The Other Housing Crisis
In order to understand what transpired at Ocelot’s buildings, one needs to consider how the real-estate boom and subsequent bust played out in a hot rental market like New York City, where unlike most places, 70 percent of families rent apartments as their primary residence. During the early part of the decade, rents in New York were increasing at a steady pace, and once marginalized neighborhoods were starting to gentrify. The tight rental market, combined with loopholes in New York’s rent regulation system that allow for substantial rent increases when an apartment has been vacated, created a climate in which investors and real-estate speculators saw multifamily rental housing as a premium opportunity for short-term, high-return investment.
At the height of the market, between 2004 and 2007, dozens of private equity firms with access to large pools of privately raised capital purchased dozens of apartment buildings across the five boroughs. Betting that property values would continue to rise and that rents could be increased, buyers openly participated in bidding wars, paying astronomically high prices. The banking industry was a willing accomplice, providing buyers with mortgage loans accounting for as much as 80 percent of the total acquisition cost of each deal.
The enormous mortgage obligations left many of the portfolios saddled with debt that far outweighed what existing rent rolls could support. By the time the global economy started to spiral downward, hundreds of buildings in New York City had been purchased at prices that, without tremendous increases in rental income, were financially unsupportable. By 2009, the city’s department of Housing Preservation and Development (HPD) estimated that there were more than 110,000 apartments in the city financially at risk.
Stages of Grief
The first wave of pain came in the form of targeted harassment campaigns aimed at rent-regulated, and particularly low-income, tenants. New York’s rent regulatory system allows rent increases of up to 20 percent when tenants permanently vacate their apartments. Private equity companies, now acting as landlords, believed that their properties were ripe for gentrification and looked for ways to force low-income tenants out in order to make way for higher income families. A review of public documents revealed that some investors openly projected they could displace 30 percent of occupied units over a 12-month period, despite New York City Rent Guidelines Board statistics that show annual turnover rates in rent-regulated housing are closer to 5 percent.
Some relied on subtle harassment tactics—losing rent checks and refusing to make apartment repairs were popular—while others engaged in full-scale warfare, inundating tenants with baseless eviction threats month after month. No one knows for sure how many families voluntarily gave up or forcibly lost their apartments, but many advocates believe there is a direct correlation between the harassment epidemic and the all-time high number of families living in homeless shelters that The New York Times reported in June 2009.
On the other hand, a surprising number of families across the city dug in their heels and refused to give up their apartments. Eventually, thanks to a combination of effective organizing, political advocacy, and a global shift in the economic forecast, the majority of investor-landlords halted displacement campaigns and began to grapple with the reality that their chance of recouping their investments was becoming slim.
Buckling under the pressure of inflated mortgage payments and with limited ability to increase rents, a number of investors attempted to fend off foreclosure by drastically cutting their expenses, reducing maintenance in some cases slowly, in others brutally quickly, and in many cases walking away entirely.
By summer 2009, more than 5,000 units of housing were in foreclosure as a result of speculative investment in just upper Manhattan and the Bronx. A large percentage of those units were already in severe physical distress, the Ocelot portfolio among them.
Advocates and tenants have fought back, but it’s a long, hard road. Of the Ocelot portfolio, 14 buildings have been rescued; 5 went into bankruptcy proceedings; the remaining 6 are still struggling and now on their third owner.