Shares of New York Community Bancorp have plunged over 56% since Jan. 31, when the lender revealed a much larger provision for credit losses than expected.
Analysts had been looking for the bank to set aside $45 million to cover bad loans. Instead, NYCB said it was putting aside $552 million, with the increased provisions “primarily attributable to higher net charge-offs, as well as, to address weakness in the office sector, potential repricing risk in the multi-family portfolio, and an increase in classified assets.”
When it comes to multi-family, NYCB is an important player in New York City’s rent-regulated market, where landlords are constrained in how much they can increase prices each year. Recent transactions in this market have seen building owners take steep losses from deals that were made last decade. One recent building sale in Harlem, for example, came in 59% lower than the apartment complex’s price tag back in 2016.
To get a better understanding of this bank, what it does, and why multi-family has been a source of trouble, the Odd Lots podcast spoke to Ben Carlos Thypin, a New York City landlord, and the CEO of Quantierra.
Thypin was previously a guest on Odd Lots in April 2023, and in that episode he discussed why he believed that the “golden age” of being a landlord in NYC was coming to an end. Among his arguments: a rise in the YIMBY movement (which is pushing for increased housing supply) and also the emergence of a more powerful pro-tenant movement, manifesting in things like more robust rent control or stabilization, which limits the ability of landlords to increase prices.
In this conversation, Ben explains how for many years, owning rent-regulated buildings in NYC was a good bet. The tenant base was stable (due to low prices) and landlords eventually found ways of pushing prices up. What’s more, there was an option value embedded in some of this real estate, based on the assumption that a loosening of regulations would allow owners to unlock even higher returns from the property. But, as we've seen, neither the politics nor the market conditions worked out quite as planned. Soaring interest rates and higher operational costs are colliding with a resurgent interest in rent stabilization.
Below is the full text of our conversation with Ben, which goes through the history of New York’s housing regulation, and NYCB’s distinct connection to the multi-family market. As noted at the beginning of our chat, over the last year, Ben has consulted with hedge funds who have gone short NYCB due to its multi-family exposure. The transcript has been lightly edited for clarity.
Key insights from the pod:
Ben’s disclaimer — 6:14
NYCB’s multifamily portfolio — 7:23
A history of rent stabilization in NYC — 8:47
Boom times for landlords — 11:05
1994 rent deregulation — 12:56
How landlords charge higher rents — 14:01
Availability of financing — 17:18
NYCB’s relationship with landlords — 19:22
The Housing Stability and Tenant Protection Act of 2019 — 20:53
The faltering ‘deregulatory trade’ — 22:51
What happens to rent-stabilized apartment buildings now? — 26:20
Subsidies for rent-stabilized buildings — 30:40
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Joe Weisenthal: (00:00)
Hello Odd Lots listeners, you are about to hear a conversation about the troubles at New York Community Bancorp. We recorded this interview on February 6th. And then that night, NYCB said that its deposits have increased since the end of last year, and that liquidity remains ample. A spokesperson for the company did not respond to a separate request for comment from Odd Lots.
And now here's our episode on New York Community Bancorp.
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy (00:39)
And I'm Tracy Alloway.
Joe: (00:41)
Tracy. Banking troubles again. Obviously we had that little, I don't know, mini -crisis…
Tracy: (00:46)
Kerfuffle?
Joe: (00:48)
.. Kerfuffle, last March with SVB and a couple other banks. And then recently, I think just last week, we're recording this Tuesday, February 6th, another one.
Tracy (00:58)
That's right. So we saw New York Community Bancorp, NYCB, their shares fell something like almost 40% in a single day after they released a bunch of announcements. So let's see, I'm trying to remember all of them. So they missed on earnings per share, they cut their dividend and they increased their reserves for bad loans, so basically the provisions or the amount of money they set aside to cover souring credit.
