Rent-stabilized distress, long tied to local banks, is now hitting CMBS.
The impact underscores that pains are radiating, exposing a new crop of investors to potential losses.
In the past two years, the distress rate for securitized New York multifamily loans has more than doubled to 14.4 percent, according to Kroll Bond Rating Agency data recently reported by Trepp’s CRE Direct. Distress, per Kroll’s definition, designates a delinquency or special servicing stay.
Notably, 90 percent of the $1.8 billion in New York multifamily debt is tied to properties subject to some sort of rent restriction, according to CRE Direct.
The distress rate for apartment properties built before 1974 — when most rent-regulated units came online — is 25 percent, further highlighting the ties between rent stabilization and financial trouble.
Citywide, rent-regulated buildings have suffered since the 2019 rent law severely suppressed revenues. To make matters worse, inflation and rising interest rates stoked expenses.
Now, more owners are failing to fend off delinquencies and defaults. Some have succumbed to the struggle, selling off assets at incredible discounts or trying to toss keys back to lenders refusing to play catch.
But as the downtrend crystallized, it was largely New York City bank lenders bearing the blow: Signature Bank failed, New York Community Bank narrowly avoided collapse and NYCB’s recent rebrand, Flagstar Financial, is still scrambling to cut or cure its rent-stabilized debt.
Data showing rent-regulated CMBS deals are struggling signals the wider crisis isn’t just a mom-and-pop problem. The big dogs that lean on securitized debt are suffering, too.
The $540 million senior mortgage tied to Meyer Chetrit’s Yorkshire and Lexington Towers at 305 East 86th Street and 160 East 88th Street, respectively, is one example.
The buildings, which are a little less than half rent-stabilized, landed in special servicing last year after Chetrit and co-owner Stellar Management made a series of late payments.
The loan was marked current in March by Morningstar Credit. The deal’s cash flow, however, cannot cover its total debt, which includes about $175 million in mezzanine financing.
The sponsors bought the buildings in 2014 and planned to renovate the overwhelming majority of their rent-stabilized units, aiming to boost rents by 20 percent, according to CRE Direct.
The 2019 rent law decimated such strategies.
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