Inside New York’s Rent-Stabilized Mess

No preamble today. Want to get right into a couple of stories that dropped this week that illustrate both the carnage & opportunity in one of the most valuable (formerly), emotionally charged, and politically radioactive asset classes in all of CRE: New York City rent-stabilized apartments. Yalla.

Rent-Stabilized (Cont.)

• In March, NYCB/Flagstar, moved to foreclose on a mammoth 5,200-unit portfolio controlled by Joel Wiener’s Pinnacle Group. Pinnacle had borrowed $600M+ against the portfolio, and in an attempt to hold on, has now placed most of the package (5K units) under bankruptcy protection, per PincusCo. If Wiener, who is one of the big boys, is in this situation, and fellow titan A&E is grappling w/ a similar fate, think of the mess among the minnows.

• Two big rent-stabilized landlords have opened the books to Bisnow to help put some numbers on the crisis. One of them, a nonprofit, bought a 40-building, 1K-unit package in the Bronx in ‘08, and rehabbed the units over the next few years. By ‘22, 3Y after the city’s rent law overhaul, the buildings were collectively losing $1M+ annually, the group said. The RGB’s approval of a 3.25% rent hike in ‘23 helped mitigate the damage somewhat, but the portfolio lost nearly $4M between ‘22-24 – and that’s not factoring in debt payments. The 2nd landlord, a for-profit player, shared info on 3K+ units spread across 4 portfolios in Brooklyn, Queens and SI. Two of the portfolios are already underwater, the landlord said, predicting that the others would soon meet the same fate. Property taxes on one of the portfolios has doubled, while insurance costs are up 400%+. “We're hoping that between now and when we actually are in distress, which is going to happen, we could get a change in the laws, which will allow the buildings to start becoming profitable again,” the landlord said. Hope is not a strategy, goes the saying, but this is where we’re at.

• Hungry like the wolf: One investor in the space def sleeps w/ a Buffett quote by his side. Peter Hungerford is where all the institutional players’ unwanted rent-stabilized stock seems to end up – at fat discounts of c. He bought Sentinel’s 1,300-unit portfolio for $180M (40% 💇‍♂️ ) last March, followed it up w/ a note purchase from Pimco on a 442-unit portfolio this Feb., and now has closed on what looks to be the largest RS deal of the year: 2K+ units from Related Fund Management for $193M (24% 💇‍♂️). “#dropthemike,” Hungerford posted.

  
  How violently things have turned: We’ve gone from REBNY’s boss calling a reporter from within the Senate office as he was writing pro-industry legislation to this 👆️ feeling of impotence. Meanwhile, the gap between how the industry feels about this asset class (≈1M units) and how everyday New Yorkers feel about these homes has never felt larger: Even as these tales of woe were coming out in the trade press, consumer-facing Gothamist dropped a story titled: 4th-generation resident of rent-stabilized Manhattan apartment fights eviction. “It’s not even about the rent,” the protagonist of the article says. “Even if I found rent cheaper than here, [that's] not my apartment. It’s not my grandmother’s apartment.” A react piece in Marginal Revolution nails the dynamic: “Thanks to succession rights, what was meant to help the poor now functions as a kind of family heirloom — a subsidized apartment passed down like grandma’s china set.” 🍽️ 👵 

Dealmacher Nussbaum Charged W/ Grand Larceny

Describing Mark Nussbaum as a commercial real estate attorney is like describing Robert Moses as a commissioner of parks: While technically true, it misses the ambition, impact & multiplicity of the man’s career. Yes, Nussbaum did closings, for the who’s who of the Five Towns, Brooklyn and Lakewood crew. But he also helped raise money (“heimishe pref”) for deals, made introductions, facilitated “show capital” (the temporary arrival, in one’s bank account, of a sum sufficient to demonstrate purchasing power), facilitated loans, and, through a combination of charm, chutzpah, drive and among the strongest frum Rolodexes in New York, made himself an essential player. At the top of this year, however, it all began coming apart.