And of course this set off a wave of conversation and analysis about how much of that issue has to do with NYCB specifically, or whether it's saying something broader about the outlook for these loans. And I should just say that in its statement, NYCB specifically cited commercial real estate and multi-family as well, which is -- I always call it the forgotten CRE. Because everyone focuses on offices, but multifamily also falls into the CRE category.
Joe: (02:01)
Yeah. Right. We did that episode a few months ago, I think in October, we did an episode on multifamily, because we know that there was just this incredible boom right in 2021. And social media influencers were like raising money on Instagram for, you know, Sunbelt CRE. And so there is this big question about the category more broadly.
This is of course not a Sunbelt story. It's New York Community Bancorp. But it gets this question of like, oh, is this something idiosyncratic to the bank or is this broader? Are we going to see multifamily problems elsewhere? It feels like each one of these banks that's gotten into trouble over the last couple years, there's this furious debate. It's like, ‘Oh, it's just, it's just idiosyncratic. It's just Silicon Valley. It's just crypto exposure. It's just New York.’ But then eventually you have enough idiosyncratics and people start to worry, and they're like, are there things going wrong? Are there similarities with other banks?
Tracy (02:58)
Yeah. And it's funny you mentioned the multifamily episode. I think that was with Lee Everett. And he was basically saying that was the next shoe to drop, in the troubled CRE category. But we did actually do an episode even before then titled “The NYC landlord who says the ‘golden age’ of being a landlord is over.”
Joe: (03:20)
That's right. So we did do a New York specific one. Our guest then [was] Ben Carlos Thypin, [a] local real estate guy who owns residential real estate. He also does some data stuff and other things. And he basically came on, he’s like, ‘Look, my family has been in this business of renting out apartments for a long time and the business is going bad. This is not a business I really want to be in anymore.’
He mentioned that he would be selling off some or all of his assets over time. I think he specifically said he wouldn't be doing a fire sale or a mass liquidation, but that he wanted to get out of the business. He also said that he was interested in ways to essentially not just get out of the business, not just remove his de facto long position, but seeing if there were ways to bet on the downside.
There is a combination of like, okay YIMBYism in New York seems to be on the rise, so there perhaps is going to be more supply plus a sort of shifting political landscape -- but I think this is key -- such that regulations will make life harder for landlords.
Tracy (04:21)
Yes. This is the return to, I mean, it never went away completely, but a newfound popularity of rent control and the issues that maybe causes for landlords. And of course, I mean, the backdrop to all of this is that interest rates have gone up spectacularly. And so why deal with tenants and policy when you can just put your money in a money market fund and earn 5%?
Joe: (04:45)
Yeah, that's right. And also, you know, in New York specifically, we have an affordability crisis and we have an affordability crisis even among individuals and families that make a lot of money. So plenty of New York City professionals who are renters who make decent incomes still find this housing market very frustrating, feel that they're paying way more than they should be in getting squeezed.
And of course you know, people with good money and professional jobs historically have had a lot of political power. And so this idea that, okay, there is this very powerful renter class in New York City specifically that politicians have to listen to, which sort of turns the dial more towards pro-tenant policies that landlords may not like.
Well, on that note, I'm very excited. We have Ben back on the podcast. Ben, thank you so much for joining us.
Ben Carlos Thypin: (5:40)
Thanks for having me.
Joe: (05:41)
Let's talk, before we get into the conversation, because we want to talk to you about this real estate market, we want to talk to you about NYCB specifically and what's going on with them. I mentioned in the intro that you said, on our episode early last year, that you are not just interested in getting out of the space, selling off of your assets, but also exploring ways to essentially short the space. Of course, you've done some work on that, including on NYCB. So I think we should start with a disclosure. Where are you at right now with this?
Ben: (06:14)
Sure. So, you know, after our episode last year and really before it, I was exploring, you know, the various ways that one could approach shorting multifamily to, you know, express the thesis that I talked about on that podcast.
