On the Housing Front

Here are a few Bronx-related housing stories for the beginning of summer:

The main topic for 2009 that will likely continue on for the foreseeable future is the issue of foreclosures in apartment buildings, especially those owned by private equity investors who gambled on increasing rents dramatically.

In the Gotham Gazette, Bronx-based freelance reporter Eileen Markey documents the Foreclosure Threat that Looms Over Thousands of City Apartments, including many in the Bronx.

Included in her piece is the worst-case scenario being played out a number of Bronx buildings owned by private equity investor Ocelot Properties, where the owners have walked away, the buildings are in complete disarray and a number of them have gone vacant.

Earlier this month, City Limits reported on the situation in these buildings and the efforts by the City and housing advocates to get the lender, Fannie Mae, to "take a more active role in ensuring upkeep of the properties."

University Neighborhood Housing Program has warned about these types of scenarios for years at our affordable housing forums. Two years ago at our forum on Shrinking Affordability, panelist Frank Anelante of Lemle & Wolff warned about the condition of much of the City's housing stock and that we would be seeing more and more buildings falling down, such as what happened in Brooklyn yesterday.

(The report from this year's forum on Envisioning the Future of the Red Zone contains an extensive collection of maps and charts focusing on the west Bronx including new housing, demographic, economic and real estate data.)

Finally, NY1 has a segment on how the City's housing department (HPD) is buying foreclosed homes to rehab and sell them at below-market prices.

Private Equity “Highlights” from the Bronx

Recent developments in the world of private equity-owned Bronx apartment buildings continue to show the far reaching impact of the financial downturn and related collapsing real estate bubble.

The Real Deal picked up on the Botanical Square buildings and others owned by Hudson Realty Capital and managed by Pinnacle that, as reported on the Bronx News Network and the Norwood News are for sale at a loss (or were, as the listings have been pulled from the website). The article brings up the larger question of whether the buildings are over-financed, with varying responses from tenant advocates, owners, banker and realtor as to whether the income of the buildings can support the mortgage payments.

The City Room blog also takes a look at these same buildings, focusing more on the conditions in the apartments. (Photo from the NY Times) Their piece highlights tenant advocates protesting outside a New York Community Bank branch, who they partially blame for the conditions.

Finally, seven buildings owned by another private equity group that may now be defunct have gone into foreclosure. According to foreclosure data from RealQuest, Fannie Mae commenced foreclosure filings on February 27 against 7 buildings owned by Ocelot Properties. The outstanding mortgage balance appears to be about $18 million for the 205 apartments, or about $87,000 per unit. If history is any guide, the conditions for tenants at 1744 Clay Ave, 1663 Eastburn Ave, 2254 Crotona Ave, 422 E 178th Street, 1271 Morris Ave, 806 E 175th Street and 1269 Morris Ave are likely to deteriorate before they improve.

Apartment Building Sales Plummet in the Bronx (plus some bonus demographics)

A new housing report for real estate firm Massey Knakal shows the dramatic drop in the number of sales of apartment buildings across the City, especially in the Bronx. In an article in Crain's New York Business, the Chairman of Massey Knakal blames the drop on the reduction in supply, as "discretionary sellers are not putting their property on the market," but he warns that in the coming years prices will drop as distressed sellers will have no other option but to sell for less.

Meanwhile, the reports authors acknowledge the Bronx market is riskier than the other boroughs:

Brooklyn and Queens held up better than the Bronx in part because during uncertain economic times, there is a “flight to quality,” said John Cicero, managing principal at Miller Cicero. “Investors want to go to secure, more established neighborhoods.” Institutional investors didn’t start buying multi-family buildings in the Bronx until about six years ago, noted Mr. Knakal.

University Neighborhood Housing Program also tracks sales of residential apartment buildings in the Bronx, and we had similar findings. Prices haven't dropped, but the number of sales has gone from a peak of 260 in the first half of 2007, to 138 in the second half of 2007, to 132 in the first of 2008 and 64 in the second half of 2008. A drop in prices can be expected for the exact reason Mr. Knakal mentioned, as is the case with Botanical Square and a few other properties bought at the peak of the market by private equity investor Hudson Realty Capital.

