May 17, 2021

A Year into the Pandemic: Trends in NYC Housing Finance


COVID has been with us for more than a year, and so has the search for signs of distress in multifamily rental housing in New York City. At this point, there seems to be widespread agreement that there is or will be financial distress among landlords who have based their business plans on rapid gentrification: owners looking to fill higher-priced new rental developments or whose plans were predicated on the displacement of low-income tenants in older stock rent-stabilized housing.


While conventional lenders — the regional and national banks that still make up the vast majority of lending to NYC rental housing — have no doubt been involved in financing some of this, it is unclear how much of their multifamily mortgage portfolios have been based on such expectations. In fact, these lenders have largely argued that their portfolios, and particularly the stock of rent-stabilized housing to which they lend, have remained relatively stable over the course of the pandemic. This argument generally has three parts:

  1. Banks claim that rent collections in rent-stabilized multifamily housing have remained very strong during the pandemic, perhaps experiencing drops of only a few percentage points year-to-year.
  2. Banks claim that they have learned from the experience of the ‘08 Crisis, and have underwritten their newer loans more conservatively — using income projections based on current rather than future rents, and with lower loan-to-value ratios.
  3. Banks claim that the mortgage forbearance precedent laid out in the CARES Act (Sec. 4023), as well as moratoria on mortgage foreclosures, created outlets for borrowers who would have otherwise had issues meeting their debt service during the hardest months of the pandemic.

But at UNHP, our own analysis of both the last year as well as longer-term trends in NYC rent-stabilized housing suggests some questions about that narrative:

  1. Do banks have a full sense of lost rental income, deferred maintenance, and other dynamics over the course of 2020 in their multifamily portfolios?
  2. Are banks taking into account that the market for rent-stabilized real estate has undergone a major shift?
  3. Are recent trends in multifamily mortgage finance — specifically the rise in interest-only loan modifications and refinancings — creating more risk for bank mortgage portfolios?

While multifamily lending policy in 2020 has certainly allowed landlord borrowers to stave off loan default, we are concerned that trends in the sector may amount to an approach that avoids dealing with long-term structural issues, chiefly: the over-valuation of rent-stabilized real estate and the debt levels associated with those values.

At UNHP, we see such over-valuation as the latest stage in a more than 30-year trend of rising property values that has pushed the non-profit CDC sector and responsible private owners to the sidelines. For prices to pencil out during the height of the spending frenzy of the last decade, we believe that the investors involved must have assumed minimal expenses, fast rising rents, and, centrally, an eager buyer or bank willing to acquire or refinance at a higher level in a few years. Importantly, the more money committed to a high building valuation and the high debt service that comes with it, the more pressure on a landlord to justify that value by raising rents or decreasing expenses, which can translate into displacement pressure and / or substandard conditions for tenants.

It is often overlooked just how crucial banks are in the financing and operations of rental housing. As we’ve discussed elsewhere, multifamily mortgages in NYC have, in recent years, been more about increasing leverage and pulling equity out as a result of rising building values than providing capital to operate buildings. Importantly, this means that the principal on these mortgages is rarely paid down, such that banks hold the largest financial stake in a building not just at the moment of acquisition, but over the 5-7 year life of a loan.

Because of their large stakes, banks play a key role in how the long-term effects of COVID are going to play out on NYC housing. This includes ensuring that their borrowers keep tenants in their homes and buildings well-maintained and, if necessary, that distressed mortgages are dealt with responsibly.

2020 Income and Expenses

In 2020, the big question in the multifamily sector was about rent collections. We at UNHP were puzzled that lenders stated that multifamily collections have consistently remained at close-to-normal levels over the course of the pandemic. Experiences in our own portfolio, anecdotal evidence, employment & Census Bureau data, as well as calls for unprecedented rent relief from the real estate sector itself all painted a very different picture.

Recent analysis has led us to question whether conventional lenders truly have a sense of total income lost over the entirety of 2020 and into 2021 due to drops in rent collections in their portfolios. In general, banks tend to receive information on income and expenses for the buildings to which they loan on an annual basis. The major exception to that arises in cases where the bank has reason to believe that the asset is ‘impaired’, or at a higher risk of default. In this case, the lender will generally request more regular reporting of income and expense data and pass the building through some version of a troubled asset analysis.

Over the course of the year, there were two potential pathways for landlords who lost rental income to avoid being flagged as an ‘impaired’ asset. The first pathway was to deal with losses by deferring an equal amount of expenses in order to make debt payments on time. Even prior to 2020,this was not necessarily uncommon. Mortgage payments and building maintenance are paid out of the same pot, and highly leveraged rent-stabilized buildings can often be in substandard condition because landlords will prioritize meeting their debt service over other expenses.

