With the recent imposed limitations on rent increases alongside rising costs, landlords are concerned.
When addressing such concerns, landlords must consider the two components of a real estate investment—revenue and expenses. Assuming a building is comprised entirely of rent stabilized units and is now limited in revenue growth, an owner looking to increase their net operating income (NOI) must now focus on reducing operating expenses. Outlined below are ways in which landlords can reduce operating expenses today.
File a tax certiorari as soon as possible
According to the Rent Guidelines Board’s 2019 Income and Expense study, taxes account for approximately 30% of a rent-stabilized building owner’s operating expenses and are the largest expense item per unit. Logically, tackling the largest expense upfront could make a major difference in NOI moving forward. I’ve heard from several owners that they believe the value of their portfolios decreased. If that turns out to be the case, the assessed value of their buildings should decrease as well, and therefore lower taxes.
Invest in energy efficiency
Although both major capital improvements (MCIs) and individual apartment improvements (IAIs) have been limited by the recent regulation, it may make sense to invest in building improvements purely to reduce operating expenses over the long term. Our asset services team here at Cushman & Wakefield does a great job analyzing the amortization cost of building improvements over time and the five most common recommendations they make for clients looking to reduce operating expenses are:
- Replace HVAC Systems
- Replace windows
- Update/Replace older equipment such as elevator controls
- Update/Replace Roof
- Renegotiate service contracts (cleaning, service, landscaping, etc.)
The benefit of these improvements can be estimated using either a model showing projected energy savings along with reduced cost over a period of time (which is typically done in conjunction with energy consultants) or by using a simple ROI with payback analysis.
While on this topic, be aware that New York City recently passed the Climate Change Mobilization Act—a package of bills aimed to significantly reduce the greenhouse gas emissions of New York City in buildings over 25,000 square feet. The goal of this legislation is to reduce the aggregated total carbon emissions by 40% by 2030 and 80% by 2050 relative to 2005 levels. A key component of this legislation is that rent regulated buildings are exempt from the program, but it may still be worth pursuing as it will cut costs and add greater value especially in larger scale portfolios.
Consult your attorney
We’ve gotten some interesting suggestions from attorneys who believe there may be some recourse for building owners. It’s worth having a conversation to discuss possible options and to fully understand the effects and proper interpretation of the new legislation.
If all else fails, sell
Given the new economic fundamentals, investors purchasing rent stabilized buildings may view these investments more similarly as a bond with a call option than as traditional value-add real estate. Over the life of ownership, investors can assume 100% occupancy and therefore ensure steady cash flow with limited growth. Unlike bonds, however, buildings in New York historically appreciate in value and are located in a highly liquid market, effectively allowing investors to “call” the bond’s value at some future date. This type of investment could be extremely attractive for larger funds and overseas investors looking for long-term stability backed by real property.
The rent stabilized multifamily asset class with four or more units comprises just about half of the approximately 89,000 apartment buildings in New York City. In short, multifamily won’t disappear. Like the age-old adage says: everything in New York City will sell, it just depends on price.