Speaker 1: Hello, Odd Lots listeners, you were about to hear a
Speaker 1: conversation about the troubles at New York Community Bank Corp.
Speaker 1: We recorded this interview on February sixth, and his statement
Speaker 1: to the market, NYCB said that his deposits have increased
Speaker 1: since the end of last year and that liquidity remains ample.
Speaker 1: A spokesperson for the company did not respond to a
Speaker 1: separate quest for comment from Oddlots and now here's our
Speaker 1: episode a New York Community Bank Corp. Hello, and welcome
Speaker 1: to another episode of the.
Speaker 2: Odd Lots podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Allaway.
Speaker 1: Tracy banking troubles again. Obviously, we had that little, I
Speaker 1: don't know many mini crisis at the uffle Kerfuffle last
Speaker 1: March with SVB and a couple other banks, and then recently,
Speaker 1: I think just last week. We're recording this Tuesday, February sixth, another.
Speaker 3: One, that's right. So we saw New York Community NYCB.
Speaker 3: Their shares felt something like almost forty percent in a
Speaker 3: single day after they released a bunch of announcements. So
Speaker 3: let's see, I'm trying to remember all of them. So
Speaker 3: they missed on earnings per share. They cut their dividend
Speaker 3: and they increased their reserves for bad loans. So basically
Speaker 3: the provisions are the amount of money they set aside
Speaker 3: to cover souring credit. And of course this set off
Speaker 3: a wave of conversation and analysis about how much of
Speaker 3: that issue has to do with NYCB specifically, or whether
Speaker 3: it's saying something broader about the outlook for these loans.
Speaker 3: And I should just say that in its statement, NYCB
Speaker 3: specifically cited commercial real estate and multifamily as well, which
Speaker 3: is sort of the I always call it the forgotten
Speaker 3: CRE because everyone focuses on offices, but multifamily also falls
Speaker 3: into the CRE category.
Speaker 1: Yeah right, we did that episode a few months ago.
Speaker 1: I think in October we did an episode on multifamily
Speaker 1: because we know that we know that there was just
Speaker 1: this incredible boom right in twenty twenty one and social
Speaker 1: media influencers. We're like raising money on Instagram for you know,
Speaker 1: sun Belt cire and so there is this big question
Speaker 1: about the category. More broadly, this is of course not
Speaker 1: a sun Belt story. It's New York Community Bank Orp.
Speaker 1: But it gets this question of like, oh, is this
Speaker 1: something idiosyncratic to the bank, Where is this broader are
Speaker 1: we gonna see multifamily problems elsewhere? It feels like each
Speaker 1: one of these banks that's gotten into trouble over the
Speaker 1: last couple of years, there is this furious debate. It's like,
Speaker 1: it's just it's just idiosyncratic. It's just Silicon Valley, it's
Speaker 1: just crypto exposure, it's just New York. But then eventually
Speaker 1: you have enough idiosyncratics when people start to go worry.
Speaker 1: They're like, are there things going wrong? Are there similarities
Speaker 1: with other banks?
Speaker 3: Yeah? And it's funny you mentioned the multifamily episode. I
Speaker 3: think that was with Lee Everett. He was basically saying
Speaker 3: that was the next shoe to drop in the troubled
Speaker 3: cre category. But we did actually do an episode even
Speaker 3: before then titled the NYC Landlord who says the golden
Speaker 3: age of being a landlord is over.
Speaker 1: That's right, So we did do a New York specific one.
Speaker 1: Our guest then, Ben Carlos, type in local real estate
Speaker 1: guy who owns residential real estate. He also does some
Speaker 1: data stuff and other things, and he basically came on
Speaker 1: He's like, look, my family has been in this business
Speaker 1: of renting out apartments for a long time, and the
Speaker 1: business is going bad. This is not a business I
Speaker 1: really want to be in it anymore. He mentioned that
Speaker 1: he would be selling off some or all of his
Speaker 1: assets over time. I think he specifically said he wouldn't
Speaker 1: be doing a fire sell or like a mass liquidation,
Speaker 1: but that he wanted to get out of business. He
Speaker 1: also said that he was interested in ways to essentially
Speaker 1: not just get out of the business, not just remove
Speaker 1: his defecto long position, but seeing if there were ways
Speaker 1: to bet on the downside. It was this, there is
Speaker 1: like a combination of like, okay, gimbiism in New York
Speaker 1: seems to be on the rise, so there perhaps is
Speaker 1: going to be more supply plus a sort of shifting
Speaker 1: political landscape. But I think this is key, such that
Speaker 1: regulations will make life harder for landlords.
Speaker 3: Yes, this is the return to I mean it never
Speaker 3: went away completely, but a newfound popularity of rent control
Speaker 3: and the issues that maybe causes for landlords. And of course,
Speaker 3: I mean the backdrop to all of this is that
Speaker 3: interest rates have gone up spectacularly and so why deal
Speaker 3: with tenants and policy when you can just put your
Speaker 3: money in a money market fund and earn five percent?
