Even in the crisp afternoon sunlight, the two-bedroom Manhattan apartment has a ghostly pallor, its cracked walls yellowing like an ancient black-and-white photograph. Paint chips are falling from the ceiling. A dead pigeon lies on the kitchen floor.
Its landlord, Douglas Peterson, is making a stop on a dispiriting tour of a 21-unit building he bought in 2018 for $4.8 million. Peterson’s City Skyline Realty Inc. specializes in a subgenre of real estateinvestment: properties subject to the New York City rent-regulation system, the oldest and biggest program in America. For this well-situated apartment on West 164th Street in Washington Heights, the quickly gentrifying Dominican enclave immortalized in a Lin-Manuel Miranda musical, he can charge no more than $650 a month, perhaps a quarter of the market rate.
For landlords the playbook had long been simple and lucrative. Buy run-down buildings that are, in New York lingo, rent-stabilized. Fix them up. Pass along the expense to tenants by raising rents, which was allowed under the regulations. Cash out. Repeat. Once rents approached $2,800 a month, owners could charge what the market would bear, and the apartments became a potential gold mine. “You just had to be patient,” Peterson says.
But his bet on raising rents has gone disastrously bad, as it has for landlords across the city. In 2019, alarmed about the decline in affordable housing, New York state lawmakers rewrote the rules. In one key change they sharply reduced how much landlords could raise rents after renovations. In an even more important shift, the apartments no longer leave the program when rents rise high enough.
Peterson—who’s bought more than 40 properties for $300 million over 20 years—is now in distress. He’s falling behind on his mortgages and scrambling to find money for repairs. In October, Fannie Mae, the government-backed home loan company, started foreclosure proceedings against a dozen of his properties, including the building on 164th Street. “My career is over,” Peterson says. “Now it’s just a question of: What’s my legacy going to be? Is it going to be that I abandoned the ship when it was sinking, or that I stayed and fought?”
Last year, New York buildings with at least one rent-stabilized apartment sold on average for $203,000 a unit, down 34% since 2019, according to Maverick Real Estate Partners, a New York investment manager. By contrast, the price of nonregulated apartments rose 23%. The value of rent-stabilized units declined by as much as $75 billion, Maverick found. In December the Federal Deposit Insurance Corp. unloaded $15 billion in loans backed primarily by New York rent-stabilized apartments—at a 40% discount. Last week, amid concern over real estate exposure, shares of New York Community Bancorp Inc.—which holds about $37 billion in apartment loans, half backed by rent-regulated units—dropped 38% in a single day. “A lot of owners I’m speaking with want to walk away from buildings,” says Lazer Sternhell, chief executive officer of Cignature Realty Associates Inc. in the city.