2022 BIP Data Reveal Uncertainty and Changes in NYC Multifamily Real Estate Market
On December 15, 2022, 75 individuals representing 29 banks and affordable housing stakeholders participated in UNHP’s Annual Multifamily Lenders Meeting. The UNHP Multifamily Research and Action Center Director, Jacob Udell shared the data from our historical Building Indicator Project (BIP) database that tracked a dip in sales values and a rise in distress in multifamily buildings. The foundation of our research and data work at UNHP is the Building Indicator Project, or BIP, a database that attempts to identify physical and financial distress in the approximately 70,000 multifamily buildings in New York City. We have been doing this work on a quarterly basis for around 15 years, and a lot of our recent work has been focused on trying to make use of the database as a historical source of the state of multifamily housing in New York City for the last decade plus.
This “historical” question is particularly important right now, with so much uncertainty and rockiness in the local and national economy. This includes:
- The last decade of rising property values in NYC, and the tenant movement fighting back against the negative effects of that.
- The impact of the pandemic on incomes, and the fact that the temporary interventions to deal with the loss of income over the last few years have already ended, leaving poor and working-class households in particular struggling again, especially in a period of inflation.
- And the transition from low-interest rates over the past decade, to even cheaper money and financing during the first few years of the pandemic, to an environment right now of much tighter money as the Fed tries to respond to inflation.
While BIP and associated data about the state of NYC housing can’t provide answers to all the questions that stem from that uncertainty, it can help, at the very least, frame the appropriate questions and show what’s at stake. (Presentation slides here)
The first slide in our presentation focused on distress over time in the Building Indicator Project, using our BIP score. Our distress indicator is in many ways a conservative one— it really looks only at data that a broad range of stakeholders agree are good proxies for physical or financial distress, like violations or unpaid charges and taxes. Because of this, we think of it as a starting point rather than an ending point in defining the scope of distress.
Even so, however, there is a clear long-term rise in distress as we define it, which is even more acute among the rent-stabilized subset of the market. Overall, there has been a rise in distress of nearly 300% since 2017, and as one can see from the top of the two charts on the slide, much of that increase has happened over the last two or three years. For Q3 of 2022, this means that around 3,500 of 71,000 plus buildings in our database, or around 5% of the database, are distressed. Distress in the Bronx has followed a very similar pattern, just at a higher starting level. Approximately 8.5% of Bronx buildings are likely or highly likely to be distressed, as of BIP 2022 Q3.
Among properties that we identify as having at least one rent-stabilized unit, the rise in distress is even higher over the last number of years, at 435%.This sharp increase in distress in likely rent-stabilized properties is particularly important because it’s part of forming the answer to why this shift might be happening. In general, we think of this rise in distress as having to do with three separate trends over the last few years, described on the slide above. First, even by the end of 2018, real estate participants were talking about the “end of the real estate cycle”, meaning that the prior decade post the 2008 Global Financial Crisis had seen a sustained run-up in speculation on ever-rising asset values in rental housing in NYC. In other words, investors were expecting this wave to slow at some point, noting that real estate markets often function cyclically. The second trend that impacted this shift was a number of pro-tenant reforms, specifically the Housing Stability and Tenant Protection Act, passed in June 2019. This probably built on top of those cyclical expectations and added to a sense that values would not continue to rise, as business plans predicated in particular on quick turnover of rent-stabilized tenants became unfeasible. And finally, of course, is the pandemic, and the immense amount of uncertainty and disruption it brought.
All of that together led to an environment where, there seems to have been a higher frequency of landlords either unwilling or unable to keep up with their responsibilities to their tenants and the city, instead cutting corners in ways that show up in higher BIP figures. Because of that, we at UNHP think it is critical to think about the role of lenders and financial institutions in the past and present of the NYC multifamily housing market. Lenders are not landlords or the city, and it’s important to note that they can’t solve everything. But at the same time, lenders have been active participants in the last decade of rising asset values, via mortgage originations at ever-rising debt levels, and banks need to both take account of that past participation and consider how they can be part of the solution if distress levels continue to rise.
To help fill out the picture that was described by rising distress levels in the last slide, the following slide in our presentation contained two charts, focusing on the market for rent-stabilized housing. To the left on the below slide, one can see the median per unit sales price by geographies — looking at the Bronx, Brooklyn, Upper Manhattan, and Queens, from 2008 through 2022. And then to the right on the below slide, one can see the total sales volume for that same universe of rent-stabilized properties over that same period and those same geographies.
