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The Institutional Risk Analyst

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The Interview: Hemmerdinger on the End of Hope for NY Multifamily Housing

New York | This week we return to our friend Dale Hemmerdinger, a New York real estate executive and active public citizen, to talk about the new rent control laws in New York. Dale oversees the properties and service subsidiaries of his family real estate company, ATCO, as well as its parent company, The Hemmerdinger Corporation and The Hemmerdinger Foundation. He served as Chairman of New York’s Metropolitan Transportation Authority. Dale formerly served as Commissioner of the New York City Conciliation and Appeals Board during the Administration of Mayor Ed Koch. Dale is active in many public and private organizations in New York and is known for his honest and incisive perspective on the New York political economy.

The IRA: Dale, thanks for taking the time. Let’s pick up from our discussion last year. How is the state of the real estate market in New York, particularly the City and suburbs? Over the past several years, we’ve been watching the implosion of the Westchester and Connecticut single family market as sellers slowly capitulate.

Hemmerdinger: The City has leveled off as we’ve discussed. Too much supply. Westchester is still a disaster. We have years of inventory of unsold homes and it is getting worse. And they just increased the sales tax in Westchester. We’re in a very bad spot in New York. All we see is self-destructive policies. Most of the New York State political system is controlled by Democrats and they, in turn, are controlled by people who are unreasonable. Reasonable people are being pushed out of politics in New York. There will be unintended consequences to this trend that we cannot yet imagine.

The IRA: Sounds strangely like Washington and especially the world of residential mortgages. We presume that you did not support the recent changes to the New York rent control laws? Are changes like this going to increase the exodus of wealthy residents from New York?

Hemmerdinger: That’s the problem. The rich people can leave, the poor people can’t. The agencies in Albany responsible for housing are basically dysfunctional. They are populated by people who really are not focused on the big picture. The new rent control legislation has essentially killed rental housing in New York as an asset class. By limiting the ability to move rent-controlled apartments to market rates, you have taken away any hope for investors to make these properties grow in value. And you have damaged these assets in terms of financing. Who wants to finance a property that cannot recover costs and therefore must slowly deteriorate?

The IRA: That will come as a rude shock to many community banks, insurers and institutional investors that operate in New York. Should you and other developers be selling New York assets and moving to other markets where developers are not demonized?

Hemmerdinger: Our new projects are in markets like Charlotte, NC, and Austin, TX. We have more coming down the pike. In these markets, we are welcomed for bringing capital and financial know-how to growing communities. We are considered friends and often partner with local developers. In New York, by comparison, we are the enemy. The Democrats in Albany couldn’t go after the big private equity funds, so instead they attacked the local developers and small business owners, the very people who invest in New York and make it livable. These are very self-destructive policies.

The IRA: Austin is a very hot market. How long have you been involved in TX?

Hemmerdinger: We’ve done five deals in that market and are developing two more. Each of these markets have special characteristics and requirements, but the big difference is that they don’t see us as enemies.

The IRA: How does the deteriorating political climate and the aggressive New York rent control laws affect the bigger players who have thrown billions into this market?

Hemmerdinger: It’s hard to say how this will impact the biggest developers and investors. My general take on things is that the larger developers think that they can get their way until they can’t. That’s where we are now. We had a boom of residential construction in New York, but that is over. We probably have enough office space and residential space to last for some time. The big concern I have is that rent control is going to hurt the local economy. Landlords will have to take cost out of buildings. This means that people will lose jobs. Everybody who works in one of these new building make five or six figures a year. People making union wages in older buildings will also be impacted severely. Those jobs will disappear. We also won’t have construction jobs because nobody paying attention to the numbers will want to put money into new projects in New York.

The IRA: How will this change impact tenants in New York?

Hemmerdinger: The quality of life for tenants in New York will slowly erode. The new law makes it impossible for landlords to recover the cost of improvements or even invest in buildings to maintain existing amenities. Over time, landlords will slowly reduce spending on these properties. Eventually, if the law is not changed, you will see properties being abandoned, as we did in the 1970s. The dream of getting rent controlled apartments out of the system is gone. For many developers, this was the only reason to hold onto some of these older properties – the hope that one day the apartments would escape rent control and be let at market rates. The new legislation even eliminates the 20% vacancy allowance that allowed owners to increase rents somewhat. The vacancy allowance helped owners to fund upgrades for units and maybe get the rent somewhere near market levels. That is gone now. All of this undercuts the value of these properties.

The IRA: Bottom line is that costs will go up faster than revenue from rents. If I am a bank that holds a mortgage on an older multifamily property in New York, am I worried? Should I be looking to get out of mortgage financing on New York multifamily properties? What happens to all of the small and mid-size businesses in New York that have invested in multi-family assets for their personal portfolios?

Hemmerdinger: The banks are screwed first and foremost. As I said, the new rent control law in New York takes away any hope of seeing rents increase to market levels so that the owner can keep up with rising operating costs. How do you sell that asset? How do you finance that asset – or not roll that existing loan -- if you are a bank? What I have been wondering is what happens to all of the really significant investments made by big private equity funds in the larger multifamily rental properties in New York City? My guess is that they will minimize cost as we said and then simply let the property diminish in value over time. There is no longer any upside for an investor. The banks will be forced to roll these mortgages or else foreclose and take ownership of a property that cannot be sold.

The IRA: That is a sobering assessment, but also amusing. Nationally loss given default on bank owned multifamily loans is just barely positive, suggesting that credit has no cost. You are suggesting that New York assets ought to be considered impaired now as a result of the legislation. If you are an investor in New York rental properties do you take the hit now and sell for whatever you can get?

Source: FDIC/Whalen Global Advisors

Hemmerdinger: That is a tough question. Albany took away hope for these multifamily rental properties. How much of a loss do you have to take to sell an asset that has no future, that will cost you money as time goes on? Legitimate investors will flee, but others not. Also, consumers will be hurt by this new law because the supply of new apartments and renovated units will slow to a crawl. That supply of new or refurbished units kept overall rental prices down. Now rental rates for new and renovated market apartments will rise. How does this help consumers? Who is going to spend a couple hundred thousand dollars to renovate a rent-controlled apartment after somebody has lived there for 30 or 40 years? These units will stay in the rent control system, they will be let “as is,” and they will deteriorate. The cost of housing will go up and quality of life, job opportunities will fall for all New Yorkers.

The IRA: What you are saying is truly scary for banks and bond investors. Right now, multifamily properties in metro areas like New York are the favorite asset of community banks and hard money investors. What you are basically saying is that the banks and bond investors will own these assets indefinitely and may even need to take an impairment charge to cover the declining value of the collateral. Is that correct?

Hemmerdinger: Yes. Banks, insurance companies and other big lenders are caught first and foremost. Lenders are victims of this law along with the developers and local investors in these properties, they just don’t know it yet. Lenders will be forced to roll these loans or take possession of the property. That’s it. No legitimate investor will want to even look at these assets. And as landlords and institutional investors come to realize that New York multifamily rental properties have a declining value, political pressure will build for a change. That process could take years or even decades. But by then most legitimate investors will have exited the market. As I said, the worst part of the new law is that is takes away hope for getting thousands of rental properties in New York to market rates. Without that promise, that hope, there is no reason to own these properties.

The IRA: Thanks Dale.


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