Speaker 2: Yeah, that's right.
Speaker 1: And also you know, in New York specifically, we have
Speaker 1: an affordability crisis, and we have an affordability crisis even
Speaker 1: among individuals and families that make a lot of money.
Speaker 1: So plenty of New York City professionals who are rent
Speaker 1: who make decent incomes still find this housing market very frustrating,
Speaker 1: feel that they're paying way more than they should be
Speaker 1: in getting squeezed. And of course, you know, people with
Speaker 1: good money and professional jobs historically have had a lot
Speaker 1: of political power, and so this idea that okay, there
Speaker 1: is this very powerful renter class in New York City
Speaker 1: specifically that politicians have to listen to, which sort of
Speaker 1: tilts the dot, turns the dial more towards pro tenant
Speaker 1: policies that landlords may not like. Well, on that note,
Speaker 1: I'm very excited we have Ben back on the podcast.
Speaker 2: Ben, thank you so much for joining.
Speaker 4: Us, Thanks for having me.
Speaker 2: Let's talk before.
Speaker 1: We get into the conversation, because we want to talk
Speaker 1: to you about this real estate market. We want to
Speaker 1: talk to you about CB specifically and what's going on
Speaker 1: with them. I mentioned in the intro that you said
Speaker 1: on our episode early last year that you're not just
Speaker 1: interested in getting out of the space selling off of
Speaker 1: your assets, but also exploring ways to essentially shorten the space.
Speaker 1: Of course, you've done some work on that, including on NYCB,
Speaker 1: So I think we should start with a disclosure.
Speaker 2: Where are you at right now with this? Sure?
Speaker 4: So, you know, after our episode last year, and really
Speaker 4: really before it, I was exploring, you know, the various
Speaker 4: ways that one could approach shorting multifamily to you know,
Speaker 4: express the thesis that I talked about on that podcast.
Speaker 4: And you know, I found out a couple of things,
Speaker 4: one of which shorting is very hard and requires a
Speaker 4: lot of capital. But in doing so, I settled on
Speaker 4: New York Comedy Bank as a target, and spoke to
Speaker 4: and advised several hedge funds on New York Commedy Bank
Speaker 4: being a good target based on you know, totally public information.
Speaker 4: I can't speak to what trades, if any, they executed
Speaker 4: on this. All I can say is that I neither
Speaker 4: I nor my firm were or are short New or
Speaker 4: Commedy Bank, and I have not received or are not not
Speaker 4: entitled to any compensation tied directly or indirectly to the
Speaker 4: performance of that stock.
Speaker 1: But you were paid, yes, for your advisory services or
Speaker 1: your consulting services to the hedge Fund. Correct, And just
Speaker 1: to be clear, you said on the podcast last year
Speaker 1: that you were planning on getting out of the residential
Speaker 1: real estate business in New York City.
Speaker 2: What's happened between then and now on that front.
Speaker 4: We've sold one of our buildings, we still have a
Speaker 4: few more to sell off.
Speaker 3: So maybe just to begin with, can you talk a
Speaker 3: little bit about NYCB's relationship to multifamily, Like what is
Speaker 3: the exposure here? So they mention a multifamily portfolio, what
Speaker 3: is that? How did they come to own it, and
Speaker 3: what does it look like?
Speaker 4: Yeah, so they are, by their own account, I think,
Speaker 4: the second largest multi family lender in the country, and
Speaker 4: multi family loans represent to forty four percent of their
Speaker 4: entire loan book, not just real estate loans, and twenty
Speaker 4: two percent of their entire loan book is a particular
Speaker 4: type of multifamily loan, which is rent stabilized. It loans
Speaker 4: on rent stabilized buildings in New York City, and this
Speaker 4: is a business they've been huge in for five decades.
Speaker 4: They are currently the biggest lender on rent stabilized buildings,
Speaker 4: even more so than the now failed Signature Bank. And
Speaker 4: the growth of New York comed Back as an institution
Speaker 4: is really tied up in the fortunes and evolution of
Speaker 4: the rent stabilized market over the past thirty years. So,
Speaker 4: you know, let me ask the two of you if
Speaker 4: you ever lived in an apartment in New York City
Speaker 4: within a building that was built prior to nineteen seventy
Speaker 4: four and contained six or more residential units.
Speaker 3: Yes, but it hasn't been rent stabilized exactly.
Speaker 4: And did you pay like, what it felt like, a
Speaker 4: really high rent for it?
Speaker 3: Oh my god, I am still paying a really high
Speaker 3: rent for it.
Speaker 4: Go on, Well, there was a time that all apartments
Speaker 4: and buildings like that were rent stabilized, and the reason
Speaker 4: that you paid a very high rent for that ancient
Speaker 4: apartment is deeply tied up in the story of New
Speaker 4: York Comedy Bank over these past thirty years.
Speaker 3: Wait, so what is the allure of rent controlled apartments?
