Moody’s warns New York rent freeze could trigger defaults on 8.3% of stabilized loans
While the broader multifamily default rate is estimated at 6%, buildings with high levels of rent stabilisation face greater risk, particularly under high-inflation scenarios.
A proposed five-year rent freeze in New York City’s stabilized apartment market could lead to defaults on more than 8.3% of loans for buildings with at least one rent-stabilised unit by 2030, according to a new analysis by Moody’s Ratings. The estimate emerges as the city’s Rent Guidelines Board weighs the policy, which has been championed by Mayor Zohran Mamdani.
The broader multifamily loan default rate is estimated at 6%, a figure that includes properties with no rent-stabilised units. However, the financial strain is concentrated in buildings with high stabilisation levels. In a high-inflation scenario where expenses grow at 4% annually while revenue grows at 3%, more than 14% of loans associated with rent-stabilised properties could fail at least one financial stress test by the end of the decade.
Moody’s researchers utilised two primary metrics to identify financial strain: a debt service coverage ratio dipping below 1.0, indicating that net operating income is insufficient to cover debt service, and net operating income falling below 6% of the total loan amount. The analysis suggests that most defaults would occur in properties where more than 90% of units are rent-stabilised, with debt service coverage ratios declining by an average of 0.11x.
Darrell Wheeler, head of CMBS research at Moody’s, noted that while some properties with mixed stabilisation levels are buoyed by high rent growth in market-rate apartments, many buildings would still lose net operating income if expenses rise faster than projected. “There are a lot of other buildings that will lose NOI and feel financial stress, especially if their expenses increase faster than what we’re projecting,” Wheeler said.
Despite the projected stress, Moody’s researchers found that many of the distressed loans were already problematic prior to the proposed policy. Of the 51 loans identified as financially strained, only 29 cases, representing 8.3% of loans in buildings with at least one rent-stabilised unit, could be specifically attributed to the rent freeze. The analysis also highlighted that New Yorkers are more rent-burdened than residents of any other major city analysed, with the bottom fifth of income earners spending 133% of their income on rent.