And, you know, I found out a couple things. One of which shorting is very hard and requires a lot of capital. But in doing so, I settled on New York Community Bank as a target and spoke to, and advised, several hedge funds on New York Community Bank being a good target based on, you know, totally public information.
I can't speak to what trades, if any, they executed on this. All I can say is that neither I nor my firm were or are short New York Community Bank and have not received, or are not entitled to, any compensation tied directly or indirectly to the performance of that stock.
Joe: (06:59)
But you were paid for your advisory services, or your consulting services to the hedge funds.
Ben: (7:05)
Correct.
Joe: (7:06)
And just to be clear, you said on the podcast last year that you were planning on getting out of the residential real estate business in New York City. What's happened between then and now on that front?
Ben: (07:17)
We've sold one of our buildings. We still have a few more to sell off.
Joe: (07:22)
Got it.
Tracy (07:23)
So maybe just to begin with, can you talk a little bit about NYCB’s relationship to multifamily? What is the exposure here? So they mention a multifamily portfolio. What is that? How did they come to own it and what does it look like?
Ben: (07:38)
Yeah, so they are, by their own account, I think the second largest multifamily lender in the country and multifamily loans represent 44% of their entire loan book, not just real estate loans. And 22% of their entire loan book is a particular type of multifamily loan, which is loans on rent stabilized buildings in New York City. And this is a business, they've been huge in for five decades.
They are currently the biggest lender on rent stabilized buildings, even more so than the now failed Signature Bank. And, you know, the growth of New York Community Bank as an institution is really tied up in the fortunes and evolution of the rent stabilized market over the past 30 years.
So, you know, let me ask the two of you. Have you ever lived in an apartment in New York City within a building that was built prior to 1974 and contained six or more residential units?
Tracy (08:38)
Yes, but it hasn't been rent stabilized, to my knowledge.
Ben: (08:39)
Exactly. And did you pay what felt like a really high rent for it?
Tracy (08:43)
Oh my God, I'm still paying a really high rent for it. Go on.
Ben: (08:47)
Well, there was a time that all apartments and buildings like that were rent stabilized. And the reason that you paid a very high rent for that ancient apartment is deeply tied up in the story of New York Community Bank over these past 30 years.
Tracy (08:57)
Wait, so what is the allure of rent controlled apartments? Because if I think about, I want to be a real estate developer or a lender in New York, I want some luxury building that's all shiny and new, and I can charge an incredibly high amount for people to live there. I don't necessarily think ‘Oh, I'm going to go into rent stabilized properties.’
Ben: (09:18)
Right. So historically, up until the early 1990s, the allure of these properties was a lot less than it than it became. And it was largely based on, you know, the solidity of it as a business. The rents are low, so the occupancy always stays high. It was a bond business.
And what changed in in the early nineties is, you know, New York City at that time was in really bad shape. There's a lot of high budget deficits, high crime, all these foreclosed buildings costing the city hundreds of millions dollars in property tax revenue.
And in response to that dynamic, landlords claimed that the foreclosures and the blight were the fault of rent regulations. And if you think about it, this doesn't really make sense because, you know, it's a self-serving argument, and it sort of gets the causality backwards. Like, every city in the country was having major problems resulting from deindustrialization, white flight, and these other, you know, mega trends, most of which did not have any form of rent regulation.
So the real estate industry's claim was like, ‘All right, if you let us raise the rents, then we'll fix up the buildings, property taxes will go up, etc.’ Politicians and New York City Council bought that and implemented a policy called Vacancy decontrol, which allowed apartments to be deregulated in the buildings that we talked about, once the legal rents breached a threshold of -- at the time [it] was $2,000, that was later raised several times. And I think before it, it went away the highest was $2,700.
So, you know, at the time, legislators from places like Bushwick, which were very poor, where the highest rent in the neighborhood was $500, they could never imagine that a rent could get to $2,000.
Tracy (11:00)
Oh, I see. So they thought they had a long way to go until they would reach that cap.
