What’s happened to Stuy-town rents?

By Felix Salmon
September 10, 2009
reported earlier this month, quoting an investor in the Stuy-town deal:

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When Tishman Speyer bought Stuyvesant Town and Peter Cooper Village for $5.4 billion in 2006, they knew that they couldn’t cover their mortgage payments with their rental income. But that was OK: they expected that rents would rise significantly as the housing market continued to rise and as rent-controlled tenants moved out.

Naturally, that never happened, and now they’re in trouble. As Bloomberg reported earlier this month, quoting an investor in the Stuy-town deal:

“Rents are not going up like they normally would, landlords are making concessions like free rent and people have not moved out at the rate anticipated,” said Williams, who came to the SBA after nine years as a managing director at Fir Tree Partners, a New York hedge fund.

Manhattan apartment rents fell as much as 10 percent in August from a year earlier, the Real Estate Group of New York said on Aug. 25.

All that I understand. And I understand too that there’s a big risk that the owners will have to refund a lot of previously-paid rent if they lose a lawsuit saying that they improperly deregulated 3,000 apartments. But they haven’t lost that lawsuit yet, and already their revenues, far from being even flat, seem to have fallen off a cliff:

Jerry I. and Rob Speyer and their partner, BlackRock Realty, who paid $5.4 billion for the quiet middle-class redoubt near the East River, have seen the property lose more than half of its value, and the income from rent — down 25 percent from its peak — covers less than half of their debt payments.

How on earth can rental income be down 25%? More than half the apartments are rent-regulated, and we know the income from those apartments hasn’t fallen. Meanwhile, the owners have been putting a lot of money into tarting up the complex and making it more attractive to yuppies, in an attempt to be able to raise market rents significantly. Even if those rents haven’t gone up, I can’t see how they could have fallen by a third, or whatever the number would need to be in order for total rental income to be down by a quarter. Something has gone spectacularly wrong here, and I’d love to know what it is.

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