Robert Knakal, chair of New York Investment Sales at JLL Capital Markets and a speaker at the FAE's Real Estate Conference today, said there's a lot to dislike about the current state of the market, exacerbated by new rent regulations passed early this year, but that there's still a few bright spots that can give some hope to investors. 

Knakal said the trouble began in September 2015, which was when the industry saw a significant shift in the land and hotel market, both of which are highly sensitive to economic changes (hotels because they're very short term leases, and land because its value depends on how developers think things will be in three to four years). These early warning signs were followed, in 2016, by a 78 percent drop in sales volume in Manhattan. This was the start of the longest market correction he has ever seen in the course of his career. 

"The 50 month correction we're now in is the longest correction I've ever seen, and I've been doing this for 36 years now. It's been longer than the savings and loan crisis, longer than the great recession, longer than the early 2000s recession," he said. 

Based on the timing, though, he said the industry expected things to start improving in 2018, and then really take off the following year. While early dollar volume figures indicated that this was the case and "we were thinking 2019 would be a great year," new rent regulations cleared Albany which he said put a significant damper on what should have been a really positive time. 

The new law significantly increased the power of renters while restricting that of owners. Among many other things, security deposits are limited to one months rent, application fees were severely limited, and it has become much more difficult to evict someone. 

Unintuitively, though, Knakal said the immediate aftermath of the new law actually saw higher capitalization rates and higher value per square foot on average. This was because owners of non-rent stabilized housing stock, anticipating more regulations to come, began selling at a higher rate because they didn't want to be holding the property when the next shoe dropped. 

However he predicted dire consequences in the long term. For instance, he said that the Major Capital Improvement program, which is meant to incentivize owners to improve their properties by letting them increase their rent after doing so, has been severely limited, with the total amount of allowable rent increases over 15 years going from $80,000 to $15,000. This meant, he said, that owners will stop improving properties because there's no profit it in anymore. 

"If you have an apartment that, say, rent is $700 a month, and it's worth $4,000 a month, and that apartment becomes vacant, are you going to put $15,000 and fix it up?" he said, adding that the unit will likely not be in very good condition without these improvements, so "that apartment is just nailed shut today. They're not renting for $700 to $800 for the lifetime of the tenant in that unit. What's the owner's motivation?" 

He believes that this means the new regulations won't actually increase the supply of affordable housing, because no one will get to rent that $700 a month apartment. It will remain vacant until rents can increase enough to make it worthwhile to renovate and then reopen. 

Since owners have less flexibility on the revenue side of things, he predicted they will put more emphasis on cutting costs, which means less maintenance and upkeep, which in turn means fewer contractors are hired to do the maintenance and upkeep, which means less money going to hardware stores to supply those contractors. 

However he did point to a few bright spots in the market. For one, he said, activity on land sales "have been fantastic," albeit at a lower price point than before. Another strong area are class B, C, and D office buildings, which picked up as a direct result of the rent regulations. Since the new regulations concern residential buildings, investors who had previously specialized in apartments and other homes are now looking to buy office buildings. Additionally, he said that foreign capital flows are only slightly below average, provided one removes from consideration the outlier years of 2015 and 2016. He also said that the industrial market is benefiting from the downturn in the retail market, saying that most industrial properties are now a sort of hybrid between industrial and retail, as they are shipping products out directly. And, finally, he brought up that the sales market in New York is always cyclical, so as bad as things might seem now, they're going to improve eventually. 

"At some point it's got to, have to, go back up, preferably sooner rather than later," he said.