Speaker 3: Because if I think about I want to be a
Speaker 3: real estate developer or a lender in New York, you know,
Speaker 3: I want some luxury building that's all shiny and new,
Speaker 3: and I can charge an incredibly high amount for people
Speaker 3: to live there. I don't necessarily think oh, I'm going
Speaker 3: to go into rent stabilized properties.
Speaker 4: Right. So, historically, up up until the early nineteen nineties,
Speaker 4: the allure of these properties was a lot less than
Speaker 4: it became, and it was largely based on, you know,
Speaker 4: the solidity of it as a business. You know, the
Speaker 4: rents are low, so the occupancy always stays high, and
Speaker 4: it's a it was a bond of business. And what
Speaker 4: changed in the early nineties is, you know, New York
Speaker 4: City at that time was in really bad shape. There's
Speaker 4: a lot of high budget deficits, high crime, all these
Speaker 4: foreclosed buildings costing city hundreds millions dollars in property tax revenue.
Speaker 4: And in response to that, dynamic landlords claimed that the
Speaker 4: foreclosures and the blight were the faults of rent regulations.
Speaker 4: And if you think about this doesn't really make sense
Speaker 4: because you know, it's a self serving argument and sort
Speaker 4: of gets the causality backwards. Like every city in the
Speaker 4: country was having major problems resulting from deindustrialization, white flight,
Speaker 4: and these other you know, mega trends, most of which
Speaker 4: did not have any form of rent regulation. So the
Speaker 4: real estate industry's claim was like, all right, if you
Speaker 4: let us raise the rents then we'll fix up the buildings,
Speaker 4: property taxes will go up, et cetera. Politicians and the
Speaker 4: New York City Council bought that and implemented a policy
Speaker 4: called vacancy decontrol, which allowed apartments to be deregulated in
Speaker 4: the buildings that we talked about. Once they once the
Speaker 4: legal rents breached a threshold of at the time was
Speaker 4: two thousand dollars. That was later raised several times, and
Speaker 4: I think before it went away it was the highest
Speaker 4: was twenty seven hundred dollars. So, you know, at the time,
Speaker 4: legislators from places like Bushwick, which were very poor, where
Speaker 4: you know, the highest rent in the neighborhood was five
Speaker 4: hundred dollars. They could never imagine that a rent could
Speaker 4: get to two thousand dollars, so.
Speaker 3: They thought they had a long way to go until
Speaker 3: they would reach that cap.
Speaker 2: Yeah.
Speaker 4: So you know, incidentally, that's in nineteen ninety four. A
Speaker 4: little bank known as Queens County Savings Bank goes public
Speaker 4: the year before in nineteen ninety three, that later becomes
Speaker 4: New York Community Bank. So what happens between nineteen ninety
Speaker 4: four and twenty nineteen New York City's economy booms. Like
Speaker 4: many other urban markets around the country, population growth job
Speaker 4: growth far up housing construction, which then sends rents on
Speaker 4: existing housing soaring. So this makes for a very good
Speaker 4: combination for landlords. The apartment value of apartment buildings increases,
Speaker 4: liquidity in the debt and equity markets for a apartment
Speaker 4: buildings in New York sty increases, and New York Community
Speaker 4: Bank really grows along with its landlord clients. Becomes the
Speaker 4: biggest lender on these rent stabilized buildings, provides acquisition loans
Speaker 4: for the landlords to expand, It provides refinancing after refinancing,
Speaker 4: allowing their clients to take money out of these buildings.
Speaker 4: And you know, during this process, where like the BET
Speaker 4: is basically all right, market rents are, it's worth deregulating
Speaker 4: these buildings all over the city. Because the spread between
Speaker 4: market rents and the regulator rents is so high, the
Speaker 4: pricing on these assets gets totally out of whack. The
Speaker 4: spread between buildings that are selling in the Bronx which
Speaker 4: have a very weak credit profile, and buildings that are
Speaker 4: selling in Manhattan really narrows. And that continues for the
Speaker 4: next twenty years.
Speaker 1: Sorry, just to back up, I'm just because I want
Speaker 1: to be precise. What specifically did the New York City
Speaker 1: Council do in the early nineties. When you say that
Speaker 1: twenty seven hundred, what happens then?
Speaker 4: Okay? So up until that point, rents on a rent
Speaker 4: on a regular department like the one that Tracy lived in,
Speaker 4: could only be raised a certain.
Speaker 3: Amount of I didn't live in a regulated apartment. Well
Speaker 3: it was, yes, sorry, yes, it's previous life.
Speaker 4: Yes. And up until that point, the rents could only
Speaker 4: be raised by a certain amount based on what the
Speaker 4: Rent Guidelines Board issues each year. Okay, and starting there
Speaker 4: was some erosion of that system prior to nineteen ninety four,
Speaker 4: but the big change in nineteen ninety four was that
Speaker 4: the apartment could become completely deregulated once once it breaches
Speaker 4: that two thousand dollars threshold, So instead of being able
Speaker 4: to only go up three percent a year, it could
Speaker 4: go from two thousand to four thousand. And there's also
Speaker 4: a bonus for when an apartment goes vacant, so every
Speaker 4: time an apartment turns over from tenant to tenant, the
Speaker 4: rent could be increased twenty percent, as opposed to just
Speaker 4: the rent guidelines board amount.