First, nursing-home investor Jacob Sod sued, alleging that Nussbaum failed to return $15M in escrow capital. Then, longtime Nussbaum client and friend Mendy Steiner, staring down a web of debts, took his own life. A few days later, Nussbaum abruptly shuttered his law firm, leaving angry clients in his wake. Lawsuits flew in (developers, cash advance men, hard-money lenders, nursing-home bigwigs), one more salacious than the next: the wildest of them, again filed by Sod though against a third party, alleged that Nussbaum had used his $15M to make hush-money payments; that suit also surfaced a Steiner connection. By Feb., Nussbaum had retained criminal defense counsel, and now we know why: He was arrested Wednesday and charged by the Manhattan DA w/ 1st-degree grand larceny; the DA, who claims Nussbaum took $15M from one victim and $500K from another, per TRD, believes more victims are out there. (Nussbaum’s former partner Sam Lowinger 🎷, though named in a couple of civil suits, has largely been spared the legal firestorm; he now works for nursing home mogul Avery Eisenreich’s family office)

Nussbaum pleaded not guilty and posted bail. His saga is going to get even messier as the case plays out; it has already become the 🛀 talk of the Orthodox and legal communities and has revealed the underbelly of sub-institutional CRE.

See also: The lads of Lakewood 

OZK Tames Its CRE Lions 🦁 

Used to be, if you saw a 9-fig construction loan and had 3 guesses as to who the lender was, you’d probably use 2 of them to say Bank OZK. The lads from Arkansas 🌽 became the most important financiers of the for-sale skylines in Miami and New York, w/ the bank’s Real Estate Specialties Group (started by Dan Thomas, who reportedly resigned mid-air in ‘17 ✈️ ) acquiring quite the aura. In ‘23, OZK put out $3B+ in construction debt and was unabashed about its intent to keep lapping the competition. “It's real hot, or it's real cold,” CEO George Gleason said last May of his rivals’ appetite for construction lending, whereas OZK was active regardless of the temperature. But soon after, Gleason started paying much more attention to the thermostat 🌡️ 

In Oct., OZK announced a push to reduce its overall CRE exposure. From 620% of its total equity as of Q1 ‘24, by the end of the year it was down to 537%, per finance prof Rebel Cole’s analysis of call report data. Gleason has said that RESG, which at its pomp accounted for 70% of the bank’s total loan volume, may eventually become less than half the balance sheet, per WSJ. Takeouts of its loans are getting harder to find. Most worryingly, 17 of the completed projects it’s backed are over 90% vacant, and nearly 2 dozen are over half vacant, per Wells Fargo analyst Timur Braziler. The lender is working through a high-profile default at Chicago megaproject Lincoln Yards, and a mammoth $915M life-sci loan in San Diego catalyzed a double-downgrade last May. All this has titillated the short sellers: per data from financial marketplace S3 cited by WSJ, short interest in OZK is now at 16.5% of float 🛟, the most among US listed regional banks.

Quickies

• FBI arrests Sonoma CRE investor Ken Mattson on Ponzi charges (See also: Wild Wild Wine Country)

• Great Neck strivers strike again on Park Ave South 👔 (“God willing, we are going to buy over $1B in this market” 🙏 )

• OpenAI commits to mega data center in the UAE (Sheikh Tahnoon is on The Promote’s ‘Dons of Data Centers’ list)

• Blue Owl/Crusoe/PDI JV lands $7B from JPM-led consortium for Oracle-leased data center in TX (It’s the 2nd phase of this)

• Related/13th Fl/Merrimac make play for $10B mixed-use Miami project

• Good context here on Fannie/Freddie privatization talks

• NY blesses RXR/SLG/Apollo’s 1,250-unit conversion at 5 Times Sq.

• Wylde Tales: A longtime New York power broker calls it quits 🤝 

• Dive into The Promote’s archives - a candy store for a CRE insider 🍬🍭 🌶️ 

Unquotable Quotes

Programming note: We’re off Monday for Memorial Day. Have a safe & restful break, and we’ll see you back here Wednesday. 🫡 🪖