In our opinion, the two charts in the above slide contain the major story of the last decade-plus in our city’s multifamily housing market: the run-up in asset values and investor interest in rent-stabilized real estate, which reached a peak in 2018 and then dipped across all geographies Interestingly, over the last year or two, on this chart only Brooklyn seems to be rising again from that dip. (It’s worth noting that Lower Manhattan prices and investment are increasing similarly. Lower Manhattan was not included on the chart in our presentation because the average prices in that geography are so much higher and distort the Y axis.)What makes Brooklyn and Lower Manhattan rent-stabilized properties unique is that they are more likely to have significant amounts of market-rate units. In contrast, in geographies like Upper Manhattan, the Bronx, and Queens, where rent-stabilized properties likely have lower proportions of market-rate units, values and sales volume seem to have not recovered. This is particularly true in terms of sales volume in these geographies, where total building transactions are a small percentage of what they were during the height of the speculative wave in 2015-2017. This suggests a more or less frozen market, a lack of new buyers willing to pay more than the previous owners bought their buildings for.
Anecdotally, there are indications that this chart actually understates the impact of the last few years on values. From our tracking of sales and debt events at UNHP, most of what is being bought and sold seem to be properties that are rent-regulated but also subsidized in one form or another, with guaranteed income from public programs. But if you look at buildings that are unsubsidized and mostly rent-stabilized, these properties are being sold at significant discounts. In the Bronx, for instance, it has been very common to see old-stock, fully rent-stabilized properties being sold at $130,000 per unit or less, a huge discount over previous years.
As we have written about this before, the big question is still whether this trend will continue, and if it does, will it portend a crisis for landlords, investors, or lenders who bought or provided financing at valuations that no longer make sense? In some way, the rise in distress in rent-stabilized buildings we showed on the previous slide may be a sign that, for tenants, the crisis of that market has already hit; some landlords may be responding to the changing market by cutting corners in an environment where profit is not as immense as it once was.
But whatever the state of this potential crisis, to us at UNHP it’s also important to remember that this presents an opportunity to intervene with targeted preservation programs for landlords — specifically non-profit and mission-aligned landlords — to fill the vacuum as buyers of the existing rent-stabilized stock of housing. Acquisition costs are significantly lower than a few years ago, and a program to efficiently provide acquisition and rehab financing to rent-stabilized housing sorely in need of it could both set a floor to market and also provide an out for landlords who no longer want to be in the business. At this moment, it is crucial that existing rent-stabilized housing — still by far the most important piece of affordable housing in NYC — is in the hands of responsible actors who are interested in rehab and long-term stewardship.
The following slide we showed in our presentation moved onto a look at one aspect of distress that we look at in BIP — housing maintenance code violations. Over the last year plus, we have seen significantly higher unresolved maintenance code violations across our database. During the last four quarters of BIP, there has been an average of approximately 325,000 unresolved maintenance code violations across the database. That’s compared to a previous average over the last five years of around 235,000 unresolved violations, or 90k less on average than what we’ve been seeing over the last 12 months.
Relatedly, recent violations — those that have been issued and remain unresolved over the last 12 months — are also way up, and are really concentrated in areas with high numbers of poor and working-class renters of color: Uptown Manhattan, Neighborhoods in Brooklyn like East Flatbush and East New York, and much of the West Bronx, particularly in the Northwest Bronx where UNHP works. This is depicted on the slide with the heat map you see here, where darker colors indicate a higher average count of recent violations per unit, by community district.
This uptick in recent maintenance code violations is of course troubling, as it speaks to conditions that seem to be deteriorating, especially in buildings likely to house low-income tenants. However, it’s important to note that maintenance code violation data is often difficult to interpret, and there could be a few different things happening. On the one hand, there may have been a shift in perspective among HPD’s code enforcement in proactively looking for violations when they go out to a building to inspect a complaint. That would ultimately be a good thing and would reflect HPD posting violations on issues that have potentially festered for a long time. But, on the other hand, we know that maintenance code violations can tend to underplay the physical state of the building, and are imperfect proxies for actual maintenance conditions because they are predicated on tenant-initiated complaints, via calls to 311. We also know that HPD inspectors are one of the roles within the agency that is quite understaffed at the moment — so again, it’s possible that this rising trend not only captures recently deteriorating conditions in buildings but that the picture, in reality, is actually worse than the rising violation count indicates.