Speaker 3: So the obvious question here is that would seem to
Speaker 3: create an incentive structure for landlords to basically try to
Speaker 3: get to the twenty seven hundred or twenty eight hundred
Speaker 3: threshold so that they could then raise the rent to
Speaker 3: whatever the market can bear. Did we see that behavior
Speaker 3: and how exactly do they try to speed up that process?
Speaker 4: Yes, so there are three ways that they try to
Speaker 4: speed up that process. One is buyouts, offering people money
Speaker 4: to leave, which is legal. Others are harassment of tenants
Speaker 4: out of buildings and using all sorts of means. And
Speaker 4: the third is inflating the cost of renovations that they're
Speaker 4: doing that are used to justify increases, because that was
Speaker 4: always another way to increase rents. Was like, if you
Speaker 4: need to put in a new boiler in the building,
Speaker 4: you could amortize the cost of that improvement across all
Speaker 4: the rents and the buildings in the building. If you
Speaker 4: need to redo the plumbing in a particular apartment, you
Speaker 4: could amortize the cost over that.
Speaker 1: Sorry, something I'm still confused by, even post nineteen ninety four,
Speaker 1: and I've only lived in New York almost twenty years now,
Speaker 1: But every once in a while you like hear some
Speaker 1: story about so and so has an apartment on the
Speaker 1: Upper east Side and they're living in it and their
Speaker 1: grandmother is still there.
Speaker 3: It is still like crazy, this is a friend's plot line.
Speaker 2: Right, yeah, something like that.
Speaker 1: How did those stories exist in a post ninety four world?
Speaker 4: Sure, so one, there's still the very old system of
Speaker 4: rent control, so like that is a very small number
Speaker 4: of units, but also does represent some of those situations.
Speaker 1: So we're talking about a difference between rent.
Speaker 2: Control rent staabilized. I see, I see.
Speaker 1: So the rent control like they're just like this is
Speaker 1: it and this is the price where someone is That
Speaker 1: actually was not changed. What changed was these was the
Speaker 1: units that were designed to just go very slowly.
Speaker 4: Correct. Well, I mean rent control is also designed to
Speaker 4: go out very slowly in a way. But once a
Speaker 4: rent control, once a tenant at this point, once a
Speaker 4: tenant in a rent control unit vacates that it becomes
Speaker 4: rent stabilized and it sort of enters into the new system.
Speaker 2: I see.
Speaker 4: But to answer your broader point, which I think speaks
Speaker 4: to this dynamic here is post ninety four. You know
Speaker 4: this trade of you know, improving the apartment either actually
Speaker 4: or on paper in order to get the rent above
Speaker 4: the deregulation threshold. Really only works in strong submarkets, So
Speaker 4: there was a time every apartment a building of a
Speaker 4: certain size in below below ninety sixth Street was rent stabilized.
Speaker 4: But Manhattan is the highest rent market in New York City,
Speaker 4: so all of those apartments are excuse me, a huge
Speaker 4: portion of those apartments were deregulated because there was enough
Speaker 4: spread in there for the landlord to be able to
Speaker 4: for it to be worth doing the work. Same thing
Speaker 4: in places like Park Slope and sort of Western Brooklyn Queens,
Speaker 4: you know, the gentrifying areas of the city, whereas in
Speaker 4: the non gentrifying areas. The ways this policy mainly manifests
Speaker 4: itself was in just increasing the rents higher than they
Speaker 4: otherwise could be. But rents never are much more rarely
Speaker 4: reached the threshold.
Speaker 2: To be able to deregulate it.
Speaker 3: Can you talk to us a little bit about the
Speaker 3: financing picture. To what degree did this dynamic become, I
Speaker 3: guess well known in the fundraising side of this whole thing.
Speaker 3: So was it pretty easy to get loans an additional
Speaker 3: capital in order to either buy more properties on the
Speaker 3: assumption that you could eventually get to that threshold and
Speaker 3: raise the rent or to fund renovation to try to
Speaker 3: get to that threshold.
Speaker 4: Yes, it was pretty easy and became particularly so in
Speaker 4: the early two thousands, early to late two thousands, you know,
Speaker 4: with sort of the broader sheends in real estate of institutionalization,
Speaker 4: more private equity, and you know, became a more sophisticated
Speaker 4: business that was putting more capital in more places. So
Speaker 4: prior to let's say two thousand, the rent stabilized business
Speaker 4: was a pretty sleep still a pretty sleepy business in
Speaker 4: so far as like what type of capital played in it.
Speaker 3: So like mom and pop, mom and pop and apartment building.
Speaker 4: Okay, And you know there were certainly large landlords at
Speaker 4: that point that it accumulated a lot of these properties.
