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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How do you know the income from rent-regulated apartments hasn’t declined? It’s entirely likely that some of those tenants have fallen behind.


Posted by brenda | Report as abusive

It’s not rents that went down that much, it’s rental income. I’m not sure how it’s calculated 100%, but it is clear that a vacant apartment has no income. Is the money spent sprucing up the place deducted from the income? I can’t say.

With a modest 5-10% rent reduction and an increase in vacancy rates, a big drop in income is definitely possible. With rents dropping around the city, even some rent controlled tenants may decide to move for a deal somewhere else.

Posted by Adam | Report as abusive

Plus, free rent would be a drop in income. How many new tenants are getting 1-2 months free rent? A month of free rent is like dropping your rental income by over 8%.

Posted by Adam | Report as abusive

Serves them right. The only way they could make money was if they could get apartments to come out of rent-stabilization at twice the historical rate. So they tried to unfairly evict a whole bunch of people, the NY Times called them out on it, and now they’re going to go bankrupt. So somebody else will come in and buy the complex for a song, eventually make money on it, while Tishman takes it like jailbait. At least there’s some justice in the world

Posted by Phil | Report as abusive

why not get on your bike and go over to their rental office inquiring about renting a place? do some investigative reporting. might be fun!

ps they might also mean that *income* as opposed to *revenue* from rent is down spectacular. operating costs have probably gone up.

Posted by q | Report as abusive

The rent declines in the Stuy Town market rate apartments have been crazy. $3800 1-BRs in 2007 are $2500 1-BRs now (really, I couldn’t believe it myself – which is why I live in Stuy Town now – ha). The market rate these days is 2 months free i.e. 14-months for the price of 12, or ~15% off. Say the full rent drops 10% on top of that – then a $4200 2-br becomes a $3240 2-br. Let’s say the 6,000 regulated apts average $1200/mo and the 5,000 market rate apts go from $4200 to $3240/mo. That’s 17% off the top line. Now let’s say expenses remain the same at 30% of original revenue (remember ST/PCV pays all utilities too, so even the empty apartments have heat in the winter; plus all the new landscaping etc.) and voila, ~25% decline in income. I bet these figures weren’t in the T-S sensitivity tables when they did the deal.

Posted by VG | Report as abusive

My guess is the article conflates income with net income, meaning they imply gross but it’s not. You can’t have a drop of 1/4 of your rent roll in a market that’s been soft for a year or so. It’s almost not possible – outside of some fluke situation where you have a garden apartment building in a town where the main employer suddenly shuts.

I don’t know their upside assumptions but it also looks like they both believed they could increase the rent roll more than normal – more deregulated units? – and that they could save on costs – maybe invest capital to generate more cash flow from new chillers and the like.

Posted by jonathan | Report as abusive

Address any further questions regarding residential real estate to Candy and Candy. A lovely article just came out about them and they’re doing just fine. Spent $500M of ethereal Kaupthing money on a tear down in Beverly Hills when it should have gone for about $30-$50M, a few years back? Or ask Carlos Slim… they appear to be good friends.

(Any relation to Izzie Salmon?)

You are forgetting that they were assuming that they could raise rents significantly on the non-regulated apartments. Some of those apartments are now in danger of being regulated and others are just not being rented because they are too expensive (for the current market).

The other thing that everyone is missing is what happens if the buildings actually go into bankruptcy. It is my understanding that in bankruptcy all contracts can be invalidated. ALL. Including rent stabilized leases. Any bankruptcy proceeding would be governed by federal law. In bankruptcy the overarching goal is the repayment of the creditors. The creditors would be best served by emptying the buildings and then selling the units.

Could this happen? I have no idea. But no one is discussing what a default could look like.

Posted by Nate Gordon | Report as abusive

I really appreciate people who “do the math” and ask the questions thereby implied.

There’s so much conflict surrounding how this area is being managed. It seems like some like it, some love it, and many either hate it and are vocal about it. One thing is for sure…Everyone who either lives in Peter Cooper Village or Stuyvesant Town or is thinking about living there, or thinking about leaving…EVERYONE is being affected. I’m sure there are some who will consider moving out either by choice or by necessity. I lived in the City from 1984-1994 and applaud the life-style. Loved it and hope come back to visit all the time. Perhaps there are those who want to explore options outside of the City. The suburbs of New York, like Stamford and Norwalk, offer lots and lots of hi-rise options or low rise lofts at a fraction of the cost. Also, Darien, Greenwich, Fairfield, and Westport are all within an hour on the train and as of this morning, there were over 4000 houses, apartments or condos for sale or rent in thes towns. Certainly, there are a few residents who want to take control of their housing needs instead of continuing to be priced out of the lifestyle they desire. The suburbs isn’t for everyone, but for those few, http://www.MikesCorner.com may be of some help.

Rent’s are off 25% because market apartments make up the majority of income. Market rents are off by about 30%. Vacancies are up. Instant 25% decrease in gross profit. I’m not guessing. That is the fact.

Posted by el bren | Report as abusive

There are a large number of vacant apartments within the complex. The transient first-time renters are not renewing their leases as StuyTown management has shown no flexibility on rentals rates for those wishing to renew upon expiration of current leases. Rather than enjoy the fruits of a continuing customer, apartments are being vacated and languishing empty. The complex has transformed itself from one of a stable community to a very transient one – the complex has become strewn with garbage and detritus of leaving tenants, dirtier (rats are commonly seen in public spaces such as the oval), louder, and not what was once a jewel of NYC. People cared about the community and their homes here in the past – the renters they are now trying to attract could care less.

Posted by David Weintraub | Report as abusive