Q&A: NYC Investment Post Rent Reform
Robert Morgenstern, founder of Morgenstern Capital, explains why the next growth story in the Big Apple’s multifamily landscape is about the right submarkets and new verticals.
Investors are recalibrating their investment strategies after the approval of New York City’s new rent control laws. Some are heading south for new opportunities and others are digging deeper for higher yields.
Multi-Housing News reached out to Robert Morgenstern, founder of New York City-based real estate investment firm Morgenstern Capital, to discuss the short- and long-term implications of rent regulations for multifamily investors and owners. Morgenstern is also a principal with Canvas Property Group, which operates 25 properties (775 units) in the city. Morgenstern Capital, established in 2014, owns 12 of these assets.
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How do you think rent control laws will impact multifamily investment in New York City in the short and long term?
Morgenstern: The Housing Stability and Tenant Protections Act of 2019 has immediately shifted multifamily underwriting in New York City. The cap rates for partially rent-stabilized assets have widened significantly. I think it is unclear what yield a buyer would want for a 100 percent rent-stabilized asset that would only depreciate as operating expenses and taxes increase far greater than the rent guidelines board increases rents.
In the short-term, cap rates for statutorily free market or soon-to-be free market assets have shown signs of tightening as the supply of free market apartments declines. In the long term, I don’t think these laws will be meaningfully overturned and this will create two different asset classes: free market and rent-regulated apartments.
What has changed in your business approach since the laws passed?
Morgenstern: As an owner/operator, I’ve never utilized a business plan to buy at tight cap rates with the goal of deregulating rent-stabilized apartments as the primary goal. My assets have generally been at least 85 percent free market, and most are 100 percent free market either through substantial rehabilitation or conversion.
That said, the cap rates on multifamily assets with a balance between market and regulated units have widened and will continue to do so. We are approaching them as two different asset classes in a way that is similar to a mixed-use property with a different cap rate on the retail component. We are looking for portfolios that are appropriately priced for acquisition. Unfortunately, that pricing likely means there is no equity remaining in many of these deals.
What are your plans going forward? How will your multifamily investment strategy in NYC look like in the years ahead?
Morgenstern: We are actively making bids on multifamily assets in Manhattan, Brooklyn and Queens. We believe there is a significant rental growth story outside of the rent laws and political issues that are often discussed in the market.
We are looking for a specific type of multifamily deal with our long-standing institutional capital partners seeking a core-plus return in a declining interest rate environment. We believe executing a business plan to improve the units, common areas and building amenities will yield strong risk-adjusted returns when targeting the right submarkets of New York City.
You are also part of a multifamily property management business. What is a property manager’s view on the new laws?
Morgenstern: We actively manage our properties, as well as a growing portfolio of assets we manage for others. As a property manager who owns and operates, we are keenly aware of how these laws affect things like tenant screening, application fees, prepaid rent, security deposits and so much more. The laws have created a significant increase in workload for a property manager and property owner.