Speaker 4: But you know, private equity firms were not a big
Speaker 4: player at that time. But in particularly in the two thousands,
Speaker 4: the private equity and both on and also private credit
Speaker 4: and New York coming back to the world really put
Speaker 4: a lot of capital into this sector, and largely based
Speaker 4: on the premise that they would be able to raise
Speaker 4: these rents a lot more.
Speaker 1: Let's talk a little bit more about that, because Tracy
Speaker 1: mentioned in the beginning like setting aside everything you know,
Speaker 1: it doesn't seem like rent control or rent stabilized buildings
Speaker 1: or any of these buildings are like a particularly exciting
Speaker 1: place to lend in. But if everyone thinks the place
Speaker 1: is not an exciting place to lend and then intuitively
Speaker 1: there's sort of like above market opportunities for the one
Speaker 1: player that goes in. And we see this all the
Speaker 1: time and all kinds of markets where like, yes, like
Speaker 1: you can make a lot of money in distressed assets
Speaker 1: of all sorts because most people don't want it. So
Speaker 1: if you put in a new legwork to make it work,
Speaker 1: you can make a lot of money. Talk to us
Speaker 1: a little bit more about like the relationship that New
Speaker 1: York Community Bank Corp. Had with a fellow landlords in
Speaker 1: your world, why landlords liked working with them, why they
Speaker 1: liked working with landlords, and why this was you know,
Speaker 1: the profits that they accrued during the good times.
Speaker 4: Sure, so the New Yor Community Bank really, like many
Speaker 4: community banks, it's a relationship bank, and clearly as part
Speaker 4: of its strategy it was building relationships with rand stabilized landlords.
Speaker 4: So this has several benefits them. Obviously, making loans is
Speaker 4: what a bank does. But also these community banks typically
Speaker 4: require anyone getting a commercial mortgage from them to have
Speaker 4: deposits at this bank as well, saying and also like
Speaker 4: the deposits from tenant security deposits held in these buildings
Speaker 4: excuse me, at New York Commedy Bank. So it became
Speaker 4: a way for the New York community banks of the
Speaker 4: world to really build their deposit bases and their loan
Speaker 4: books on a product type in which there's a lot
Speaker 4: of product. You know, there's a lot of these buildings
Speaker 4: that need loans, and it's also kind of complicated. So
Speaker 4: like lenders from out of town you know there, you know,
Speaker 4: which were coming to land on office buildings and you know,
Speaker 4: all sorts of other assets were less inclined to land
Speaker 4: on rent stabilized buildings, not because of any sort of
Speaker 4: accurate assessment of risk, but just because like it's easier
Speaker 4: for some for some French bank to you know, loan
Speaker 4: on an office building then figure out the rent stabilization code.
Speaker 3: So if we're looking at all the headwinds that are
Speaker 3: facing this particular segment, in addition to things like the
Speaker 3: fact that rates have gone up enormously, I think there
Speaker 3: was a more recent change to policy in twenty nineteen.
Speaker 3: Can you walk us through what exactly that was and
Speaker 3: how it sort of changed the picture for multifamily.
Speaker 4: Sure, So, prior to twenty nineteen, you know, the bad
Speaker 4: behavior that we talked about earlier of harassment, the lack
Speaker 4: of houses construction, and you know, the general dynamics in
Speaker 4: New York Cities housing market had really produced a terrible situation.
Speaker 4: We have, you know, rent housing burden for tenants across
Speaker 4: the city is way up record levels, homelessness is way up.
Speaker 4: And twenty nineteen, a finally unified statewide coalition of tenant
Speaker 4: groups called Housing Justice for All capitalized on the post
Speaker 4: Trump progressive resurgence to pass the Housing Stability and Tenant
Speaker 4: Protection Act of twenty nineteen, which is now known as
Speaker 4: the HSTPA. This bill did many things, but for the
Speaker 4: purpose of this conversation, the most important things it did
Speaker 4: is it ended vacancy de control, so you can no
Speaker 4: longer deregulate rent stabilized apartments.
Speaker 1: So that reduced as your incentive to harass your tenants.
Speaker 4: Theoretically, and it removed the twenty percent vacancy bonus. Can't
Speaker 4: you know, you can't raise the regulated rent by twenty
Speaker 4: percent on turnover, and it also severely curtailed the degree
Speaker 4: to which landlords could recapture the renovation costs in rents.
Speaker 1: It's funny, So I I want to go here actually
Speaker 1: at some point in the conversation because right around the corner,
Speaker 1: little did we know in twenty nineteen that a couple
Speaker 1: years later we'd have like the worst inflation in forty years.
Speaker 1: And we know that it was like a real headache
Speaker 1: and a very costly headache for landlords to get contractors
Speaker 1: in and renovate and floors and air conditioners and anything
Speaker 1: else that landlords would have to deal with. So I
Speaker 1: was sort of curious about that. Okay, it sort of
Speaker 1: like curtails the ability to recapture renovation costs, but objectively,
Speaker 1: the cost of renovation did.
Speaker 2: Explode, right two years later?