For a great long term perspective on real estate booms and bust in New York City neighborhoods, don't miss the Furman Center's latest State of New York City’s Housing and Neighborhoods, which was released by the NYU research center just this month. Among the many tidbits you'll discover is that certain Bronx neighborhoods fared well during the last bust in the early 1990s, perhaps because they were still making up for the devastation of earlier decades (page 14). There is a related fascinating case study of the Morrisania/Crotona area (Bronx Community District 3) on page 20 showing price appreciations through every boom and bust period since 1974 (though they were pretty much starting from ground zero).

There is also a section on sustainability showing how the Bronx produces a lot of waste per capita and recycles very little.

At the end there is the heavy demographic and housing data, mostly based on 2005-2007 American Community Survey from the U.S. Census. Many of the findings are the same old story: Bronx neighborhoods have the highest rates of poverty, lowest educational attainment, lowest homeownership rates, the youngest population, etc.

But there was at least one surprise: none of the neighborhoods with the highest incidence of elevated blood levels in children are in the Bronx. Instead, neighborhoods with converted manufacturing loft space (SoHo and Williamsburg) rank tops in the City.

One other interesting stat: the three most densely populated community districts outside of Manhattan are in the West Bronx. Here are the top 10 in the City with the number of persons per square mile:

1. Upper East Side (MN) - 105,900
2. Lower East Side/Chinatown (MN) - 99,100
3. Morningside Heights/Hamilton Heights (MN) - 98,800
4. Stuyvesant Town/Turtle Bay (MN) - 88,100
5. Central Harlem (MN) - 86,100
6. Kingsbridge Heights/Bedford (BX 7) - 77,000
7. Highbridge/Concourse (BX 4) - 75,800
8. Washington Heights/Inwood (MN) - 73,700
9. Fordham/University Heights (BX 5) - 73,000
10. Upper West Side (MN) - 66,000

In Defense of CRA

Opinion by Gregory Lobo Jost
It's getting a little ridiculous, to tell you the truth. According to the New York Times, an Iowa Representative has introduced legislation to repeal the 1977 watershed legislation that helped save neighborhoods across the country, including the those in the Bronx. Maybe it should come as no surprise that certain deregulation-minded conservatives who have been battling the Community Reinvestment Act for years (following the lead of former Senator Phil Gramm) would take the opportunity of a financial meltdown to once again go on the attack against CRA.

Fortunately, the Times editorial board has taken a stand today in support of CRA:

The charges do not hold up. First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years? Then there’s the fact that the regulatory guidance issued under the reinvestment act and other banking laws actually impose restraints on the riskiest kinds of subprime lending.

In addition, subprime lending was not driven by banks, which are covered by the act. Rather, most subprime lending was driven by independent mortgage lending companies, which the act does not cover, and, to a lesser extent, by bank affiliates and subsidiaries that are not fully covered by the act. By some estimates, nonbank lenders and bank affiliates and subsidiaries may have originated 75 percent or more of the riskiest subprime loans.

The Times also cites a report by the Center for Community Capital at UNC Chapel Hill that shows much lower default rates in CRA loans than in subprime. A separate January 2008 study showed that banks who were subject to CRA, "were less likely to make a high cost loan, charged less for the high cost loans that were made, and were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio." In other words, they had better lending practices.

The real problem was from lenders not regulated by CRA (thanks in part to Phil Gramm) who went wild with their products. Often they didn't care if the loans were affordable because they were going to sell them off to be packaged into securities and sold to investors around the world, who were in turn duped by the ratings agencies. Plenty of people made a lot of money along the way without any real accountability. Since CRA-regulated banks are more likely to keep their loans on their own books, they actually lent with the intention of being repaid.

The lack of accountability inherent to the mortgage securitization process is what fueled the housing bubble and has brought us to this disastrous economic moment. The weakening of CRA in 1999 might be a better place to look to place a good chunk of the blame. The timing suggests it warrants a closer look.

Is the Bronx Real Estate Bubble Finally About to Burst?