For buildings with recent loans, debt service can often be the largest building ‘expense’ — up to an industry standard of 1.2 debt service coverage ratio. In other words, if a building produces $100 in rent and spends $40 in expenses each month, an owner can take on debt up to a level that translates into a $50 monthly debt service ($100 – $40 = $60, $60 / $50 = 1.2). When one of every two rental dollars goes to pay debt service, any drop in rental income or unforeseen issue can trigger a choice between staying current on debt service or deferring maintenance.

The second pathway, which was unique to 2020, was to request mortgage forbearance which granted borrowers full or partial deferral of their mortgage payments. However, using the process laid out in the CARES Act for federally-backed multifamily mortgages as a guide, it is possible that many banks did not require continuous reporting of income and expenses as a prerequisite of forbearance. Early in the pandemic, one bank’s forbearance application process was described as a one-page form, with information only the most recent rent roll and a written statement describing the impact on cash flow at that time. And while there is no available data on the use of forbearance among borrowers at private banks, data from government-sponsored enterprise lenders suggest that owners of old-stock multifamily housing in NYC made up a large percentage of national forbearance recipients.

In either situation, it is possible that lenders are only now fully delving into building losses, as they would have received annual income and expense reports in Q1 2020, to be analyzed throughout Q2. While previously they may only have had momentary snapshots of collections, the total loss of income over the year is what is important for both tenants and building operations. And if building incomes were indeed hit harder than previously understood, this could have important implications. First, it emphasizes the need to carefully monitor for deferred maintenance. Lenders must play an active role in understanding just how properties that lost income managed to stay afloat over the course of the year and, if that answer includes lower operating expenses, to ensure that their borrowers catch up to ensure safe and habitable conditions.

This is particularly true among buildings that have shown signs of physical or financial distress in the recent past. At UNHP, our Building Indicator Project (BIP) attempts to measure exactly that, and, while it is still early, we have found the beginning of some troubling trends in the data. Since 2017, close to 6,500 multifamily buildings citywide (representing over 330,000 units) have been identified as likely to be in physical or financial distress in our BIP database. These are buildings that we pay close attention to as data shows that distress often shows up in cycles in the same subset of multifamily rental buildings.

Over the last few years, we’ve seen a steady rise in the number of open HPD violations in this subset of buildings, particularly among immediately hazardous (class C) violations and DOB violations, as the below charts show. A recent uptick in C violations over the past six months is particularly troubling, as it implies a buildup of hazardous issues that may be associated with deferred maintenance throughout the pandemic.

We have also seen an uptick in unpaid water charges in multifamily buildings, a potential early indicator of distress. In March, DEP reported that, among 4+ unit buildings, there has been a close to 33% increase in the dollar value of accounts receivable delinquent for more than 180 days from the previous year. In BIP as of the first quarter of 2021, among buildings that have had delinquencies for more than a year, the median unpaid charge is $2.66k. A year before, the median unpaid charge for properties delinquent on water payments for more than a year was less than $2k.

If banks are just now internalizing the extent of the losses in income experienced by their landlord borrowers, it is possible that more widely felt distress in the rent-stabilized, multifamily sector may still arise. While banks have argued that residential real estate is in better shape than other sectors (retail, office, and hotel, for instance), have financial problems in multifamily housing simply been delayed?

In the short-term, this question is likely connected to the ability of New York State to administer a successful rent relief program, and again banks will play a crucial role in ensuring that relief benefits tenants. If landlords deferred maintenance over 2020, banks should ensure that relief funds are put back into the building instead of being used as a financial windfall for investors. Banks also can help ensure that landlords work with tenants who may continue to be in arrears moving forward.


But even if banks play an active role in a just recovery, there are still open questions about rent relief: were there enough funds distributed to NYC through the rent relief package to cover arrears? And if there were, what types of households will fall through the cracks of the program administration?

Property Values and LTVs

Trends in the values of rent-stabilized properties also raise questions about distress, particularly among those landlords who made bets at high valuations and high debt levels. For landlords & investors, rising property values have been essential to the lucrative profits associated with rent-stabilized housing; for banks, rising values are the key to why residential real estate is considered a safe asset to lend to. Banks measure value relative to the size of their loan, or loan-to-value (LTV). LTVs can generally equal up to 75% of the appraised value of the property, and loans with an LTV above that threshold are, in certain cases, considered at-risk.

Some banks have argued that their LTVs in NYC rent-stabilized multifamily are very conservative — between 50% to 60%. However, it’s worth asking: what are the property values that banks are measuring their loans against? Those numbers might come from prevailing values at the time of underwriting, in other words from the years before the rent laws were strengthened. In this period, many loans were originated or refinanced at extremely high valuations, as rising rents and frequent deregulation of units drove the market.

