Even in the crisp afternoon sunlight, the two-bedroom Manhattan apartment has a ghostly pallor, its cracked walls yellowing like an ancient black-and-white photograph. Paint chips are falling from the ceiling. A dead pigeon lies on the kitchen floor.
Its landlord, Douglas Peterson, is making a stop on a dispiriting tour of a 21-unit building he bought in 2018 for $4.8 million. Peterson’s City Skyline Realty Inc. specializes in a subgenre of real estate investment: properties subject to the New York City rent-regulation system, the oldest and biggest program in America. For this well-situated apartment on West 164th Street in Washington Heights, the quickly gentrifying Dominican enclave immortalized in a Lin-Manuel Miranda musical, he can charge no more than $650 a month, perhaps a quarter of the market rate.
For landlords the playbook had long been simple and lucrative. Buy run-down buildings that are, in New York lingo, rent-stabilized. Fix them up. Pass along the expense to tenants by raising rents, which was allowed under the regulations. Cash out. Repeat. Once rents approached $2,800 a month, owners could charge what the market would bear, and the apartments became a potential gold mine. “You just had to be patient,” Peterson says.
But his bet on raising rents has gone disastrously bad, as it has for landlords across the city. In 2019, alarmed about the decline in affordable housing, New York state lawmakers rewrote the rules. In one key change they sharply reduced how much landlords could raise rents after renovations. In an even more important shift, the apartments no longer leave the program when rents rise high enough.
Peterson—who’s bought more than 40 properties for $300 million over 20 years—is now in distress. He’s falling behind on his mortgages and scrambling to find money for repairs. In October, Fannie Mae, the government-backed home loan company, started foreclosure proceedings against a dozen of his properties, including the building on 164th Street. “My career is over,” Peterson says. “Now it’s just a question of: What’s my legacy going to be? Is it going to be that I abandoned the ship when it was sinking, or that I stayed and fought?”
Last year, New York buildings with at least one rent-stabilized apartment sold on average for $203,000 a unit, down 34% since 2019, according to Maverick Real Estate Partners, a New York investment manager. By contrast, the price of nonregulated apartments rose 23%. The value of rent-stabilized units declined by as much as $75 billion, Maverick found. In December the Federal Deposit Insurance Corp. unloaded $15 billion in loans backed primarily by New York rent-stabilized apartments—at a 40% discount. Last week, amid concern over real estate exposure, shares of New York Community Bancorp Inc.—which holds about $37 billion in apartment loans, half backed by rent-regulated units—dropped 38% in a single day. “A lot of owners I’m speaking with want to walk away from buildings,” says Lazer Sternhell, chief executive officer of Cignature Realty Associates Inc. in the city.
These losses highlight an escalating battle over a kind of affordable housing that provides a foothold for the working class in one of the world’s most expensive cities. To landlords such as Lewis Barbanel, owner of Barberry Rose Management Inc., in Woodmere, New York, tighter rent regulation violates their private property rights and will only worsen the housing shortage by discouraging renovation and construction. His company sold 21 rent-stabilized buildings last year at a loss. Barberry parted with one building in Harlem for $3.8 million, 59% less than the company paid in 2016. “The politicians are defunding these buildings,” says Barbanel, who’s shifting his investments to New Jersey and elsewhere. “They’re trying to create a situation where the owners fail.”
But to tenants, apartment owners are merely paying the price for reckless borrowing that relied on skyrocketing rents that were bound to spark opposition. The new laws shouldn’t have come as a surprise to property investors, says Cea Weaver, campaign coordinator of Housing Justice for All, who helped lead the fight. “We weren’t being very secret that we were trying to change the rules, nor were the lawmakers in Albany,” Weaver says. “I don’t know if it was hubris or not, but laws change, and that impacts markets.”
Rent control is having something of a comeback after losing favor across more than a generation. In 2019, Oregon became the first state to pass a statewide rent control law, which capped annual hikes at 7% plus inflation. Later the same year, California limited increases to 10%. Two dozen states last year considered caps, according to the National Multifamily Housing Council, a trade group for landlords.
