After witnessing over a decade of strong growth, landlords are now facing the worse real estate crisis since 2008.
Even in the first months of the pandemic, areas of the country like Florida were able to benefit, as millions of Americans fled major metropolitan regions to more welcoming locations.
Despite a temporary drop in tenants in 2020, property owners in major cities like New York continued to earn revenue from tenants through apartment rentals.
However, a rise in borrowing rates, high inflation, and a sluggish economy, is finally causing the real estate sector to tumble.
New York Rental Business Has Become Difficult
Ben Carlos Thypin, a New York City apartment landlord, spoke with Bloomberg’s Odd Lots Podcast in April to discuss recent changes within the local market.
Apartment prices in NYC in the first quarter of 2023, reached a historic high, as people flocked back to the city despite a shortage of units.
Rents in New York still remain elevated, but have slightly fallen in recent months, as newer apartments come online, alleviating some of the pressure.
Thypin said that the rise in interest rates has less of an effect on the New York real estate market, which is based more on appreciation versus yield prices.
He told Bloomberg that demographic and political changes over the past few decades have caused rents in NYC to become very expensive.
Since the late 1960s, the average price of single-family housing or a condo apartment has surged, pushing millions of would-be homeowners out of the buyers market and into rentals.
That left the rental market as the only part of the sector with unlimited demand and growth, with a demographic increasingly concerned with future rent hikes.
The New York landlord blamed competing rivalries between homeowners, municipalizes, tenants, and landlords for driving up housing costs.
Thypin said that years of successful lobbying by homeowner advocacy groups have pressured local authorities to keep property taxes low, often by giving them special exceptions.
He said that officials often compensate for the loss in revenue by forcing owners of apartment buildings to accept the bulk of property tax hikes, which in turn leads to additional rent increases.
“Municipalities really have very few levers for generating revenue in this country. So they typically need someplace to make up the revenue,” he said.
He also noted that over the years, more long-term tenants are tending to be professionals who previously would have been owners 30 years ago.
Thypin said that the new wave of tenants are now fighting back against their landlords, by organizing like homeowners did in the past, becoming their own political bloc in states like New York and California.
Tenants’ rights groups have also pushed for laws in those states that make it harder for landlords to evict delinquent tenants, along with other demands like price caps on rents.
Social media use over the past decade has enabled many tenants to better voice their opinions, making the residential business more troublesome for landlords in the long run, he said.
Pandemic Era Florida Real Estate Boom Nears Its End
Meanwhile, in West Palm Beach, Florida, Phil Nicozisis, a regional real estate developer and landlord, saw his business boom during the pandemic amid an influx of new migrants from the Northeast.
Although people were still coming down to the Sunshine State, he said that things were noticeably beginning to slow down, he told The Epoch Times.
Over the past year, Nicozisis saw a negative adjustment in prices, a slowdown in the velocity of transactions, and the multiple offers that he usually received from potential buyers regarding the asking price, became fewer.
He also said that construction costs were continuing to rise because of the persistent supply chain crisis, which negatively affected the real estate industry across the United States.
Nicozisis said that his firm took a hit when a long-term commercial client unexpectedly backed out of a major deal because of the spike in costs to finish the building.
“I think that this is emblematic of what’s going on around the country and even in even in Florida, which you know, which some people will still tell you as hot as a pistol, but we are affected,” he said.
Nicosizis said that the average sales pace for his properties is beginning to slow down and that single apartment listings which would have received multiple offers a day only a few months before are taking longer to close.
“Last year, we had multiple offers a typical listing in a waterfront or waterfront block property would have multiple offers over asking right now. Instead of that, properties are on the market for longer than before, and they’re taking longer to sell,” Nicozisis said.
The Florida real estate investor added that some of the brokers and salespeople that did business with on a regular basis did not even pull a commission check this year, which he blamed on the effect of the interest rate hikes by the Federal Reserve.
The Fed’s aggressive interest rate policy caused the 30-year mortgage rate to rise last year to its highest level since the early 2000s.
“When we were three and a half percent, you could pay a seven or even a six and a half percent capitalization rate and still have positive leverage, but at six or seven, it doesn’t work at those prices,” he said.
“And the other thing is sellers have not adjusted yet. I guess you could say we’ve had close to 20 years of low of interest rates and I know that people are so used that, they cannot think about lowering their prices.”
However, Nicozisis said that one positive sign for the future is the continued shortage of housing nationwide, which has kept demand and prices high.
He added that if the supply chain logjam ever gets ironed out, it would allow construction to eventually pick up and carry the rest of the economy.
Commercial Office Space Landlords Face Ruin
The U.S. commercial office sector has been slower to recover compared to the residential market, after many landlords failed to anticipate the changes in the post-pandemic workplace.
Nicozsis told The Epoch Times that many commercial property owners are facing serious losses, as millions of employees began working remotely during the lockdowns and many offices remain empty.
He warned that commercial properties which were signed before the pandemic under 5- to 7-year leases are now being called to term.
Nicozisis said this will wreak havoc on those particular landlords burdened with the underused commercial spaces.
“Over the next two years, a lot of these five-year loans are going to be due at market and these deals were signed when mortgage rates were under 3.5 and 3.75 percent,” he said.
The Florida property investor said that a double blow of higher interest rates and a lack of tenants could end in a situation where only the strong may survive.
Much of the commercial mortgage debt held by banks will need to be refinanced in much tougher conditions in the coming years, but around 80 percent of outstanding commercial property debt is held by small and medium-sized banks that are under pressure since the start of the bank crisis in March.
With many regional banks under pressure, many are less inclined to release liquidity into the commercial real estate market without doing so at higher interest rates.