Since 2018, we have seen static multifamily property values in NYC and, in some cases, noticeable drops in value, which broke a more than half-decade trend of speculative acquisitions following the ‘08 Crisis. We at UNHP think of this shift as being due to three different factors:

  1. The long-predicted end of the real estate cycle, or the approximately six years (from 2011 to 2018) when property values shot up citywide.
  2. The June 2019 passage of the HSTPA, which, by closing loopholes central to unit deregulation and displacement of low-income renters, had a clear cooling effect on the market.
  3. The pandemic, with its well documented impacts on building operations and the real estate sector.

Below are three charts which tell the story of the last decade of multifamily property values in NYC. The first shows the above story, charting the annual average per unit price of multifamily properties, broken down by borough (and sub-borough, in the case of upper Manhattan). The second shows the approximate average debt per unit in these same geographies, suggesting that as buildings were being sold for ever-higher amounts, landlords took advantage of this boom by levering up their buildings to match the pace of rising values. The third chart maps the total dollar volume of multifamily sales transactions on an annual basis in those same geographies.

The sales volume chart is particularly important for the current moment. It seems that the market for multifamily real estate is frozen, with owners and investors waiting it out to see whether values rebound or continue to drop. In addition, while prices have dropped across NYC over the last few years, debt levels have simply leveled off, without decreasing in parallel to prices. Because the vast majority of annual originations in NYC multifamily are actually refinancings of existing debt, this suggests that banks are simply rolling over existing debt, as opposed to adding new mortgage money on top of existing principal. This is a significant shift from the last decade.

But will banks have to internalize lower market values on their loans, and if so, when? This question is complex, and based on market psychology, dynamics with regulators, and more. While the above charts show that values rebounded quickly post ‘08, property values are much higher than they were a decade ago, households have higher rent burdens, and the political environment is friendlier to the tenant and housing movement. We at UNHP are concerned that banks are downplaying the decrease in asset values particularly among rent-stabilized properties, which seem to be both widespread and potentially long-lasting.


To analyze the current state of the rent-stabilized market in the Bronx, we looked at every multifamily sale in 2020 that was likely to contain rent stabilized units. We found that:

  1. There were 67 likely rent-stabilized properties (2,357 units) sold in 2020.
  2. The average per unit price in those sales was $152k per unit.
  3. The average per unit debt level in those sales was $72k / unit.

The fact that we could identify only 67 likely rent-stabilized properties sold indicates an enormous dropoff in market activity. Over 70% of Bronx multifamily properties are likely to have rent-stabilized units, so this means that these 67 sales reflect the vast majority of the market. More, the average per unit sales price represents a significant drop from prior years. Anecdotally, UNHP and other non-profit CDCs were used to seeing per unit rent-stabilized building prices between $180k – $200k before 2019.

If all loans on Bronx rent-stabilized multifamily were measured relative to that prevailing market price, how many LTVs would still look conservative or safe? We estimate that among the close to 4,000 likely rent-stabilized Bronx properties that have a new or refinanced loan from 2015 on, 38% have a debt per unit level of over $114k, which would translate into an LTV of more than 75% at a valuation of $152k per unit. In other words, all else being equal, more than a third of recent loans in the Bronx have a debt level that is potentially at risk, especially if property values continue to drop.

Next, among these 67 buildings, the average debt per unit level on the property (at the time of last origination) was $72k. This is significantly less than new debt taken on by Bronx buildings in recent years. It seems, then, that over the last year, primarily less-leveraged buildings have been selling, as they are able to get out of the now less attractive rent-stabilized market while still being able to pay off their debt and make a significant profit. Strengthening the point, 40% of the 67 Bronx properties in the analysis were sold by long-time property holders with no active senior debt on the property.

For owners with higher leverage from loans, decreasing asset values make it harder to sell or refinance for a profit. In order to maintain their margins in a stagnant market without high returns, landlords may allow building conditions to worsen as they wait for property values to rebound. They will also look for new ways to profit, which will likely impact outcomes for tenants and the buildings they live in. The following section details one such trend — interest-only mortgages.

Interest-only Mortgages — a new profit strategy?

While there is no current data available on interest-only (IO) mortgages, anecdotally we have continued to see a large uptick in the use of long or full interest-only periods. IO mortgages are generally considered to be more speculative in nature, as principal is not paid down and debt service is kept at a minimum. So why, at this moment of uncertainty in the rent-stabilized market, are we seeing a rise in this mortgage structure?

The answer, it seems, involves multiple different reasons. The first is that loans with IO periods have been part of a long-term trend, driven in large part by the increasing involvement of government sponsored enterprises like Freddie Mac and Fannie Mae in the multifamily sector over the past decade. Both GSEs have popular offerings, such as Freddie Mac’s Small Balance Loan program, which regularly comes with partial or full IO periods. Balance-sheet lenders have argued that in order to compete with these loan terms they must offer significant interest-only periods as well.

