Investors in apartments are squeezed
Before the financial crisis, real estate investors saw potential profits everywhere. Now their properties aren't worth what they sold for, and it's turning into a problem for middle- and working-class renters. Alisa Roth reports.
An apartment building (gorenter.com)
More on Housing - Real Estate
TEXT OF STORY
Kai Ryssdal: Back in the boom days of real estate, investors saw potential profits almost every place they looked. Forget houses and commercial real estate. Even apartment buildings where rents were regulated looked like gold mines. Developers paid luxury prices for those buildings, hoping to turn them into cash cows. Now though, those properties aren't worth near what they sold for, which is a problem for investors. But it's worse for the people who live in them. Marketplace's Alisa Roth reports from New York.
ALISA ROTH: For a long time, rent-regulated housing was considered a boring investment. The income was steady. But it was never very big because the city limits the rents and so they're often well below market rates.
Benjamin Dulchin is the director of the Association for Neighborhood and Housing Development, it's an advocacy group in New York. And he says the real-estate boom really changed that.
BENJAMIN DULCHIN: Starting at about 2005 is that these private equity funds began to notice rent-regulated real estate as an undervalued potential investment.
He says in New York alone developers backed by private equity firms bought up about 100,000 units. That's about 10 percent of the city's rent-regulated housing stock. The idea was to make more money from the buildings by raising the rents dramatically.
Emily Youssof is a housing consultant. She says this is how the developers planned to do it...
EMILY YOUSSOF: In the future, three or four years down the road, the new owner would be able to turn over the tenants and make these buildings into more luxury buildings, as opposed to middle class, working class or even lower-income units.
The prices the developers paid for the buildings were based on much higher rents than the apartments had been getting. And the developers took out big mortgages to pay for them.
But they haven't been able to get low-paying tenants out of the building fast enough, and they underestimated how much it cost to operate these buildings. So the developers just aren't getting the income they need to pay their expenses.
Youssof says the money problems are starting to show.
YOUSSOF: In a number of buildings, you're beginning to see the owners milking the building for the money that is there. They're not paying their mortgages, the maintenance of the building is going down, the violations are going up.
I went to visit Yolanda Naba-Juarez. She's lives in a rent-regulated building in Upper Manhattan with her husband and their two teenagers.
The building is owned by a developer called Vantage Properties, which got backing from a private equity firm to buy it. Vantage paid about $15 million for it in 2007. It was part of a whole real-estate portfolio. The mortgages were then securitized, and they were sold off as investments.
Naba-Juarez comes from Mexico; she doesn't speak English. She doesn't really know anything about her landlord, except that she can't get the company to fix things, like the hole in her bathroom ceiling or the broken refrigerator.
But she and her family may have much bigger problems to deal with: Benjamin Dulchin's advocacy group has been analyzing data from the SEC and from loan servicers. And they found that many of the developers of rent-regulated buildings in New York -- including Vantage -- just aren't making enough money to keep paying their mortgages.
DULCHIN: This is sort of not just a disaster in the making. This is a disaster that has already happened. And it clearly shows that these buildings are really grossly distressed.
Neil Rubler is the CEO of Vantage. He wouldn't talk to me about the specifics. But he did say all of his buildings are already profitable.
He says these buildings were meant to be long-term investments. And his plan is to use technology and economies of scale to make them more profitable.
NEIL RUBLER: We believe that by operating our business more efficiently, we can provide a better quality product, and higher quality services to our consumer and therefore raise their standard of living while at the same time keeping the product ultimately affordable to them.
But the mortgages on a lot of these buildings are starting to come due. The developers can't afford to pay the loans off. And the banks won't refinance because they think the investments are just too risky.
Youssof, the housing consultant, says this is starting to happen all over the country.
YOUSSOF: Anywhere where you have a high concentration of renters, you'll see issues like this. And, of course, California, Florida, Illinois, Chicago, New York, D.C.
She's been talking to lenders and government officials to get them to work with building owners. Because she says entire neighborhoods are at stake.
In New York, I'm Alisa Roth for Marketplace.
Comments
Comment | Refresh
11/17/2009
1) Exactly HOW were poor income people going to get moved out of these places, anyway? By force? 2) Gentrification is nothing new. 3) If upkeep isn't being done...will the buildings get condemmed, in order to get the poor out? 4) Who will, therefore, get stuck with the repair bills? Or maybe it will become demolition bills, by that time.
From Palo Alto, CA, 11/13/2009
Concerning Kai Ryssdal's and Alisa Roth's November 12th report about rental-apartment investors who've taken a bath lately, I think that "Marketplace" missed the forest for the trees.
First, commercial real estate investments are always risky because many developers' schemes are pretty hare-brained even in the best of times. In the case of apartments in cities with rent-control ordinances, these schemes could never possibly have made money without wilfully and deliberately breaking the law, and many now-failing developers hired armies of lawyers to lay seige to already beleagured local governments in order to blast holes in their local ordinances. To them, I say: good riddance!
Second, the decline in rental-building values is not just a problem for private
capital, since some of the biggest investors--and losers--have been the nation's pension funds, including giants like the federal Pension Benefit Guarantee Corporation and the California Public Employee Retirement System (CalPERS). Recent reports by other media indicate that pension-fund managers have been making these risky investments in search of an 8% average annual rate of return, which they think they need in order to keep up with rising retiree health-care costs, since their only other choice is to ask employers and employees to increase their pension-fund contributions. (How realistic is either alternative?) In turn, this has caused public-employee pension funds like CalPERS to put themselves in the politically untenable position of using public money to enrich developers who destroy badly needed low-income housing, instead of helping to create more.
I think that "Marketplace" has done its listeners a disservice by not putting
the rental-housing mess into this larger context and failing to discuss the "big picture".
From Oak Harbor, WA, 11/13/2009
This part really bothers me:
"The idea was to make more money from the buildings by raising the rents dramatically.
Emily Youssof is a housing consultant. She says this is how the developers planned to do it...
EMILY YOUSSOF: In the future, three or four years down the road, the new owner would be able to turn over the tenants and make these buildings into more luxury buildings, as opposed to middle class, working class or even lower-income units."
The greedy rich come up with a scheme to through poor people out on the street. When that scheme fails the poor people are still in danger of being thrown out on the street! Had the poors' homes (apartment buildings) been left as housing instead of trying to turn them into cash cows poor people would still have a roof over their heads!
Another example of how rich people toy with poor peoples' lives.
From cleveland, OH, 11/12/2009
Many lenders are now turning to receivers to mitigate these issues while the property is in foreclosure. The neutral party manages the building keeping all funds in an escrow account subject to the court. The receiver fixes many of the perils discussed in this story, keeping tenants satisfield and maintaining the property to appropriate standards.
From New York, NY, 11/12/2009
The simple solution to this problem is for the free market to triumph when the building owners default on the bonds and commit the rent revenue to building services. The investors come after the residents.
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.