During the meeting, Kim Darga, Deputy Commissioner of Development at HPD, did respond to the rise in open violations by stating that HPD inspectors are now expected to proactively seek out additional code violations when they visit a building to respond to a tenant-initiated complaint. This is particularly true for lead paint issues as well as protections against fires such as self-closing doors. UNHP will be conducting additional analysis to look into how much those violation types account for the rise we are seeing in the Building Indicator Project.
The next slide in our presentation contained two additional maps with results that map very similar to the map of recent code violations. In the below slide, the map to the left is a heat map showing the percentage of households in a given zip code that are severely rent-burdened, or who pay more than 50% of their income in rent, according to the latest American Community Survey estimates. And the map to the right looks at eviction filings per 1,000 units since the start of the pandemic, or the middle of March 2020, also by zip code. (It’s important to note that these are eviction filings — meaning not that a household has been evicted, but they have had a court case initiated against them, overwhelmingly due to unpaid rent.)
What is notable about these maps is how clearly they overlay with the maps of high recent violation counts. In other words, these darkened areas on the maps are not only areas where tenants are most likely to be living in poor and deteriorating conditions, but also where the rent burden is extremely high — or where tenants are living paycheck to paycheck — and also where tenants are most commonly behind on rent and at risk of eviction. And these are, of course, precisely the areas where poor and working-class households of color are concentrated, as the last relatively affordable and stable places to rent in NYC.
As we write on the slide, this suggests a serious question about the operations of these buildings. Tenants in buildings in these areas are commonly both dealing with conditions they should not have to be forced to deal with and are paying too much in rent given how much income they are making. The question becomes, is this troubling overlap happening because operating low-income housing is simply becoming less feasible?
While that is difficult to answer overall, recent data indicate that there is still adequate profit to be made in rent-stabilized housing, though operating deeply affordable housing in particular has become significantly more difficult. However, the changing market we discussed earlier in the presentation has meant that the huge dollar signs involved in buying and leveraging rent-stabilized housing are no longer there. And certain landlords — particularly those who assumed or even bet on the profit environment remaining the same — are seemingly reacting to this by cutting costs, which we see in the data as a rise in violations. This seems to be happening most acutely in areas with buildings that are largely rent-stabilized and where the tenant base most commonly is rent burdened and therefore most likely to miss a rent payment.
Digging deeper into questions of how rent-stabilized housing and low-income housing operates, we also wanted to spend some time looking at chronic distress, and particularly buildings that consistently show up as being in substandard condition over the life of the BIP database. To do that, we looked at buildings in the top decile, or top 10%, of BIP as of 2022 Q3 in terms of violations per unit, which one can see in the below slide. This top decile is comprised of some 7,500 properties that together have an average of 5.63 unresolved hazardous and immediately hazardous (or B and C) violations per unit.
Overall, this top decile of properties accounts for a large percentage of outstanding hazardous maintenance code violations in our database at any given time, and generally, these sorts of “worst performers” are the primary focus of code enforcement in NYC. Given that, what is troubling about that top decile — that 10% of properties with the most unresolved violations per unit across our database — is that over 80% of them have been in that top decile for at least 10 quarters over the 14 years of BIP. Some of that is to be expected, as violations can stay open over multiple quarters in BIP. But the sheer number of times that physically distressed buildings as of 2022_q3 were physically distressed during previous quarters of BIP should give us pause.
In other words, chronic distress is a real problem, and even more so at a moment when we’re seeing distress levels rise across the board, as we’re seeing now. And again, we are left with the question of how to intervene in that? It’s difficult, and there isn’t one answer: Code enforcement is key, but there are questions as to whether there are enough teeth involved in racking up code violations to force reinvestment back into the building. Proactive enforcement programs, the most prominent of which is the Alternative Enforcement Program, are also really important, but they are largely too small in scope to address the thousands of chronically distressed buildings. Targeted subsidy is also an important piece of the puzzle, especially for mission-driven owners struggling with operating costs, and especially if we can figure out ways to be sure that the money is used to address long-standing issues. And finally, we again need to turn our attention to preservation, which is generally the only permanent way that buildings that have languished in disrepair can get the work done that it needs to catch up to years of neglect and turn a building into a safe place to live.
