the rates rise so much that it sends the market into paralysis?
The Federal Reserve’s meeting in the first week of May went as expected. They raised rates by 50 basis points. Ironically the 10 year treasury went down that day and the stock market went up! The market was so relieved that they didn’t raise the rates by 75 basis points with Jerome Powell stating: “a 75-basis point increase is NOT something that the committee is considering.” He did however say additional “50 basis point increases should be on the table for the next couple of meetings.” This is important because the Fed will meet five more times in 2022! June, July, September, November, and December.
The sales process has four steps: put the building on the market; accept an offer; go to contract; and close. Since the typical sales cycles take four to six months, there will be several rate increases between start and finish. Understanding this and having your team in place to help you navigate from beginning to end without surprises is more important than ever.
On May 5th, the RGB released its preliminary vote to increase one year rent stabilized renewals between 2 and 4%. The final vote will take place on June 21st. Although this is only a preliminary vote, it give us a good indication of where we are likely to finish.
According to the RGB study released on 3/31/2022, the average monthly expense per unit in 2020 was $1,037 per month! Or $12,444 per year. Owners spent 60 cents out of every dollar of revenue on operating and maintenance costs in 2020. This does not include debt service. Much of the data that is used in this study is not from 2021, but 2020 – the most recent year data was available. In the 31 page report the word “inflation” was only found 14 times. It takes me two phone calls with an owner to meet that same mark! But alas, the study is from 2020 and doesn’t include recent 2022 inflation metrics. In our survey of thousands of NYC property owners, 50% of owners predicted 1-year RGB increase would be between 1 and 3%.
We anticipate that no matter the result of the vote in June there will be a significant amount of new inventory to come to market. If the increases are low (1-2%) many owners are unlikely to stick around for expenses outpacing income. On the other hand, if the increases are high (3-5%) we believe many owners will put buildings on the market to sell that upside and optimism to someone else.
This is Mayor Adams’ first year in office and the RGB is something he has legitimate influence over. The result of this vote will set the tone and set expectations in the real estate industry for at least the next four years.
Three years ago, the Community Housing Improvement Program (CHIP) and The Rent Stabilization Association (RSA) jointly filed a lawsuit arguing that the HSPTA violates the Takings Clause of the Fifth Amendment; “nor shall private property be taken for public use, without just compensation.” The case has been making its way through the legal system. If CHIP & RSA win in the Second Circuit the case would go back down to trial court. If they lose which is more likely, they can ask the U.S. Supreme Court to review the case. This has been accounted for from the very beginning of their argument. At some point in the second half of 2022, there’s a chance the Supreme Court will decide whether it wants to hear the case. SCOTUS only takes 1-2% of cases that reach their desk.
Why does this matter? If you think the case will make its way to the right-leaning Supreme Court, the eternal optimist within you must imagine that CHIP & RSA will win and overturn HSPTA. That’s what CHIP & RSA are betting on. Their expectation from the onset was to lose in the lower courts in order to make it to top of the legal system. On the other hand, if SCOTUS doesn’t take their case, the door is officially closed and HSPTA is here to stay. At the moment, buyers are betting on a glimmer of hope that the rent laws will be reversed and are “buying the dip.” Sellers must be aware that if they wait until SCOTUS shuts the door on the lawsuit this will have an immediate negative impact on value. There will be no going back. Place your bets and act accordingly!
No matter what type of election we have, whether that’s a national presidential election or a local election, velocity always slows down in the months leading up to election day. To the extent that you can avoid it, it’s not ideal to put a building on the market right before an election. There never seems to be enough bidding during that short period.
Buyers would rather wait and see what happens before making more aggressive bids. They’d prefer to know what types of policy will be enacted that will impact their business before making multimillion dollar bets. In New York, we have an election in November for assembly and state senate. It seems like the only headlines we read are the most extreme. Middle ground, purple policy isn’t exactly newsworthy. In New York the progressives and socialists have been making headlines calling for things like a further decrease in police funding, bail reform, and additional rent protections. Leading up to elections politicians get Twitter-Happy and one-up each other with further and further left leaning policy. Our favorite media outlets eat this up and feed it to us daily where we cannot avoid it even if we tried.
Depending on which way you think the November election will fall, it will impact your timing on putting a building on the market. If you think NY politics will come back to center you might be better off waiting, but if you think we’ll turn further blue, perhaps you’d be better of selling sooner.
All four of these upcoming events are significant and will have a profound impact on the real estate market. I hope this provided you with some additional context. How people respond is highly personal based on their believes, gut intuition, opportunity cost and investment horizon.
If you would like to discuss any of these events, specific timing, or market conditions, please don’t hesitate to reach out to me.
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