The Next Big Opportunity in NY Multifamily

New construction and 421-a buildings will offer investors above market returns

Key idea: 421-a buildings and other new construction housing will offer investors above market rate returns because of the scarcity of housing assets without revenue caps, in a market with one of the largest unmet demands of product.

What Is The Opportunity?

The mass exodus of NYC residents due to COVID-19 fears has stopped for some time, and apartment rents in NYC are higher than they were before COVID-19. Good Cause Eviction has passed, and, in most cases, it has closed off the avenues for owners to make "catch-up" rent increases for tenants paying very low rents (come see me if you're in this predicament). The most straightforward way to be exempt from Good Cause rules and be free of rent restrictions is to invest in properties built after 2009. So, how big is this opportunity? How many buildings and units does this comprise?

Between 2010 and 2020, NYC developers built ~220,000 housing units. As a result, the total housing stock grew from ~3.4 million units to ~3.6 million, reflecting a 5.0%-6.5% growth rate, depending on the data used – and whether they include new buildings, alterations, and demolitions in total unit counts. According to the NYU Furman Center's data, only ~175,000 of the units built from 2010-2020 were in properties containing four or more units, which means about ~45,000 of the total units built were in properties too small to be considered multifamily. Out of that 175,000 figure, the Furman Center reports that 90% of these units were built with tax abatements and city and state programs that place rent controls and other restrictions on the properties. That leaves just ~18,000 apartments built in properties large enough to be considered multifamily that don't have rent restrictions. But you'll recall the luxury condo boom that occurred during the 2010s. About 45% of these 18,000 units were built as condos.

That leaves just ~10,000 apartments. For investors who seek to avoid caps on revenue growth in their investments, only about 10,000 apartment units can meet this requirement. Only 10,000 apartments have 'True Fair Market' status and are exempt from rent controls.

Wait, just 10,000 apartments?

Out of the 3.6 million housing units in NYC in 2020, only 2.1 million were rented to tenants and not owner-occupied. Estimates vary, but 50%-45% of those 2.1 million apartments were subject to rent stabilization. The remaining 1.2 million apartments were fair market before becoming subject to Good Cause Eviction in April 2024. Out of the rental apartment supply of 2.1 million housing units, just 10,000, or 0.5%, are in buildings 100% exempt from rent regulations.

NYU Furman Center data suggests that buildings without abatements and agreements, built between 2010 and 2022, are about 20 units in size, on average. That means:

~10,000 units / 20 units per building = 500 buildings.

Only 500 'True Fair Market' buildings in NYC are exempt from rent controls.

This excludes buildings built between 2021 and now- which should be a relatively small number because of the expiration of the 421-a abatement and the ensuing development slump due to interest rates and costs of construction surging. The 500 figure isn't exact, but it should be directionally correct. The total number won't exceed 600 buildings or 22,500 units.

The Importance of Understanding 421-a Buildings

Besides the ~500 buildings exempt from all rent regulations, some properties are temporarily rent-stabilized due to tax abatements. Many of these properties will become 'True Fair Market' once their abatements expire (…and their property taxes surge).

As the Furman Center research report illustrates, the number of properties that multifamily developers built from 2010 to 2020 varied widely from year to year. To make calculations easier, let's pretend developers spread out their projects equally each year so that out of the 117,000 units, about 11,700 were built each year. 421-a tax abatements last 10, 15, 20, 25, or 35 years. Next year is 2025, which is 15 years from 2010. That means all the 15-year tax-abated properties that were built in 2010 will see their abatements expire. That spells eligibility for 'True Fair Market' status at the end of next year. Similarly, all 10-year abatement properties built between 2010 and 2015 will have expired abatements and be eligible for 'True Fair Market' status.

# of 421-a Tax Abated Properties Built by Tax Abatement Duration

# of 421-a Tax Abated Properties Built by Tax Abatement Duration- Analysis

Some quick analysis reveals that another ~250 properties, or close to 10,000 units, will become eligible for 'True Fair Market' status by 2025. Though these properties don't automatically become exempt from Good Cause upon the expiry of their abatements, they are on track to be. By considering expiring 421-a properties, investors can expand their window of opportunity by 50% from just 500 properties to 750 today. As time passes, more 421-a abatement properties will exit the abatement period and become eligible for True Fair Market status – approximately 200 per year until 2030, when the 20-year abatement properties will expire, or 'unlock their rent upside'. In truth, though, whether bought today or closer to abatement expirations, all 421-a properties will eventually be eligible for 'True Fair Market' status

What Should Investors Do?

Investors have shown their preferences for fair market properties over the last few years, with institutional investors like Carlyle funneling money into these assets – even sacrificing scale in exchange for guaranteed fair market status, amongst other benefits. The demand for acquisitions in NYC that was previously spread out over tens of thousands of properties (1,200,000 / 20) will now converge on just ~500 properties. Many buyers will still contend with Good Cause Eviction rules and even rent-stabilized properties. However, the gold standard for investors – especially for fund managers not interested in understanding the nuances of state and city regulations over multifamily– will be to focus on 'True Free Market' properties.

Pricing for these assets might trend like this…

Savvy buyers will begin to focus their searches on legacy 421-a tax-abated buildings – taking care to underwrite significant increases in property taxes upon tax abatement expiration. There are fewer than 1,000 'True Fair Market' properties today. But, this number will grow quickly each year as more abatement properties become 'unlocked'. Developers built ~70,000 apartments with the 421-a tax abatement from 2010-2020. That's a large supply of new acquisition targets to consider. Though buying these buildings when their abatements run out means higher property taxes, future expected rent growth due to tight supply and difficult development conditions in NYC should make this a good trade.

More thoughtful investors will invest capital into the remaining new development projects with 421-a eligibility before they come out of the ground because those exits will reap more rewards in many cases than resales. This includes land, alteration 1s, stalled construction sites, and more.

There are real challenges in developing in NYC right now. Construction costs are very high, land prices across Brooklyn and Manhattan are narrowing (i.e., Brooklyn land is pricy), and financing projects is challenging. Still, there is good reason to believe that new construction will benefit from a swell in investor interest and sustained rent growth over time, benefiting operators and sellers.

It's also important to caveat that there are more exemptions to the Good Cause rule than the post-2009 rule. The 245% rule, for example, grants Good Cause Eviction exemptions to apartments with rents greater or equal to 245% of the fair market rent (established by HUD by MSA). Investors can use this rule to support or weaken exemption claims without ambiguity.  I have not counted the potential units that could be exempt due to the 245% rule because it would be tough to size that up. But, in theory, luxury boutique buildings in TriBeCa, West Village, and Gramercy could be subject to this. I won't speak about the other exemptions because they introduce grey areas that most capital allocators and investors won't be interested in dealing with.

I am bullish on Multifamily in New York City.

Call me at 212 658 1471

Best Regards,

Romain Sinclair

Sources: Furman Center 421-a Report, Department of City Planning