In our presentation, we also wanted to take a close look at eviction filings over the last few years, particularly in the Bronx, which is what the below slide depicts. Access to eviction filing data is relatively new for us, the product of advocacy within the state court system to make that data available, and there’s a wealth of information in the data that advocates are only beginning to uncover. What we’re looking at for now, though, are not actual evictions, but filings to initiate court cases, mostly as a result of tenants falling behind on rent over the last three years. This makes the data complicated to interpret.
But even with that caveat, it’s still important to look at just how many filings have occurred, particularly in the Bronx. We’ve long known that the Bronx has had the highest rate of eviction filings in NYC, and, as the chart shows, that has continued through the pandemic. The Bronx has basically had twice the filing rate of the rest of NYC, at 260 filings per 1,000 units since the start of the Pandemic in March 2020.
As we say in the chart, one important statistic is that there are a significant number of properties where filings have likely affected the majority of households in that property. 20% of Bronx properties in BIP have seen eviction filings on more than 50% of households since March 2020. The map on the slide shows where those types of properties are located, where each dot on the map represents a property in BIP, and the shade of the dot represents the number of filings in a building as a percentage of total units. In this map, the dark purple dots would be buildings where there have been as many eviction filings over the last nearly 3 years as there are units in the building.
As the slide describes, there is a lot left to sift out as those filings are calendared and become court cases, and we’ll be watching that closely. But it’s important to show this right now to give people a sense of the eviction crisis in places where low-income families live in particular. While policy intervention and other disruptions might have stopped the “eviction tsunami” that people were predicting, that’s not to say that there aren’t real issues with just how many households in neighborhoods in the Bronx and elsewhere have a looming eviction over their heads. And this trend may easily be exacerbated by the economic reality we are looking at in the coming months and years.
To end our presentation, we summarized a report that we put out this year, in collaboration with LISC. This report was the culmination of lots of our recent work with BIP and associated housing data, and I think helps return us to the role of lenders in particular in ensuring safe, stable, and affordable housing in New York City. The report was entitled Gambling with Homes or Investing in Communities: How speculation drives evictions and poor housing quality, and how affordable housing protects neighborhoods of color. And as the title describes, the analysis was an attempt to capture the empirical effects of “speculation” on tenants, in terms of physical conditions and displacement. We used data from our BIP database to form a proxy for speculation, which we defined as buildings with particularly high year-over-year increases in property values, reflected either through the increase between consecutive sales prices or the increase between one mortgage and refinancing of that mortgage a few years later. Once we identified speculation in proxy, we were able to measure how those buildings fared before and after what we defined as a “speculative event”, in terms of things that matter to tenants, like violation counts or evictions.
The results were based on a regression analysis, which allowed us to control for the impact that neighborhood characteristics — like rent levels or poverty levels — had on those negative outcomes, and really try to isolate the effect that the speculative event had on tenants. The two charts on the above slide, for instance, show one of the many results included in the report, looking specifically at the effect of speculative events on the physical conditions in the building that followed.
Overall, what we found was extremely revealing, essentially making an empirical link between speculation — fast-rising property values and debt levels — with a higher likelihood of bad outcomes for tenants. In short, buildings that were sold for the highest price increases or that took on the greatest amount of additional debt had up to 2.7x the number of maintenance code violations. And this effect was particularly stark when buildings took on added debt; according to the research, even controlling for community characteristics, buildings with the highest increase in debt had about .78 more maintenance violations per unit per year than properties in similar areas.
This finding — that taking on more debt is a leading indicator of poorer maintenance quality — presents a challenge. It undercuts the argument that increased investment and loans to multifamily buildings tend to benefit tenants, and reinforces the notion that additional debt taken on by landlords has more commonly been used to extract profit rather than reinvest in properties. And we wanted to end this challenge because it brings the role of lenders back into relief. Over the previous decade, rising debt levels have, according to our research, played a part in the negative outcomes that we have been discussing in these BIP meetings for so many years. Now that the market seems to be changing and new problems — distress & disinvestment, and tenants finding it ever harder to make rent — are arising, the question becomes: how can lenders participate in being part of the solution to new issues and those that have stemmed from that previous decade of speculation? We at UNHP believe that many of the bank representatives at our meeting want to figure out ways to be part of that: to intervene in problem buildings; fund direct services and community organizing efforts; and provide financing for the preservation of chronically distressed buildings