Tenants Can’t Pay Rent. Landlords Won’t Pay Bills. What Happens Next?

This article is published in our Perspectives section, featuring analyses and views by New Yorkers uniquely qualified to weigh in on high-stakes political debates.

New York stands at a crossroads.

As thousands of tenants fall behind on rent amid the pandemic-induced recession, many property owners will be unable to make their mortgage payments. Private equity investment firms like Blackstone and Jared Kushner’s Cadre have amassed billions just for this moment and are ready to swoop in, purchase properties at rock-bottom prices and then generate returns by driving up rents, displacing tenants and adding to New York’s already record-high rates of homelessness.

That’s exactly what happened in 2008, when private equity firms took advantage of the mortgage crisis by buying up a slew of relatively affordable housing and setting out to maximize rents and skirt regulations. 

But there’s another option. The city and state governments have existing programs at their disposal and bills in the works that could convert distressed buildings into social housing—housing that is deeply affordable, decommodified, and democratically operated.

These are the two paths facing us today: widening inequality and corporate profiteering, or expanded affordability and community well-being for decades to come.

How the Mountain of Debt Accumulated

New York’s looming foreclosure crisis was catalyzed by the pandemic, but the groundwork was laid by decades of risky, predatory and—for a time—tremendously profitable financial practices by landlords and their lenders.

Rental housing in New York City, as in many other places, has increasingly been run as a business based on escalating levels of debt on the assumption of ever-rising rent levels, property values, and profit margins. In the last decade, debt levels have more than doubled; according to rough estimates based on public filings, between 2010 and 2018 average debt levels per unit of housing increased by 121%.

Short of some major intervention, unpaid rent will continue to pile up past the historic highs set earlier this year—and firms like Blackstone will pull out the 2008 playbook and repeat it word for word.

The process goes something like this: a landlord buys a building with a conventional mortgage. Their property values rise. The landlord expels long-term tenants and charges new tenants higher rents. Based on these higher rents, they go back to their bank and refinance for a larger mortgage. They can pocket this influx of cash or use it to buy more buildings. Meanwhile, their monthly mortgage bill has grown. If they can’t keep up the payments, they may lose one building, but they hold on to all the money and additional properties they accumulated along the way.

As long as property values and rent levels rise, as they did for most of the last twenty five years, the model works splendidly for landlords. But when they stop rising—and if they start falling—landlords find themselves facing mountains of debt they can no longer pay. What happens next?

Investors smelled blood in the water even before the onset of the pandemic. Predicting a downturn, investment firms at the end of 2019 had $142 billion set aside to spend on distressed properties. By May 2020, that figure had risen to $328 billion. Those looking to profit include both locally based New York City real estate players like Alma Realty and transnational private equity firms like Blackstone.

“Our thoughts and prayers are with all of our fellow Americans and nobody wants to capitalize on anybody’s misfortune,” one investor told the Wall Street Journal. “But I will tell you, real-estate investors—when you take the emotion out of it—many of them have been waiting for this for a decade.”

If this sounds familiar, it should: it’s exactly the playbook investors used in New York and in cities around the world in the aftermath of the 2008 financial crisis. When the subprime market blew up and unemployment cascaded, homeowners and landlords alike faced difficulty making their mortgages. Private equity firms went on buying sprees and became the world’s biggest corporate landlords.

In New York City, when over 5,500 multifamily buildings faced fiscal and physical distress, these companies pooled capital from both private investors and institutional funds, such as union pensions and sovereign wealth funds, to buy up a major slice of New York’s housing sector at the bottom of the market. From 2005 to 2009, firms like BlackRock Realty Advisors bought approximately 100,000 units of rent regulated housing, advocates estimate— roughly one in ten available units.

Conditions for tenants deteriorated while real estate rates profit soared, more than doubling between 2010 and 2018 in many neighborhoods. Buildings flipped fast, with the volume of sales on rental apartment buildings skyrocketing from $1.29 bullion in 2010 to $8.31 billion in 2016. In short, in the aftermath of the crisis, investors turned larger profits than before while tenants suffered and homelessness spiked.

We now face a strikingly similar situation. 