Ben: (11:05)
Yeah. So, you know, incidentally, that's in 1994. A little bank known as Queens County Savings Bank goes public the year before in 1993. That later becomes New York Community Bank. So what happens between 1994 and 2019, New York City's economy booms like many other urban markets around the country, population growth, job growth, far outpace housing construction, which then sends rents on existing housing soaring.
So this makes for a very good combination for landlords. The apartment value of apartment buildings increases, liquidity in the debt and equity markets for apartment buildings in New York City increases.
And New York Community Bank really grows along with its landlord clients, becomes the biggest lender on these rent stabilized buildings, provides acquisition loans for the landlords to expand. It provides refinancing after refinancing, allowing their clients to take money out of these buildings.
And, you know, during this process where the bet is basically alright, market rents are… it's worth deregulating these buildings all over the city because the spread between market rents and the regulated rents is so high, the pricing on these assets gets totally out of whack. The spread between buildings that are selling in the Bronx, which have a very, you know, weak credit profile and buildings that are selling in Manhattan, really narrows. And that continues for the next 20 years.
Joe: (12:32)
Sorry, just to back up, just because I want to be precise, what specifically did the New York City Council do in the early nineties? When you say that $2,700, what happened there?
Ben: (12:43)
Okay, so up until that point, rents on a rent on a regulated apartment like the one that Tracy lived in, could only be raised a certain amount each year.
Tracy (12:51)
Oh, wait, I didn't live in a regulated apartment.
Ben: (12:53)
Well, it was a regulated apartment.
Tracy (12:54)
Oh, it was. It was a regulated apartment, sorry. Yes.
Ben: (12:56)
It was a regulated apartment in its previous life. And up until that point, the rents could only be raised by a certain amount based on what the Rent Guidelines Board issues each year.
And there was some erosion of that system prior to 1994, but the big change in 1994 was that the apartment could become completely deregulated once it breaches that $2,000 threshold. So instead of it being able to only go up 3% a year, it could go from $2,000 to $4,000. And there's also a bonus for when an apartment goes vacant. So every time an apartment turns over from tenant to tenant, the rent could be increased 20% as opposed to just the Rent Guidelines Board amount.
Tracy (13:38)
So the obvious question here is it that would seem to create an incentive structure for landlords to basically try to get to the $2,700 or $2,800 threshold so that they could then raise the rent to whatever the market can bear. Did we see that behavior and how exactly do they try to speed up that process? Yes.
Ben: (14:01)
Yes, so there are three ways that they try to speed up that process. One is buyouts offering people money to leave, which is legal. Others are harassment of tenants out of buildings and using all sorts of means. And the third is inflating the cost of renovations that they're doing that are used to justify increases. Because that was always another way to increase rents. It was like, if you need to put in a new boiler in the building, you could amortize the cost of that improvement across all the rents in the building. If you need to, you know, redo the, the plumbing in a particular apartment, you could amortize the cost [through] that route
Joe: (14:42)
Sorry, something I'm still confused by. Even post-1994, and I've only lived in New York, well, almost 20 years now, but every once in a while you'll like hear some story about ‘Oh, so and so has an apartment on the Upper East side and they're living in it, and their grandmother is still there,’ but it's still crazy.
Tracy (15:01)
This is the Friends plot line, right?
Joe: (15:03)
Yeah, something like that. How, how did those stories exist in a post-‘94 world?
Ben: (15:07)
Sure. So one, there's still a very old system of rent control. So that is a very small number of units, but also does represent some of those situations.
Joe: (15:17)
So we're talking about a difference between rent control and stabilized? I see, I see. So the rent control, like the ‘just like this is it and this is the price,’ that actually was not changed. What changed was the units that were designed to just go up very slowly.
Ben: (15:30)
Correct. I mean, rent control is also designed to go up very slowly in a way. But at this point, once a tenant in a rent controlled unit vacates, that unit becomes rent stabilized and it sort of enters into the new system.
