Annual BIP Meeting – NYC Real Estate Market in the Pandemic
On July 28th, UNHP held its annual Building Indicator Project meeting. Jacob Udell, Data and Research Coordinator, presented for UNHP about trends in the housing market. NYC HPD’s Elizabeth Oakley, Deputy Commissioner for Development and Kim Darga, Associate Commissioner for Preservation discussed the importance of preservation and different tools HPD has to bolster affordable housing in NYC. Thank you to Enterprise Community Partners for hosting the meeting on their expanded Zoom platform. Usually attended by about 60 multifamily lenders, this year there were 104 attendees as additional bank and housing policy staff, as well as our affordable housing and community partners, were able to attend via the online platform. Below is a summary of UNHP’s presentation. To view UNHP’s presentation materials, click here. To see HPD’s presentation materials, click here.
We started the presentation with various heat maps, looking at the difference by NYC community district in median household income, the percentage of Black & Latinx households, and the percentage of rent-burdened households. As in previous years, we pointed to persistent concentrations of these indicators in the Northwest Bronx, as well as other low-income areas like East Brooklyn.
As we have discussed in a previous blog post, the COVID pandemic is mapping onto these existing inequalities. COVID case rates have been highest in areas of the city where there are concentrations of low-income, rent-burdened communities of color. As Eileen Markey, a Bronx-based journalist, put it in an op-ed for the NY Daily News, the COVID case rate map, “looks, with slight variation, like every other map I’ve spent my career writing about. This is the asthma map, the pays-more-than-50%-of-their-income-in-rent map, the eviction map, the real-estate-speculators-left-buildings-for-dead map. Scroll back a few generations, it’s the redlining map. COVID-19 has quickly become like all out other sins, a map of race and class.”
Beyond actual COVID cases, the economic fallout of the COVID Pandemic is hitting the Bronx especially hard as well. In June, the New York Department of Labor reported an unemployment rate of 20% for NYC. On the borough level, the Bronx had the highest rate of unemployment, at nearly 25%.
Beginning in late April, the U.S. Census Bureau began publishing the Household Pulse Survey in order to track the economic effects of COVID. New data is released weekly and provides information about employment, housing, physical and mental health, and educational disruptions. The left-hand graph below shows the percentage of households that did not pay last month’s rent by race and ethnicity. While there have been fluctuations over the weeks, Black and Hispanic or Latinx households were consistently unable to pay last month’s rent at higher rates than white households. The right-hand graph below shows the percentage of households that experienced a loss of income by income bracket. Again, while the data is not smooth, households in lower-income brackets were more likely to experience a loss of income. This is what we mean by the pandemic “mapping onto” existing inequalities.
Source: Household Pulse Survey
In the presentation, we also explored what is happening and what may happen in the real estate market as a result of the Pandemic. Again, the effects of the COVID pandemic are mapping onto already existing fragilities.
Since March, there has been widespread discussion of drops in rent collection, potential shifts in preferences for urban living, the aforementioned economic fallout, and the possibility of serious fiscal strain on the city & state levels. But these things aren’t hitting the rental market in a vacuum. Multifamily rental properties have experienced a rapid increase in value over the last ten years. However, starting two years ago, this asset boom began to slow down and even reverse itself. The boom in asset values raised questions about speculation – are the high property values justified by building income?
To think this through, our presentation shared data on pricing over the last decade and earlier. The left of the two charts below tracks median multifamily sales price per unit, based on UNHP’s analysis of available price data. Between 2012 and 2018, median prices per unit at least doubled in each of the four geographies included – we filtered out lower Manhattan to focus on non-luxury multifamily prices. What this means is that prices appreciated by at least 15% year over year during that time.
The chart below on the right collects the average capitalization rates reported by Ariel Property Advisors, a commercial real estate brokerage firm, from 2010 to the present. While capitalization rates are generally discussed in the context of individual transactions, they are also important to look at over time, because they can proxy the extent to which net income keeps pace with values. In the Bronx, for example, capitalization rates averaged above 8.5% in 2011 and only 5% in 2018. This is another way of saying that a building with $10,000 in annual net income was on average sold for around $1.15 million in 2011, whereas a building with that same income would have been sold for $2 million in 2018. Notably, capitalization rate movements in this chart are basically the mirror image of that of the price chart – as prices rose quickly, net incomes did not keep pace.