Over 1 million people have lost work statewide, more than in the previous recession. In the Bronx, 41% of residents were receiving unemployment insurance by the summer. Between April and July 2020, 26% of New York tenants could not pay rent, and 39% more had little to no confidence that they could pay the following month. The state’s meager rent relief program has been so restrictive as to deny 57,000 tenants in need of financial assistance, the vast majority of applicants, and spent less than half of its federally allocated funds. This program was recently updated but remains limited, with many tenants fearing they will be rejected a second time. Many tenants continue to pay the rent while forgoing other necessary expenses or going deeper into usurious debt.

Short of some major intervention, rent arrears (unpaid rent) will continue to pile up past the historic highs set earlier this year—and firms like Blackstone will pull out the 2008 playbook and repeat it word for word.

Another Way Forward: Social Housing

Instead of allowing Wall Street to capture greater control over the housing market, New Yorkers should use the crisis to set a new trajectory—to reassert our control over our homes and make the state more affordable for the long term.

We can do this by converting distressed properties into social housing. We already have several forms of social housing, from public housing to limited-equity cooperatives, in New York City and across the state. Most were planned during economic crises and produced as part of the recoveries. 

First, the city and state should set aside funds to immediately buy out buildings on the brink of foreclosure. This can be done either through direct acquisition or by funding Community Land Trusts and community-based organizations, and should give residents the right to determine what form of social housing they want their buildings to become. Vouchers and operating subsidies should be added to make vacant apartments affordable to people currently facing homelessness. Programs for this purpose already exist, but are currently too poorly funded to make a dent in the crisis or to compete with private buyers.

City and state legislatures should also pass laws that give tenants and community-based organizations a first shot at buying buildings when they’re put up for sale, and provide public support if they opt in to a social housing model. A similar “Tenant Opportunity to Purchase Act” has long existed in Washington DC, was recently adopted in San Francisco, may soon come to Berkeley and Oakland, and has already been introduced in New York City and State.

Similarly, when banks are ready to put an apartment building into foreclosure, they should first offer the debt in question to non-profits at a discount. Tenants in distressed buildings organized for this kind of program after 2008 and won such a “First Look” agreement with New York Community Bank and the Association for Neighborhood Housing and Development, which can serve as a model for a more widespread program.

New York must also rethink its model for dealing with tax delinquency. Instead of promoting the privatized and profit-oriented system of tax lien sales established under the Giuliani administration, the city should instead develop a system that keeps working-class people in their homes and transfers buildings from unfit landlords to Community Land Trusts.

Finally, we must continue the progress made through the 2019 rent law reforms by expanding tenant protections, establishing eviction moratoria, creating more meaningful pathways out of homelessness, intensifying building code enforcement, and using the tax code to curb real estate speculation, flipping, and underusage like pied-à-terres and warehousing. These have long been on the housing movement’s agenda, but are even more urgent amid recession and widespread stay-at-home orders.

These policies wouldn’t be cheap. Social housing costs money to build and operate, and would lower property tax revenue as for-profit housing becomes non-profit or tax-exempt.

But here, too, lies opportunity. New York city and state budgets are over-reliant on revenue from rising real estate values. In addition to falling more heavily on the poor, this leads local governments into a perverse dependency on real estate capital, in which the tools of public policy—taxation, land use, public subsidies, and more—are used in ways that prioritize housing’s profitability over its affordability, and make ongoing gentrification and displacement inevitable. 

This helps explain our enormously inefficient public spending on private housing, including a sprawling shelter apparatus which fails to provide the homeless with permanent housing and the wasteful 421a program for luxury developers which costs New York almost twice the amount the city spends on financing affordable housing production. New York simply cannot keep raising the money we need to fund public services through a model that assumes ever-rising land and property values.

Now is the time to reorient our budgets by passing progressive taxes and by moving money away from temporary shelters and toward permanent housing. If spending on a program of acquisitions and conversions seems expensive, its costs must be measured against those of inaction: a perilous increase in homelessness, an economic recovery swallowed by rising rents, and a massive missed opportunity to create large quantities of affordable housing that can weather the turbulence of real estate market cycles.

This moment presents New York with a challenge: will we stand back and allow speculators to reap windfall profits, or will we stand up and initiate a historic transition toward social housing?

Samuel Stein is a housing policy analyst for the Community Service Society. Stein is the author of the book Capital City: Gentrification and the Real Estate State and of a recent report, co-authored with Oksana Mironova, Celeste Hornbach and Jacob Udell, entitled “Corporate Windfalls or Social Housing Conversions? The Looming Mortgage Crisis and the Choices Facing New York.”