But to answer your broader point, and which I think speaks to this dynamic here, is post ‘94, you know, this trade of improving the apartment either actually or on paper, in order to get the rent above the deregulation threshold, really only works in strong submarkets.
So there was a time every apartment in a building of a certain size below 96th Street was rent stabilized. But Manhattan is the highest rent market in New York City. So all of those apartments, or excuse me, a huge proportion of those apartments were deregulated because there was enough spread in there for the landlord to be able to… for it to be worth doing the work.
Same thing in places like Park Slope and sort of Western Brooklyn, Queens, you know, the gentrifying areas of the city. Whereas in the non-gentrifying areas, the ways this policy mainly manifest itself was in just increasing the rents higher than they otherwise could be. But the rents much more rarely met reach the threshold to be able to deregulated.
Tracy (16:48)
Can you talk to us a little bit about the financing picture? To what degree did this dynamic become, I guess, well-known in the fundraising side of this whole thing? So was it pretty easy to get loans and additional capital in order to either buy more properties on the assumption that you could eventually get to that threshold and raise the rent, or to fund a renovation to try to get to that threshold?
Ben: (17:18)
Yes. It was pretty easy and became particularly so in the early 2000s, early to late 2000s, you know, with sort of the broader trends in real estate of institutionalization, more private equity and, you know, it became a more sophisticated business that was putting more capital in more places. So prior to, let's say 2000, the rent-stabilized business was still a pretty sleepy business insofar as what type of capital played in it.
Tracy (17:44)
So like mom and pop might have an apartment building?
Ben: (17:47)
Mom and pop, yeah. And, you know, there were certainly large landlords at that point that had accumulated a lot of these properties. But, you know, private equity firms were not a big player at that time. But in particularly in the 2000s, private equity and also private credit and New York Community Banks of the world really put a lot of capital into this sector and largely based on the premise that they would be able to raise these rents a lot more.
Joe: (18:30)
Let's talk a little bit more about that because Tracy mentioned in the beginning, setting aside everything, you know, it doesn't seem like rent control or rent stabilized buildings or any of these buildings are a particularly exciting place to lend in. But if everyone thinks a place is not an exciting place to lend, and then intuitively there's sort of above market [return] opportunities for the one player that goes in. And we see this all the time in all kinds of markets where like, yes, you can make a lot of money in distressed assets of all sorts, because most people don't want it to. If you put in the legwork to make it work, you can make a lot of money.
Talk to us a little bit more about the relationship that New York Community Bancorp had with fellow landlords in your world: why landlords liked working with them, why they liked working with landlords and why this was, you know, the profits that they accrued during the good times.
Ben: (19:22)
Sure. So the New York Community Bank really, you know, like many community banks, it's a relationship bank. And clearly as part of its strategy, it was building relationships with rent stabilized landlords. So this has several benefits to them.
Obviously making loans is what a bank does. But also these community banks typically require anyone getting a commercial mortgage from them to have deposits at this bank as well. And also like the deposits from tenant security deposits held in these buildings, excuse me, at New York Community Bank.
So it became, you know, a way for the New York Community Banks of the world to really build their deposit bases and their loan books on a product type in which there's a lot of product, you know, there's a lot of these buildings that need loans. And it's also kind of complicated.
So lenders from out of town, you know, which were coming to lend on office buildings and, you know, all sorts of other assets were less inclined to lend on rent stabilized buildings, not because of any sort of accurate assessment of risk, but just because like, it's easier for some, it wasn't their thing. So for some French bank to, you know, loan on an office building than figure out the rent stabilization code.
Tracy (20:31)
So if we're looking at all the headwinds that are facing this particular segment, in addition to things like the fact that rates have gone up enormously, I think there was a more recent change to policy in 2019. Can you walk us through what exactly that was and how it sort of changed the picture for multifamily?
Ben: (20:53)
Sure. So prior to 2019, the bad behavior that we talked about earlier of harassment, the lack of housing construction, and, you know, the general dynamics in New York City's housing market had really produced a terrible situation. We have, you know, rent housing burden for tenants across the city is way up -- record levels. Homelessness is way up.