Speaker 1: Can you talk a little bit more about the intersection
Speaker 1: of these regulations with just the reality that you don't
Speaker 1: even have to not even for like sort of nefarious
Speaker 1: purposes or purposes of raising the rent, like renovation costs
Speaker 1: really did.
Speaker 4: Explode, right, So I think you know, the regulations inflation
Speaker 4: and interest rates changing are really accelerants to what was
Speaker 4: sort of an evitable trend on these buildings. So you know,
Speaker 4: post HSTPA, the liquidity in the market for these buildings
Speaker 4: just dries up. There's no price discovery. Most sellers don't
Speaker 4: want to crystallize their losses. Most buyers don't know how
Speaker 4: to price the assets, you know, in a large part
Speaker 4: because the issues that we just discussed, and brokers in
Speaker 4: the sector are buying large like indulging their client's delusion.
Speaker 4: So you know, this puts people like excuping lenders near
Speaker 4: community Bank in a difficult position because, like, in addition
Speaker 4: to not wanting to mark down the value their collateral
Speaker 4: like I need lender wouldn't in this case doing so,
Speaker 4: would you know, put some of their posits at a
Speaker 4: lot of the deposits at risk as well. And they don't
Speaker 4: know what the future holds. Like everyone in this world
Speaker 4: of rend stabilized buildings is sort of engage in this
Speaker 4: collective delusion. They're waiting for the Supreme Court to overturn
Speaker 4: rank control, They're waiting for the legislature to weaken the AHASTPA.
Speaker 4: And I think this is where they really miscalculated, and
Speaker 4: I really sort of bought into their own propaganda from
Speaker 4: you know, thirty years ago, which is that you know,
Speaker 4: they think that real estate investment drives economic conditions, but
Speaker 4: really economic conditions tend to drive real estate investment. And
Speaker 4: they would have known this if they had looked at
Speaker 4: the data from the rent stabilized building sector, which showed
Speaker 4: that this trade really started to taper off before the
Speaker 4: HSTPA in twenty seventeen, the amount of rent stabilized buildings
Speaker 4: being traded. So the question is why, and the reason,
Speaker 4: I think is pretty simple. If you look at the
Speaker 4: history of this the deregulation, there were fewer and fewer
Speaker 4: buildings in which this deregulatory trade actually worked because you know,
Speaker 4: if market rents are not high enough, it doesn't make
Speaker 4: any more, it doesn't make sense to invest all this
Speaker 4: money in these buildings. So, after all the deregulation that
Speaker 4: happened over those preceding twenty five years, the vast majority
Speaker 4: of events stabilized stock and therefore collatter on near community
Speaker 4: bank loans remains concentrated in lower income submarkets. So this
Speaker 4: is always subprime real estate. And the buildings are you know,
Speaker 4: they're century old, they're expensive to maintain, The tenants have
Speaker 4: a weak credit profile. So even if the laws did
Speaker 4: allow for higher increases than they do now, at some
Speaker 4: point you can't pull blood from a stone. Big rent
Speaker 4: increases are going to increasingly show up and increase collection costs,
Speaker 4: legal fees, et cetera, all while operating costs, to your point, Joe,
Speaker 4: are increasing on these ancient buildings. And if you think about,
Speaker 4: like the other buildings in these neighborhoods, the vast majority
Speaker 4: of other multi family buildings once built after nineteen seventy
Speaker 4: four in places like the South Bronx, literally require subsidies
Speaker 4: to operate.
Speaker 3: What's the future of these buildings now? So one thing
Speaker 3: that you see landlords say nowadays is because of the
Speaker 3: changes to rent control that they aren't motivated to get
Speaker 3: new tenants in. So, you know, why spend a load
Speaker 3: of money renovating an apartment getting it up to standard
Speaker 3: if you're not going to be able to make up
Speaker 3: that investment by charging market rent. Just leave it empty.
Speaker 3: So are we just going to end up in a
Speaker 3: situation where apartments are empty? Or at some point do
Speaker 3: landlords maybe crystallize their losses and start saying, you know what,
Speaker 3: I'm just going to sell this off. Maybe a developer
Speaker 3: can knock down the building, build something new. What actually happens, So.
Speaker 4: It's obviously going to vary a lot between landlords and landlord.
Speaker 4: Some are in better financial positions than others. But to
Speaker 4: your point, Tracy, it doesn't really make sense to invest,
Speaker 4: you know, conventional for profit capital in these buildings, certainly
Speaker 4: at anywhere approaching the values of the past. So I think,
Speaker 4: you know, broadly speaking, we're sort of in the standoff
Speaker 4: between these rents stabilise building donors their lenders, and on
Speaker 4: the other side, the government because these buildings need subsidies
Speaker 4: to survive. But if I'm the government, and I guess
Speaker 4: we're all the government away as tax payers, we don't
Speaker 4: want to subsidize buildings at above market value. But on
Speaker 4: the other hand, you don't want buildings to degrade to
Speaker 4: a point where subsitdy becomes way more expensive, and not
Speaker 4: to mention, the tenants living in the buildings increasingly suffer.