Countries including Canada, India and Sweden all have regulation. As rents are climbing in big cities worldwide, governments have looked to expand protections, with mixed results. Denmark instituted a two-year cap in 2023. Berlin in 2020 enacted a five-year freeze, among the world’s most stringent measures. But Germany’s Federal Constitutional Court overturned it the next year.
As a rule, economists hate rent control, saying it distorts markets, leading to housing shortages and higher rents in market-rate buildings. The rules benefit longtime tenants at the expense of newcomers, and they’re an inefficient way to help those who need it most, scholars have found. The International Monetary Fund late last year called on Ireland to abandon its price caps in designated “rent pressure zones” such as Dublin, because restrictions are worsening the housing shortage. Instead, the agency suggested targeted subsidies for poor renters.
But Chris Herbert, managing director of Harvard University’s Joint Center for Housing Studies, says the market is failing renters. In classical economics, rising prices should be leading to more construction and moderating rents. But scarce land in attractive cities and zoning rules cause persistent shortages. In this environment, Herbert says, milder rent control, such as tying increases to inflation, could be a compromise.
New York’s history shows the ebb and flow of rent regulation amid shifts in the relative power of landlords and tenants. Two-thirds of the city’s residents rent their homes, double the nationwide rate, giving tenants greater political sway than in much of the US. New York’s efforts have roots in 19th century attempts to improve the lot of immigrants crowded into dilapidated tenements.
New York has had some form of rent regulation since 1943, when the federal government imposed price controls to combat inflation during World War II. After those protections expired in the early 1950s, the state enacted its own measures, which applied to pre-1947 buildings. That older system, known as rent control, severely restricts what tenants pay for as long as they occupy the unit, a feature that’s led some renters to organize their life around an unbelievably cheap real estate deal, sometimes stoking outrage or envy when there are reports of someone affluent or famous living for a song. Only 16,000 of those rent-controlled apartments remain.
Rent stabilization, which dates to 1969, covers roughly 1 million apartments, housing a quarter of the city’s population. (Most units have no income restrictions.) Each year landlords submit reports on their income and expenses to the mayor-appointed Rent Guidelines Board, which uses the information to help determine how much owners can raise rents. In New York City, tenants paid a third less for rent-stabilized apartments than they would have for equivalent market-rate apartments, an annual discount adding up to $5.4 billion, according to a 2023 paper from researchers at George Washington University, the University of North Texas and Johns Hopkins University.
In the more market-oriented 1990s, city and state lawmakers voted to relax the rules. Landlords could then raise rents by 20% each time a tenant moved out. They could set their own rents once they rose past a certain threshold. For many buildings, owners could also raise monthly rents by $1 for every $40 in renovations, meaning a landlord who invested $60,000 in a vacant apartment could increase the rent by $1,500 on the next tenant.
This system made regulated apartments far more appealing. “A rent-stabilized unit was viewed as an embedded option to increase rents,” says Shimon Shkury, president of brokerage Ariel Property Advisors.
A new class of investors flocked to a market historically dominated by established local real estate families. These latecomers included smaller companies such as Peterson’s as well as some of the biggest names on Wall Street. In 2015, Blackstone Inc. led the $5.3 billion purchase of rent-stabilized Stuyvesant Town and Peter Cooper Village. Blackstone, which has since spent more than $375 million in improvements, says it remains confident in the investment.
But the city’s soaring housing prices provoked a backlash. Then-Mayor Bill de Blasio and New York Attorney General Letitia James said looser controls provided incentives to harass tenants and promoted gentrification and the deregulation of hundreds of thousands of apartments. A bloc of progressive state lawmakers swept into office, setting the stage for the 2019 changes that distressed building owners. The timing was especially tough for landlords, who soon after had to contend with unpaid rent during the Covid-19 pandemic, along with rising insurance costs and interest rates.
Some tenant advocates welcome the drop in prices for regulated apartments. With government help, nonprofits or tenants could buy buildings at lower prices, as they did in the 1980s, says Sam Stein, a senior policy analyst for Community Service Society of New York. They could then charge more affordable rents.