And in 2019, a finally unified statewide coalition of tenant groups called Housing Justice for All capitalized on the post-Trump progressive resurgence to pass the Housing Stability and Tenant Protection Act of 2019, which is now known as the HSTPA.
This bill did many things, but for the purpose of this conversation, the most important things it did is it ended vacancy decontrol. So you can no longer deregulate rent stabilized apartments…
Joe: (21:41)
So that reduces your incentive to harass your tenants out?
Ben: (21:44)
Theoretically. And it removed the 20% vacancy bonus, you can't raise the regulated rent by 20% on turnover. And it also severely curtailed the degree to which landlords could recapture the renovation costs in rents.
Joe: (22:01)
It's funny, so I wanted to go here actually at some point in the conversation because right around the corner, little did we know in 2019 that a couple years later we'd have the worst inflation in 40 years. And we know that it was a real headache and a very costly headache for landlords to get contractors in and renovate, and floors and air conditioners and anything else that landlords would have to deal with.
So I was sort of curious about that. Okay. It sort of curtails the ability to recapture renovation costs, but objectively the cost of renovation did explode, right? Two years later. Can you talk a little bit more about the intersection of these regulations with just the reality that you don't even have to, not even for sort of nefarious purposes or purposes of raising the rent, renovation costs really did explode.
Ben: (22:51)
Right. So I think, you know, the regulations, inflation and interest rates changing are really accelerants to what was sort of an inevitable trend on these buildings. So, you know, post HSTPA, the liquidity in the market for these buildings just dries up. There's no price discovery.
Most sellers don't want to crystallize their losses. Most buyers don't know how to price the assets, you know, in large part because of the issues that we just discussed. And, you know, brokers in the sector are by and large indulging their clients’ delusion.
So, you know, this puts people like, or excuse me, lenders like Community Bank in a difficult position because in addition to not wanting to mark down the value of their collateral, like any lender wouldn’t, in this case, doing so would, you know, put some of their deposits, a lot of their deposits at risk as well.
And they don't know what the future holds. Everyone in this world of rent stabilized buildings is sort of engaged in this collective delusion. They're waiting for the Supreme Court to overturn rent control. They're waiting for the legislature to weaken the HSTPA.
And I think this is where they really miscalculate and really sort of bought into their own propaganda from, you know, 30 years ago, which is that, you know, they think that real estate investment drives economic conditions, but really economic conditions tend to drive real estate investment.
And they would've known this if they had looked at the data from the rent stabilized building sector, which showed that this trade really started to taper off before the HSTPA. In 2017, the amount of rent stabilized buildings being traded.
So the question is why? And the reason I think is pretty simple. If you look at the history of the deregulation, there were fewer and fewer buildings in which this deregulatory trade actually worked. Because, you know, if market rents are not high enough, it doesn't make sense to invest all this money in these buildings.
So after all the deregulation that happened over those preceding 25 years, the vast majority of rent stabilized stock, and therefore collateral on New York Community Bank loans remains concentrated in lower income submarkets. So this was always subprime real estate. And the buildings are, you know, they're a century old, they're expensive to maintain. The tenants have a weak credit profile.
So even if the laws did allow for higher rent increases than they do now, at some point you can't pull blood from a stone. Big rent increases are going to increasingly show up in increased collection costs, legal fees, etc., all while operating costs, to your point, Joe, are increasing on these ancient buildings.
And if you think about the other buildings in these neighborhoods, the vast majority of other multifamily buildings, ones built after 1974 in places like the South Bronx, literally require subsidies to operate.
Tracy (25:38)
What's the future of these buildings now? So one thing you see landlords say nowadays is, because of the changes to rent control, that they aren't motivated to get new tenants in. So, you know, why spend a load of money renovating an apartment, getting it up to standard, if you're not going to be able to make up that investment by charging market rent? Just leave it empty
So are we just going to end up in a situation where apartments are empty, or at some point do landlords maybe crystallize their losses and start saying ‘You know what? I'm just going to sell this off. Maybe a developer can knock down the building, build something new.’ What actually happens?