The second reason is that IO periods are a new profit strategy. Again, much of the NYC rent-stabilized sector was used to refinancing with cash out mortgages, which was a central part of delivering expected returns to investors. Without rising asset values, cash out mortgages are not necessarily viable, as banks are increasingly concerned about keeping their LTVs below a 75% maximum. As the above debt per unit chart shows, it looks like debt levels have mostly stopped rising, suggesting that cash-out refinance is a much less common strategy.

In lieu of refinancing at higher levels, IO mortgages present another opportunity to create what is known as “upfront yield” or a higher net cash flow (net income after debt service) on an annual basis for the years of IO payments. Given that, it is not surprising that loans that were in forbearance or might otherwise be at-risk are being modified to include interest-only periods. This effectively inscribes partial forbearance into the mortgage structure. One bank, among the largest in the rent-regulated lending space, had $6 billion in loans forborne across all of its commercial real estate. By the end of 2020, they had modified $2.5 billion, or over 40% of loans in forbearance, into IO mortgages, and they are not alone.

Below we will walk through a stylized example of a 25-unit rent stabilized building in the Bronx, bought for $5 million ($200k per unit) in 2018 to demonstrate the savings from an IO period. Will will assume that the building was bought at a 5% capitalization rate — standard in the Bronx at that time — this would translate into an annual net income of $250,000.

Let’s imagine that the bank financing the purchase was conservative, only loaning 60% LTV, or $3 million for the acquisition. And let’s put the rest of the loan terms at 4% interest over 5-years, amortized over 25 years to create a balloon payment at the end of the term, again all standard in the commercial real estate industry in 2018. This would translate into an annual debt service of just over $190k, and a debt service coverage ratio of 1.32, meaning that the owner could cover the mortgage payment out of net income with some $60,000 to spare. So far, then, while the building is highly leveraged, the standard loan statistics used to measure risk would not raise any flags.

Now, imagine that, in 2020 during the pandemic, rent collections in the building take a hit. Let’s say that before the pandemic, income on the building was $500k and expenses were $250k, but that rent collections dropped to 80% in 2020, leading to an income of only $400k and a net income of $150k.

In this case, if the loan was not modified or forborne, the landlord would not be able to meet their debt service, and would likely have had to make choices to cut back on expenses to cover more than $40k of the $190k in annual debt service, or risk default. However, if the loan was modified to interest-only in 2020, even a rent collection rate of 80% would be able to cover the debt service, with room to spare. These two scenarios, and the detail on the original loan, are provided in the below table:

While buildings that got forbearance were clearly struggling, interest-only periods on loan modifications or refinanced mortgages now ensure that those savings are semi-permanent, giving the landlord more wiggle room from an operating perspective. What’s more, the example above probably underestimates the savings, as loans refinanced to interest-only in 2020 likely did so at historically low interest rates.

But how does this savings help tenants, especially those who dealt with high rent burdens and poor living conditions even before the pandemic, and are now coming off an unprecedented year of crisis? As the example above shows, landlords can save between 35% – 45% of debt service costs through an interest-only modification or refinance. But there is no guarantee that this savings translates into a concomitant increase in maintenance, or into more flexibility for tenants who have and will continue to have trouble making rent.


Another question is whether these modifications or refinancings are based on current income and expense data, or prevailing values in 2021. Once again, our sense is that, unless the loan was considered ‘impaired’, which very few have been this year, there would not necessarily be updates to valuations, and lenders would be willing to accept pre-pandemic operating data for the purposes of underwriting.

Kicking the Can Down the Road

It seems that the only way to square recent activity in the NYC multifamily lending sector is by conceiving of it as a “kick-the-can-down-the-road” strategy. While it’s difficult to know the scale of the trends described above, banks do not seem to be proactive in their efforts to understand the effect of the pandemic on their portfolios, or to update the LTVs of their loans based on current prices. When this is seen together with the rise of interim relief to landlord borrowers in the form of IO mortgage payments, it seems banks are betting on a relatively quick return to ‘normal’ — steadily rising asset values, and rising net incomes to justify them.

This old ‘normal’ might have worked for lenders, investors, and landlords, but it did not necessarily work for tenants, specifically low-income households of color. But even from a purely financial perspective, there are indicators that we are facing a longer recovery and a very different market from past cycles. If the economic effects of COVID continue to play out as a so-called ‘K-shaped recovery’, we could see chronic rent arrears for multifamily buildings that house low-income households of color. If property values continue to drop, banks may be faced with more impaired multifamily debt than they are expecting. Instead of reacting to that situation should it arise, banks should closely monitor how buildings within their multifamily portfolio recover from the pandemic, and intervene if they see signs of substandard conditions or predatory behavior. They should also be ready to dispose of distressed assets responsibly, working together with housing and community groups as well as the public sector.