New Opportunity for NYC Building Owners: Leasing to Program Tenants
Longstanding dogma has it that renting to section 8, or other program tenants will not be as accretive to property values as renting to non-subsidy occupants. That said, the market has changed significantly in the last two years and the conditions today ought to make owners think twice before dismissing program tenants. The moves by the state to constrain and change the rules of private real estate ownership severely highlight this point. Here are a few examples:
In June of 2019, The Senate & State Assembly of NY passed the 2019 HSTPA package. This act dealt great damage to property values. Some properties declined in value by approximately 40%, and it handcuffed investors abilities to raise rents on their properties via renovations.
In March of 2020, Former Governor of NY Andrew Cuomo ordered retail businesses to close their stores due to covid. This led to 25% of tenants not paying rent in NY. He also passed an eviction moratorium which prevented owners from replacing non-paying tenants.
In the Fall of 2021, the cities of Albany, Newburgh, Hudson, and Poughkeepsie all passed Good Cause Eviction, also known as Universal Rent Control (URC) which force owners of multifamily to renew their tenants’ leases, with only a few named exceptions for when it’s okay to evict and not renew.
In each of these state interventions, owners have lost out because the government prevented them from either collecting or raising rents. Raising rents on approximately 1,050,000 apartments in NYC that are rent stabilized is near impossible thanks to 2019’s HSTPA. Collecting rent has now also become a challenge for some owners thanks to COVID-19 and the eviction moratorium provides no recourse. Universal rent control threatens to make all buildings rent stabilized, which would mandate all residential tenants have the right to infinite lease renewals, save for a few outlined exceptions. Finally, sprinkle in some macro-economic forces like rising interest rates and cost of living increasing in NYC and the picture becomes clear: owners of buildings in NY have difficult times ahead if they don’t do something different to adapt.
The answer on how to own buildings profitably, while also staving off rising inflationary costs may be to embrace program-sponsored renters. Arguments for doing so are as follows.
Rent collections will be at 100%: The government always pays their share of the rent. In the height of the pandemic 25% of renters did not pay rent to their multifamily property owners. This will not happen with Government tenants because the federal government will never be late on rent.
Inflation-adjusted rent: Program tenants have rents that are perpetually adjusted according to the cost of consumer goods in each MSA. As an example, Section 8 Fair Market Rents went from $1599 for a 1 bedroom in NYC in 2019 to $1800 in 2021.
Shrinking opportunity cost for long term tenants: If the RE laws change the way they are expected to and leases are required to be renewed for all tenants, then the opportunity cost of having a tenant stay in a unit for a long time gets closer to zero.
Adapting to win in the next NY cycle will not be easy for owners. They should employ any and every strategy available to them to do so. Embracing program tenants is not the only idea, but it makes sense – especially if good cause eviction regulations come to pass!
Sources: Hud User.com
Originally published on December 19th, 2021