Ben: (26:20)
So it's obviously going to vary a lot between landlord to landlord. Some are in better financial positions than others. But to your point, Tracy, it doesn't really make sense to invest conventional for-profit capital in these buildings -- certainly at anywhere approaching the values of the past.
So I think, broadly speaking, we're sort of in a standoff between these rent stabilized building donors, their lenders, and on the other side, the government. Because these buildings need subsidies to survive. But if I'm the government -- and I guess we're all the government in a way, as taxpayers -- we don't want to subsidize buildings at above market value.
But at on the other hand, you don't want buildings to degrade to a point where subsidy becomes way more expensive. And not to mention the tenants living in the buildings increasingly suffer. So it doesn't seem like we're at the point politically where people can, you know, come to an agreement on injecting capital into these buildings. But I think that's an inevitability.
Joe: (27:15)
But just going back, your basic argument here is that, you know, okay, you bet on this deregulation trade. Maybe the Supreme Court will one day say ‘all rent control or something is illegal, or rent stabilization regimes are illegal.’ Or maybe the government will water down, the New York State government or something, will water down the 2019 policies.
But your basic argument is that even if that were true, that gap between the fair market value of these buildings today under current law and the sort of dream legal changes aren't that big, or aren't as big as some of the call option embedded is not as great as some of these investors imagine.
Ben: (27:58)
Correct. In some cases, the call option is very valuable. Like if it's a, you know, fully rent stabilized building on the Upper West side, you know, you're buying the land, right? That land there is very valuable, but if it's a fully rent stabilized building in Eastern Queens or the South Bronx, that land is not very valuable.
So the idea that they're going to demolish it anytime soon doesn't really hold up. So I think, you know, we're dealing with a disconnect between what the market in its collective delusion valued these buildings at before, and what they're fundamentally valued at based on, you know, cashflow and [the] fundamentals of these buildings. And a change in law doesn't change that very much simply because of where the real estate is located and the credit profile of the tenants in the buildings.
Joe: (29:03)
Setting aside the investor upside potential from a regulatory change. One of the arguments that the anti-rent control argue[ment] people make, and you sort of did touch on this, it is a perverse or bad situation for people living in a building if their owner has either no interest or financing capacity to keep that building up. And so then essentially the person is living in an asset that continually gets degraded, or doesn’t get fixed that often and the building is falling apart? How real is that for some people in some buildings, that phenomenon?
Ben: (29:38)
I think it's very real, but I think that that argument from landlords really tends to fall on deaf ears because people were living in conditions like that under the old regime. It's not like all the money that was being made in this business was being plowed back into investing these buildings. These buildings are the least well kept in the entire city. They were before, and they are now.
So it's certainly a very real dynamic that, you know, these buildings require capital and they have owners that for both rational economic and moral reasons or ideological reasons, don't want to invest capital in those buildings. However, a lot of the problem goes back to having a really inept regulatory apparatus for housing, because in many cases these landlords are legally obligated to make these or make sure these buildings are in good repair and have not been doing so for quite some time.
Joe: (30:29)
So Ben, obviously people are going to need a place to live. This real estate isn't going away. Are these investible assets, is there a play here for some of this real estate?
Ben: (30:40)
I don't want to leave listeners with the impression that these are like uninvestible buildings. They are fundamentally depreciating assets, but as many Bloomberg listeners would know, there's plenty of financial assets out there that have depreciating cash flows.
What really needs to happen here is these buildings need to be valued at values that reflect their fundamentals. We're starting to see previews of this where some of these rent stabilized buildings are leased entirely to city programs, or entirely to tenants with Section 8 vouchers.