Speaker 4: So doesn't seem like we're at the point politically where
Speaker 4: that people can come to an agreement on injecting capital
Speaker 4: into these buildings. But I think that's an inevitability.
Speaker 1: But just going back, your basic argument here is that
Speaker 1: you know, okay, like you bet on this deregulation trade,
Speaker 1: maybe the Supreme Court will one day say all rent
Speaker 1: control or something is illegal, or rent stabilization regimes are legal,
Speaker 1: or maybe the government will water down some of the
Speaker 1: twenty nineteen the New York State government or something will
Speaker 1: water down the twenty nine teen policies. But your basic
Speaker 1: argument is that even if that were true, that gap
Speaker 1: between what these building the fair market value of these
Speaker 1: buildings today under current law, and the sort of dream
Speaker 1: legal changes aren't that big or aren't as big as
Speaker 1: some of the call option embedded is not as great
Speaker 1: as some of these investors imagine.
Speaker 4: Correct. In some cases, the call option is very valuable,
Speaker 4: Like if it's a fully rent stabilized building on the
Speaker 4: Upper West Side, you know, they're basically you're buying the land.
Speaker 4: That land there is very valuable. But the if it's
Speaker 4: a fully renstabilized buildings in Eastern Queens or the South Bronx,
Speaker 4: that land is not very valuable. So the idea that
Speaker 4: they're going to demolish it anytime soon doesn't really hold up.
Speaker 4: So I think, you know, we're dealing with a disconnect
Speaker 4: between what the market in its collective delusion valued these
Speaker 4: buildings at before and what they're fundamentally valued at based
Speaker 4: on you know, cash flow and fundamentals of these buildings,
Speaker 4: and a change in law doesn't change that very much
Speaker 4: simply because of where the real estate is located and
Speaker 4: the credit profile that tends in the.
Speaker 1: Setting side the investor upside potential from a regulatory change.
Speaker 1: One of the arguments that the anti rent control argue
Speaker 1: people make is like, and you sort of did touch
Speaker 1: on this, that it is a perverse or bad situation
Speaker 1: for people living in a building if their owner has
Speaker 1: either no interest or financing capacity to keep that building up.
Speaker 1: So then essentially the person is living in an asset
Speaker 1: that continually gets degraded or does it get fixed that often,
Speaker 1: and the building is falling apart. How real is that
Speaker 1: for some people in some buildings that phenomenon.
Speaker 4: I think it's very real. But it's I think that
Speaker 4: that argument from landlords really tends to fall on to
Speaker 4: fiars because people were living in conditions like that under
Speaker 4: the old rehip. It's not like all the money that
Speaker 4: was being made in this business was being plowed back
Speaker 4: into investing these buildings. These buildings are the least well
Speaker 4: kept in the entire city. They were before and they
Speaker 4: are now. So it's certainly a very real dynamic that
Speaker 4: you know, these buildings require capital, and they have owners
Speaker 4: that for both rational economic and moral reasons or ideological reasons,
Speaker 4: don't want to invest capital in those buildings. However, a
Speaker 4: lot of the problem goes back to having a really
Speaker 4: inept regulatory app apparatus for housing, because in many cases
Speaker 4: these landlords are legally obligated to provide to make these
Speaker 4: or make sure these buildings aren't good prepare, and have
Speaker 4: not been doing so for quite some time.
Speaker 1: So ben obviously people are going to need a place
Speaker 1: to live. This real estate isn't going away. Are these
Speaker 1: investible assets? Is there a play here for some of
Speaker 1: this real estate?
Speaker 4: I don't want to leave listeners with the impression that
Speaker 4: these are like uninvestable buildings. They're fundamentally depreciating assets. But
Speaker 4: like as many Bloomberg listeners would know, like there's plenty
Speaker 4: of financial assets out there that have depreciating cash flows,
Speaker 4: what really needs to happen here is these buildings need
Speaker 4: to be valued at a values that reflect their fundamentals.
Speaker 4: We're starting to see previews of this where like some
Speaker 4: of these stabilized buildings are leased entirely to city programs
Speaker 4: or entirely to tenants with Section eight vouchers. So there's
Speaker 4: gonna be various forms through which capital isn't injecting these
Speaker 4: buildings to stabilize them, whether it's providing boucher's to tenants,
Speaker 4: city leasing it directly, nonprofits taking them over and getting
Speaker 4: you know, government financing, and every possible formation in between them.
Speaker 4: There's no civil serviable fixing these buildings because they're all
Speaker 4: in their unique situation and you know, we have so
Speaker 4: little open housing that it's not like the tenants have
Speaker 4: anywhere that they can go. So it's a very live issue.
Speaker 1: All right, Ben Carlos Taipan, thank you so much for
Speaker 1: coming on to odd Laws. Fascinating sort of like New
Speaker 1: York City real Estate and history.
Speaker 2: That did a great job of clearing up how we
Speaker 2: got in this position.