Landlords have tried, unsuccessfully, to get the US Supreme Court to intervene on their behalf by ruling against the 2019 rent laws. On social media, Jay Martin, executive director of a trade group called the Community Housing Improvement Program, describes opponents as communists and has pledged a “scorched earth” strategy this year to fight them. “There’s too much at stake,” he said recently on X, formerly Twitter. “We must do everything possible to stop individuals destroying New York’s housing.”
Tay Raymond, 35, grew up on West 116th Street, down the block from the famed soul food restaurant Amy Ruth’s as well as a building where condos sell for $1 million. On this same street, Raymond’s three-bedroom now rents for $1,300, about a third of the cost of the unit down the hall. But, in January, there was a gaping hole in her bathroom ceiling that had been a problem for years, and she says mice and roaches run rampant. “They want us to self-evict,” says Raymond, who sells vintage clothing online. “Either because we’re not getting the repairs we need or because we’re afraid of getting priced out.”
In 2018 her landlord, a private equity firm called Sugar Hill Capital Partners LLC, contracted to buy 53 small apartment buildings for more than $250 million in the company’s largest deal. Sugar Hill figured each unit would need at least $60,000 in renovations, enough to upgrade plumbing and electrical systems. But once New York state clamped down on renovation-related rent increases, Sugar Hill could pass on only $15,000 per apartment.
At the end of 2022, Sugar Hill agreed to sell 13 of its buildings at a 54% discount to the price the company had paid. Managing Partner Margaret Grossman says she’d like to sell the rest of the rent-stabilized portfolio, including Raymond’s building, and focus on new projects such as a luxury apartment building in Brooklyn featuring a rooftop deck with an apple orchard. Grossman says that the inability to charge enough rent makes it difficult for Sugar Hill to invest in buildings but that it does all it can to make repairs. (The company fixed the hole in Raymond’s ceiling after an inquiry about it for this article.)
Victoria Bausch lives with a roommate so she can afford her rent-stabilized apartment in Washington Heights. Last year her rent jumped $300, to $3,300, part of a boroughwide runup that took Manhattan rates to record highs.
On a recent evening, Bausch joins about 15 other tenants in the lobby of her St. Nicholas Avenue building, which includes both regulated and unregulated apartments. There’s a Wall Street executive paying more than $4,500 a month, as well as a retired bus driver and a school administrator. The crowd complains of poor maintenance: water damage in some apartments, as well as a lack of hot water and too little heat. Over the past two years they’ve filed hundreds of complaints with the city. They also would like to roll back what they consider illegal rent increases.
Bausch, an event planner who used to work in theater, has good news: In a settlement with the state attorney general’s office, the building put her unit back into the rent-stabilization program and reduced her rent. “If things keep going the way they are, we’re going to be priced out of New York City, and I’m not willing to let that happen,” she says.
Peterson’s City Skyline Realty, which last year appeared on a government list of landlords with the most code violations, owns the building. He says that his company promptly addresses complaints and that the city’s tally unfairly penalizes large property owners. The rent settlement related to a previous owner, he says.
A 49-year-old Utah native who wears matching golf shirts and hats, Peterson usually has the outgoing bearing of the Mormon missionary he once was when he knocked on doors in declining postindustrial towns in upstate New York. He remembers better days not long ago. In 2014 he bought a building in the Bronx for $8 million and sold it only four years later for a 50% profit.
Peterson hasn’t quite given up on his role as a New York City landlord. On his visit to Washington Heights, he warns a bodega worker about an apparent gas leak and makes small talk with teenagers. Adding a note of dark humor about his deteriorating business, he tells one of his building superintendents, “You make more money from this building than I do.”
In one of the strange twists of rent regulation that worry economists, Peterson is among the landlords leaving apartments empty because it doesn’t make sense to repair and rent them out at current rates. Thousands of apartments are vacant, according to government and industry estimates.
On West 164th Street, no one has lived in the dead-pigeon apartment for more than two years. Like other units, it needs $100,000 in renovations, including new plumbing, electrical wiring and lead remediation, Peterson says. He figures he can’t make the economics work without raising the rent. “We should have two tenants in here and be collecting $2,500 a month,” he says, wondering why the city’s politicians have turned against him. “Why the hell wouldn’t they want me to do that?”
This article was provided by Bloomberg News.