NY Eviction moratorium expires today: What now for building owners and housing providers?
Eviction moratorium expiration not the victory it appears to be for owners
Since the pandemic began, multifamily owners have marked August 31st on their calendars as the day they can begin removing non paying tenants. Though the eviction moratorium is slated to expire in August, there are a number of legal decrees that will keep non-paying renters in their apartments months beyond the expiration date.
The existing blockages that extend past August 31st:
The CDC federal eviction moratorium will remain in effect until October 3rd, which prevents an unpaying renter from being removed from their home.
New York State Tenant Safe Harbor Act, prohibits courts from evicting tenants who were unable to pay rent due to financial hardship during the pandemic.
1 out of every 3 New York renters who are behind on payments have also applied for Rental Assistance and are now protected from eviction until payments are made by New York State to the tenant.
To further add to the difficulty of evicting a tenant, there is the logistical challenge of going through the eviction proceedings, with many backed-up court filings. Getting a court date and working through a case could add months or years to a non paying tenant’s tenure in an owner’s apartment. This will leave owners with limited legal recourse. In March of 2020, prior to the pandemic’s start in the U.S there were 130,000 pending eviction cases. 50,000 cases have been litigated to date. Additionally, since the pandemic’s onset, there have been 62,000 new eviction filings, none of which have been litigated.
Many looked to August 31st as the date when owning a NY multifamily building would get a little bit easier, but there are many strings attached and exceptions to the moratorium expiry. Some of these exceptions were outlined above, and yet more may come up as new scenarios not thought of before begin to emerge. Being cautious is a must until legislators provide additional signals to investors and tenants.
Sources: Wink News, City Limits, NY Times
The 1031 exchange is here to stay (for now)
Senator John Kenedy (R-La) led the passing of an amendment that would preserve 1031 like-kind exchanges, for now. The amendment symbolized an important show of support for the 1031 exchange in the legislative chamber. Unfortunately, the amendment is not a binding mechanism with teeth, and it does not preclude further action being taken against the 1031 exchange.
The like-kind (IRS Code 1031) exchange applies to any real estate used for business, trade or other productive purposes and allows Americans to avoid capital gains taxes when they make profits from a property sale by reinvesting profits from one property sale into a similar property of equal or greater value.
Under Biden’s American Families Plan (AFP) latest version, there are changes to the tax deferred exchange that investors should be made aware of (as well as economists, policy makers etc.). The most important clauses are two fold:
The AFP would limit the deferred gain from a 1031 exchange to 500,000 per tax-payer and $1MM for married couples filing jointly, for exchanges completed after Dec 31, 2021.
The AFP would increase taxes on long term capital gains for those who earn over $1MM from 20% to 39.6% at the federal level.
Many believe that Biden’s intentions to limit tax deferrals through like-kind exchanges would be a direct tax on the middle class. The rationale behind the tax policy is that tax deferrals strongly encourage capital flows back into the market. In doing so, like-kind exchanges directly benefit Middle America by creating jobs and affordable housing. Anya Coverman, General Counsel at Institute for Portfolio Alternatives, estimates that 1031 exchanges have supported 568,000 jobs and $27Bn in wages in 2021 in the United States. If the tax code is changed and 1031 exchanges are weakened it would spell disaster for owners of Multifamily real estate.
Sources: Investment News, Kennedy Senate, Anchin Real Estate Update Aug 2021
Multifamily investors look to acquire more properties as rents rise
New York City has surpassed San Francisco as the most costly city to rent in and if this trend holds it bodes well for Multifamily investment. Rental listing inventory and new leases are increasing at a rapid pace, vacancies are down, and rental prices are rising to pre-pandemic levels. July 2021 rents have recovered and trail March of 2020 rents by only $225 per month.
The factors driving rents higher across the United States are varied. They include increased demand for apartments by renters, many of whom have suffered lasting economic fallout from the pandemic, inflationary pressures (CPI index on all items increased 5.4% in the 12 months trailing from July), and the cost of construction. Across the US, rent prices soared 9.2% in the first half of 2021, tripling the average pace and exceeding the pre-crisis trend. Inflation has increased the price of used cars, food, and utilities and likely has more room to increase. These trends are on display in New York, NY. The push by firms to return to office has pressured workers in NY to return to the city. More significant than that, renters are interested in returning to a thriving city with an entertainment scene that has quasi-fully re-opened. This has led rents to increase by 20% since January. The inflationary trend is also clear in NY, restaurant prices have gone up across the board, and wages in many sectors from investment banking to dishwashing and sous-cheffing are rising.
Institutional investors snatched up $53 billion in multifamily real estate in the second quarter of 2021, compared to approximately $41 billion in Q2 of 2019 and $38 billion in Q2 of 2018 (source: Real Capital Analytics). Effectively, this activity is demonstrating investor confidence that rising inflation and growing rents will continue into the future. Strong appetites for multifamily have led to competition, which has further increased multifamily values. The lower cost of capital in the form of cheap debt, combined with strong demand for housing during the pandemic in many ways justify the high prices being paid.
New York is poised to take advantage of these capital markets and invite institutional and foreign capital to buy assets here. Rising rents and inflationary pressures are good for real estate and they are here in NY. Eviction moratoriums will eventually be curtailed and the multifamily market will resume its normal operation. Finally, NY Construction starts are at $12.6 billion the highest in the country right now and up 8% over the first half of last year. This is exciting for NY, but its political leaders must seize the opportunity and embrace it, unlike what they have done with Amazon HQ and Industry City’s redevelopment plan, if NY investors are to reap the rewards.
Sources: Bloomberg, CNBC, Globest
Originally published on August 29th, 2022