When will we see change? Will there be a vacancy reset? Nobody knows the timing, and anyone who tells you they do is guessing. The current path is not sustainable so with that in mind, something will change – what it looks like and when it happens is anyone’s guess. But what won’t change is compliance and enforcement. There are not going to be fewer regulations. There will only be more. The compliance costs only go in one direction, and that direction is up.
Facades, elevators, boilers, lead paint, union labor, DHCR – pick a letter of the alphabet and there’s a local law attached to it. Layer on taxes, water, electricity, fuel, and insurance, all climbing and completely out of one’s control.
Now layer in rent stabilization on top of all of that. Paying rent has become optional and the city is encouraging tenants to not only organize but unionize.
More of our listings have multiple warehoused units, million dollar Local Law 11 jobs outstanding, 15+% collection losses and two or more violations/unit. We are marketing a large building in Washington Heights at 3.75X the gross rent which equates to half the price the owner paid for the building in 2013! The debt quotes are barely breaking 50% financing! This is a problem.
Here’s the split that matters. Asset prices can get relief. If a vacancy reset happens, cap rates could compress and values could recover somewhat. That’s a real possibility, and owners are right to hope for it. But equity positions and compliance relief are completely different animals. The former can change but the latter only gets stricter, more expensive, and more paperwork heavy, no matter who the mayor is or what happens in Albany.
So, what does that mean for owners right now? It means the winners in this next cycle will be the people with the liquidity and the operational capability to execute a real value-add plan. If you’re tight on cash and don’t have a black belt in property management, you’re much less likely to fully benefit from future policy reforms. Know your strengths and weaknesses and then decide about selling versus holding.
If you’re holding out for the market to fix your problem, understand it’s only going to fix half of it. The other half, the half that determines whether you can actually operate the building day to day, is only going to get harder. If you’re holding out for better days, you should be hoarding cash and building up your management capabilities now, so when change happens, you’re able to maximize your benefits.
_______________________________________________________
