The yield on a 30-year Treasury note is nearly 5 percent. What does that have to do with real estate in New York?
Consider the real-world example of a 1,200-square-foot, two-bedroom apartment in a prime West Village location. After the death of its tenant for the past 30 years, its owner, a Daily Dirt reader, estimated that it would cost more than $100,000 to do a proper renovation.
However, under the 2019 rent stabilization law, he could only recover $30,000 of that expense through a temporary rent increase that would raise the rent to $1,428 per month.
The landlord calculated that his return on investment would be about 2 percent. That seems acceptable to politicians like Linda Rosenthal, who chairs the Assembly’s housing committee and is herself a rent-stabilized tenant. They expect owners to do the renovation, find another tenant (who might stay for 30 years), and make that 2 percent return, rather than leave the unit empty.
But who in his right mind would invest six figures in a rent-stabilized apartment to make 2 percent rather than buy a Treasury note, the safest investment on Earth, and make 4.8 percent?
Treasury notes are not only more reliable and pay better, but they involve a lot less agita and effort than rent-stabilized tenants.
Government securities don’t call 311 with complaints, miss payments, clog toilets, breed dogs or make noise at odd hours.
T-notes don’t sneak in subletters, stop paying rent and tie you up in housing court for two years. They don’t set fires, flood apartments or cause gas leaks.
Securities can be sold with a mouse-click, whereas a rent-stabilized tenant is entitled to perpetual lease renewals and succession rights.
Sinking $100,000 into a renovation is an illiquid investment with a high opportunity cost, meaning the money cannot be repurposed if an emergency arises or something better comes along.
Tenant advocates say landlords like to overstate the cost of repairs. Why not slap a new coat of paint on the unit, replace the appliances, refinish the floors and call it a day?
“If I did a $30,000 renovation, there is a real probability that I would be hauled into court for substandard renovation and would be ordered to renovate the apartment further for free,” the owner said by email. “That’s why there are more than 50,000 apartments sitting vacant in the middle of a major housing shortage.”
With a change in the law, he said, “They could be back online within six months.”
The state legislature reconvenes in January, so the soonest a reform could pass is next year. The latest it could happen is never.
Read more
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