Speaker 1: Thanks roving us, Tracy. I thought there were a lot
Speaker 1: of interesting points in there. One thing in particular I
Speaker 1: just start on and it's not directly related to the regulation.
Speaker 1: This idea like the relationship lenders. You know, it reminds
Speaker 1: me of SVB. It's like you have this expectation that
Speaker 1: that's where you hold the security deposits, et cetera. And
Speaker 1: it kind of brings me down. It depresses me a
Speaker 1: little bit because the idea.
Speaker 3: On a relationship with your bank, well, I.
Speaker 1: Like the idea of financial institutions that actually get to
Speaker 1: know a space that like build up a specific needs
Speaker 1: rather than like pure commodity lending, or.
Speaker 3: It seems counterintuitive because you think they should be developing
Speaker 3: expertise and good risk management skills in a particular sector,
Speaker 3: but instead, so far, what we've seen is it tends
Speaker 3: to lead to I guess over exposure.
Speaker 1: I guess one thing also that is maybe unique and
Speaker 1: very different from an SVB other than the you know,
Speaker 1: one thing that's in similarity obviously is the expectation of
Speaker 1: holding deposits, the focus on one industry. But that's one
Speaker 1: thing that's different and interesting is and I thought it
Speaker 1: was a fascinating point that I hadn't thought of because
Speaker 1: of the sort of complexity of New York City housing law.
Speaker 1: And I'm sure we basically just scratch the surface that
Speaker 1: it sort of naturally repels most capital like, as you said,
Speaker 1: a French bank isn't going to sort of like really
Speaker 1: like take the time to really deal with like a
Speaker 1: post nineteen seventy four houses, pre nineteen seventy four houses,
Speaker 1: all that, and so it sort of creates the situation
Speaker 1: where one type of bet ends up being concentrated in
Speaker 1: the hands of one or a small number of players
Speaker 1: that actually put into the legwork to understand the market.
Speaker 3: Yeah, the other thing I thought was interesting about that
Speaker 3: particular dynamic was it kind of leads to a situation where, Okay,
Speaker 3: there's not a big natural body of capital in this
Speaker 3: space for you know, the various reasons that we laid out,
Speaker 3: But if you do the work, do your due diligence,
Speaker 3: put that effort in, you can get in and then
Speaker 3: make a lot of money because the dynamic almost becomes
Speaker 3: self reinforcing. Right. It's like you have this business model
Speaker 3: that's basically predicated on the value of your building going up,
Speaker 3: and then you have lenders who are very into that
Speaker 3: dynamic as well, and you have more money coming in
Speaker 3: vis private equity, private capital, which Ben also mentioned. It
Speaker 3: feels like it almost becomes this little like tiny feedback
Speaker 3: loop feeding on itself. The other thing that this is related,
Speaker 3: but the other thing that interested me was the idea that, well,
Speaker 3: these were always subprime assets, right. But again, that ecosystem
Speaker 3: of players were sort of telling themselves a different story,
Speaker 3: and everyone agreed on that story at the same time.
Speaker 3: And that's fine as long as everyone can keep agreeing.
Speaker 3: But then when the environment starts to change, when interest
Speaker 3: rates start to go up, operational costs go up, it
Speaker 3: kind of falls apart totally.
Speaker 1: I thought that was a really fascinating point that even if,
Speaker 1: like you got the dream free market wish list, that
Speaker 1: many of these buildings just do not have the embedded
Speaker 1: value that a lot of the investors sort of assumed
Speaker 1: or imagined that they would. That's like a really interesting
Speaker 1: debate there. I also thought it was interesting, you know
Speaker 1: that in the old old days that rent stabilized billance.
Speaker 1: As he described it, it's a bond business, and so
Speaker 1: it's almost like when it got out of the business
Speaker 1: of being a bond business, where suddenly people started maybe
Speaker 1: thinking of it as like an equity business. Yes, Upside
Speaker 1: exactly showed the seeds of its eventual demise because you
Speaker 1: keep pushing to try to get out of the bond
Speaker 1: asset class to get something more like equity market.
Speaker 3: Right, and that's when the story becomes really important, the
Speaker 3: story being like, well, we're getting close to the twenty
Speaker 3: eight hundred threshold and we're going to renovate and eventually
Speaker 3: get over it, and then we'll make tons of money
Speaker 3: because this is going to be a shiny new designer
Speaker 3: apartment or something like that. On that happy note, shall
Speaker 3: we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: Okay, this has been another episode of the All Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: I'm Joe Why Isn't? You can follow me at the Stalwart.
Speaker 1: Follow our guest Ben Carlos type and he's at so Bendito.
Speaker 1: Follow our producers Carmen Rodriguez at Carmen Arman, dash Ol
Speaker 1: Bennett at Dashbot and Kelbrooks at kel Brooks. And thank
Speaker 1: you to our producer Moses Ondem. From our Odlots content,
Speaker 1: you can check out Bloomberg dot com slash odd lots,
Speaker 1: where you have transcript, a blog and the newsletter, and
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