So there's going to be various forms through which capital is injected in these buildings to stabilize them, whether it's providing vouchers to tenants, cities leasing it directly, nonprofits taking them over and getting, you know, government financing, and every possible formation in between that.
There's no silver bullet to fixing these buildings because they're all in their unique situation. And you know, we have so little open housing that it's not like the tenants have anywhere that they can go. So it's a very live issue.
Joe: (31:40)
Alright, Ben Carlos Thypin. Thank you so much for coming on Odd Lots, fascinating sort of New York City real estate history, there. You did a great job clearing up how we got in this position.
Ben: (31:51)
Thanks for having me.
Joe: (32:05)
Tracy, I thought there were a lot of interesting points in there. One thing in particular I’ll just start on, and it's not directly related to the regulation, this idea of like the relationship lenders reminds me of SVB.
Tracy: (32:18)
Totally.
Joe: (32:19)
It's like totally, oh, you have this expectation that that's where you hold the security deposits, etc. And it kind of brings me down, it depresses me a little bit, because the idea..
Tracy: (32:28)
You want a relationship with your bank?
Joe: (32:29)
Well, I like the idea of financial institutions that actually get to know a space, that like build up a specific need rather than like pure commodity lending…
Tracy (32:40)
Yeah, it seems counterintuitive. Yeah. Because you think they should be developing expertise and good risk management skills in a particular sector, but instead, so far what we've seen is it tends to lead to, I guess, over exposure.
Joe: (32:52)
I guess one thing also that is maybe unique and very different from an SVB, other than, you know, one similarity obviously is the expectation of holding deposits, the focus on one industry, but I guess one thing that's different and interesting is -- and I thought it was a fascinating point that I hadn't thought of -- because of the sort of complexity of New York City housing law.
And I'm sure we basically just the surface, that it sort of naturally repels most capital. Like as he said, a French bank isn't going to sort of really like take the time to really deal with like post-1974 houses, pre-1974 houses, all that. And so it sort of creates this situation where one type of bet ends up being concentrated in the hands of one or a small number of players that actually put into the legwork to understand the market.
Tracy (33:42)
Yeah. The other thing I thought was interesting about that particular dynamic was it kind of leads to a situation where, okay, there's not a big natural body of capital in this space for, you know, the various reasons that we laid out. But if you do the work, do your due diligence, put that effort in, you can get in and then make a lot of money because the dynamic almost becomes self-reinforcing, right?
It's like you have this business model that's basically predicated on the value of your building going up. And then you have lenders who are very into that dynamic as well. And you have more money coming in vis private equity, private capital, which Ben also mentioned. It feels like it almost becomes this little like tiny feedback loop feeding on itself.
The other thing that -- this is related -- but the other thing that interested me was the idea that well these were always subprime assets, right? But again, that ecosystem of players were sort of telling themselves a different story. And everyone agreed on that story at the same time. And that that's fine as long as everyone can keep agreeing. But then when the environment starts to change, when interest rates start to go up, operational costs go up, it kind of falls apart.
Joe: (34:59)
Totally. I thought that was a really fascinating point that even if like you got the dream free market wishlist that many of these buildings just do not have the embedded value that a lot of the investors sort of assumed or imagined that they would. That's like a really interesting debate there.
I also thought it was interesting, you know, that in the old days, that rent stabilized buildings, as he described it, it's a bond business. And so it's almost like when it got out of the business of being a bond business, where suddenly people started maybe thinking of it as like an equity business with upside that sowed the seeds of its eventual demise, because you keep pushing to try to get out of the bond asset class to get something more like equity market returns.
Tracy (35:40)
Right. And that's when the story becomes really important; the story being, ‘Well, we're getting close to the $2,800 threshold and we're going to renovate and eventually get over it and then we'll make tons of money because this is going to be a shiny new designer apartment,’ or something like that. On that happy note. Shall we leave it there?
Joe: (35:57)
Let's leave it there.
You can follow Ben Carlos Thypin at
@SoBendito
.