New York City Rent Regulated Tenants Are About To Face A Reckoning

In New York City, the residential real estate market is subject to an almost infinitely complex tangle of rent regulations. Of about 2 million rental apartments in the City, approximately half, or one million, are subject to the regulations. The rent regulations are one of the principal devices by which our politicians seek to achieve perfect justice and fairness for their constituents through government command. Is your rent too high? We’ll order it frozen! And indeed, in three of Bill de Blasio’s now seven years as Mayor, the “Rent Guidelines Board” that he controls, and that oversees the regulated apartments, has ordered freezes of the rents under its jurisdiction, the third such freeze having just been ordered on June 17.

So, as a tenant, which would you prefer: (1) the benevolent protection of the rent regulation system and the Rent Guidelines Board to assure that your landlord can only ever raise your rent in tiny annual increments, if at all? or (2) take your chances with the hurly burly of the free market?

Most of the tenants thought that the answer to that question was obvious. And now comes along the coronavirus pandemic, and the answer is no longer so obvious at all. Suddenly the supposedly benevolent rent regulation system looks like it is leading tens of thousands of mostly moderate income tenants right into a trap. As usual, the proponents of the socialist economic model failed to think things through.

The genesis of the problem is that the economic shutdown imposed upon New York threw large numbers of moderate income people out of work, leaving them temporarily unable to pay their rent. According to the New York Post yesterday, some one-quarter of all New York City residential tenants have not paid any rent at all since March. The Post does not give a breakdown of the non-payers between regulated and non-regulated tenants, but it is likely that there many tens of thousands of each. Back in March, Governor Cuomo then added some fuel to the fire by ordering a moratorium on evictions, to be in effect until August 20. Not surprisingly, large numbers of tenants have jumped at the chance to stop paying rent while there is nothing the landlord can do about it.

Now let’s consider how this situation plays out as between non-regulated and regulated tenants. First, with a non-regulated tenant, the landlord has every incentive to make some kind of deal, and particularly so if the tenant has had a record of good behavior and regular rent payments. With a simple conversation where the tenant explains the economic circumstances, many landlords will forgive one or even multiple months’ rent. People I know who own shares in buildings have been told that such concessions to tenants are necessary, and that they should expect substantially lower payouts on their investments this year. But then, those are the breaks of the business.

In the regulated market the situation is very different. Wherever the regulated rent is notably below a comparable market rent, the landlord has little or no incentive to be nice to the tenant, or to do any kind of a deal. If the tenant cannot make up the full back rent when the eviction moratorium ends, the landlord has an opportunity to get the apartment back and try to remove it from the rent regulation system. Although changes to the regulatory system in 2019 make that harder than it was previously, there are still options available to a landlord, including combining multiple apartments to make a new unit outside the system.

Back in August 2015 I had a post titled “Maybe Those Rich People Actually Serve A Purpose.” The occasion for the post was that the stock market had just had a sudden significant decline (do you even remember that particular downturn 5 years later?), and Bloomberg was reporting that billionaires in the aggregate had lost some hundreds of billions of dollars of asset values in a matter of a couple of weeks. My comment:

Well, nobody feels too sorry for them, nor should anybody feel sorry for them.  That was the deal.  We let them keep the upside, but in return they had to take the downside.

But of course, the regulated part of New York City residential real estate does not work that way. With the rent regulation system, we don’t let landlords get or keep any upside. After all, that wouldn’t be fair. So when the sudden downturn comes, they have no reason or incentive to take the downside. The downside then falls on the moderate-income tenants, many of whom are likely to lose their apartments.

Sometime in the fall the crunch will come, when tens of thousands of tenants, months behind on their rent and unable to catch up, face eviction. Watch for the politicians who created the situation to blame “greedy landlords.”