Opinion by Gregory Lobo Jost
The morning after the 2000 election, when many of us were learning about the fascinations of the electoral college and wondering who would be our next president, University Neighborhood Housing Program convened a forum at Fordham University's Lincoln Center campus on the early signs of a housing bubble in the Bronx. While no one knew just when such a bubble might burst, we were able to document a growing disparity between sales prices and the profitability of apartment buildings or, in other words, the emergence of a speculative bubble. With the help of the Citizens Housing and Planning Council, we refined the research and in 2003 released a report, A Real Estate Bubble in the Bronx? that showed it was impossible to prove we weren't experiencing a speculative bubble.

Fast-forward to 2007 and the release of another UNHP report on the topic, Shrinking Affordability, documented how the disparity between profitability and sales prices was continuing to increase to previously unimaginable levels, fueled primarily by private equity investor groups. In the west Bronx, private equity groups such as SG2, Pinnacle, Prana, Ocelot and Normandy have purchased large numbers of rent stabilized buildings, often paying significantly more per unit than other owners. In 2007, for instance, Private Equity groups paid on average about $83,300 per unit while the rest of the purchasers paid an average of about $76,000 per unit. Adjusted for inflation, the overall average sales price had more than doubled since 2001. Yet the buildings themselves are only about as profitable as they were back in 1990, as the operating expenses have climbed at least as fast as rents (according to Income and Expense Studies from the Rent Guidelines Board).

Our main concern on this issue has been the potential for owners to cut back on services to buildings in order to handle their huge debt service (mortgage) payments and rising operating costs (e.g., fuel, water, insurance). The worst case scenario involves a building going into foreclosure -- a losing situation all around not just for the owner, investor and lender, but more importantly for the building, the tenants and the neighborhood. As we saw in the late 1980s with the rash of multifamily foreclosures in Bronx buildings overfinanced by Freddie Mac, these properties often fell into serious disrepair and communities as a whole suffered.

Is history about to repeat itself? A story in the New York Times earlier this week discusses how the owners of the Riverton, a large middle income and mostly rent stabilized housing complex in Harlem, are warning their lenders that "they are in imminent danger of defaulting on their mortgage." While a number of small Bronx apartment buildings (6 - 15 units) have already gone into foreclosure in recent years, the Riverton may signal a wave of larger defaults stemming from faulty logic made by private equity investor groups in the West Bronx and Upper Manhattan, as a follow-up article in today's Times discusses:

Until a few years ago, places like Upper Manhattan and the Bronx held little allure for investors in residential property. But as the New York real estate market heated up, major real estate companies began competing vigorously for rent-regulated buildings in these neighborhoods in the belief that they could manage them more professionally and, hence, more profitably.

The recent disclosure that the owners of Riverton Houses, a 1,228-unit apartment complex in Harlem, might default on their loan has shocked the real estate industry. And it has raised fears about other apartment building deals from the not-so-distant past, when the frenzy in the market was reaching its peak.

The strategy in these types of investments has been to achieve high levels of turnover in apartments (i.e., force/encourage as many tenants to move out as possible, especially the ones with lower rents) in order to take advantage of rent stabilization laws that allow for a 20% increase in an apartment's rent upon vacancy. Coupled with increases from Major Capital Improvements and the allotted annual increase approved by the Rent Guidelines Board, getting a tenant to move out of an apartment could easily translate into a 25 - 35% jump in the allowable rent for the next tenant. In a gentrifying neighborhood (e.g., northern Manhattan), creating high levels of turnover could dramatically increase a building's income, thereby justifying the high price paid for the property.

With the example of the Riverton leading the way, we are able to see how this strategy might not pan out the way the Private Equity groups are hoping for. First and foremost, tenants are being organized and educated about how to keep their apartments and avoid being forced out. As long-time owner/manager of Bronx and Upper Manhattan buildings Frank Anelante points out in the same Times article today, turnover in his units is closer to 2%. By way of contrast, private equity groups have documented in their filings with the S.E.C. plans to reach turnover rates as high as 30% of the apartments in the first year and 10% percent annually in the following years. With the example of the Riverton, we are beginning to see what may happen to more owners when they can't meet this outlandish target.

And if private equity groups are having a hard time in gentrifying upper Manhattan, their troubles may end up being even worse here in the west Bronx where tenants already typically pay half of their income on rent. For the sake of our neighborhoods, let's all hope for a soft landing.