The trends in both charts change direction right around 2018. Qualitatively, real estate market participants were already predicting in that year that we had reached the peak of the “real estate cycle”. More, in June 2019, the Housing Stability & Tenant Protection Act passed, which had a clear cooling effect on the NYC market. According to our analysis, the Bronx saw prices for multifamily rentals that were 11.5% lower in the second half of 2019 compared to the first half of the year.
Why is it important to contextualize the effects of the COVID pandemic in an already fragile market? Because many real estate business plans are largely reliant on the ability to profit from rising asset values. When the market fails to produce those prices, we are more likely to see bankruptcies, foreclosures, building neglect, and increased displacement pressures for tenants – the types of distress we try to pick up in the Building Indicator Project.
Owners that can cover mortgage payments out of net income don’t necessarily need to worry about changing values, but higher valuations have meant larger debt liabilities. There is real reason to be concerned that the effects of the COVID pandemic, hitting an already fragile market, will cause significant distress.
For highly leveraged buildings, even rent collections that hover around 80% could make it challenging to cover debt service from net income, as the simplified graphic below attests. Of course, the mortgage forbearance that some financial institutions have offered is important, but it is often one-off and temporary, and without any mechanism to trickle down to tenants in the form of rent relief. What’s more, even if landlords are able to cobble together debt service payments at the end of each month, at what cost is that to investment in building upkeep and maintenance?
If owners are unable to cover debt payments based on the valuations of a few years ago, this will mean added pressure on lenders to adjust the values of buildings on their books to reflect prevailing prices. The reality of high valuations and maximized leverage suggests that building distress might need to be dealt with at the lender-level, and that public agencies should be thinking about how to prepare for that.
This brings us back to our work on the Building Indicator Project (BIP), a database that emerged out of a long history of tracking trends in disinvestment and speculation in the Bronx. BIP has existed in its current form since 2008, with the goal of identifying physical and financial distress in multifamily rental buildings. Properties in BIP with a score of 500 or greater are considered likely to be in distress, and those with a score of 800 or greater are considered highly likely to be in distress. The below charts show the percentage of buildings with BIP scores between 200 and 500, 500 and 800, and 800 plus, for Manhattan, the Bronx, and Brooklyn, at (mostly) quarterly intervals over the last twelve years.
After the 2008 Crisis, building distress spiked throughout the city – the largest increase was in the Bronx. Given borough differences in median income, this suggests that when the real estate market experiences a downturn, those at the lower end of the income spectrum bear the brunt of it. BIP has yet to pick up much if any change in distress over the past year or so – though we’ll be releasing our 2020 second-quarter data sometime in the next few weeks. However, as described above, many buildings now carry almost twice the amount of debt that they did a decade ago, suggesting that the effects of COVID on the multifamily rental market could be significant.
We also need to be aware of the fact that the ways we’ve dealt with COVID leave open certain questions about whether available data allows us to actively capture distress. As HPD and DOB inspection regimes have shifted to quarantines and social distancing, we saw widespread drop-offs in violation counts. There has also been some discussion of owners delaying the payment of property taxes and other charges as they wait for top-down solutions. Given that COVID – and how we manage it – is basically unprecedented, we must think about what data and tools we need to measure and account for housing distress if and when it appears.
No one knows for sure how the Pandemic will affect the multifamily rental market in the long run. However, it is clear that race and class have already played a role in determining who bears the brunt of the economic downturn. As a generalization, the less wiggle room a household had before March to make rent, the more squeezed they are now. And we know that those households are largely households of color concentrated geographically in low-income neighborhoods like the Northwest Bronx. This reality, combined with a likely overvalued real estate market in these neighborhoods and citywide, demands creative and proactive policies in order to ensure that the communities hardest hit by COVID do not also feel the full impact of rental housing distress.