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A vacant rent-regulated apartment on West 164th street in Manhattan’s Washington
Heights.Photographer: Timothy Fadek for Bloomberg Markets
Markets
The Big Take


WHY NYC APARTMENT BUILDINGS ARE ON SALE NOW FOR 50% OFF

Tougher rent control, returning worldwide, destroys $75 billion in property
value. Cash-strapped tenants cheer as they maintain a foothold in the city.

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By Patrick Clark and Prashant Gopal
February 4, 2024 at 2:00 PM HST
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Even in the crisp afternoon sunlight, the two-bedroom Manhattan apartment has a
ghostly pallor, its cracked walls yellowing like an ancient black-and-white
photograph. Paint chips are falling from the ceiling. A dead pigeon lies on the
kitchen floor.

Its landlord, Douglas Peterson, is making a stop on a dispiriting tour of a
21-unit building he bought in 2018 for $4.8 million. Peterson’s City Skyline
Realty Inc. specializes in a subgenre of real estate investment: properties
subject to the New York City rent-regulation system, the oldest and biggest
program in America. For this well-situated apartment on West 164th Street in
Washington Heights, the quickly gentrifying Dominican enclave immortalized in a
Lin-Manuel Miranda musical, he can charge no more than $650 a month, perhaps a
quarter of the market rate.

Expand

Featured in the February/March issue of Bloomberg MarketsPhotographer: Ian Allen
for Bloomberg Markets

For landlords the playbook had long been simple and lucrative. Buy run-down
buildings that are, in New York lingo, rent-stabilized. Fix them up. Pass along
the expense to tenants by raising rents, which was allowed under the
regulations. Cash out. Repeat. Once rents approached $2,800 a month, owners
could charge what the market would bear, and the apartments became a potential
gold mine. “You just had to be patient,” Peterson says.

But his bet on raising rents has gone disastrously bad, as it has for landlords
across the city. In 2019, alarmed about the decline in affordable housing, New
York state lawmakers rewrote the rules. In one key change they sharply reduced
how much landlords could raise rents after renovations. In an even more
important shift, the apartments no longer leave the program when rents rise high
enough.



Peterson—who’s bought more than 40 properties for $300 million over 20 years—is
now in distress. He’s falling behind on his mortgages and scrambling to find
money for repairs. In October, Fannie Mae, the government-backed home loan
company, started foreclosure proceedings against a dozen of his properties,
including the building on 164th Street. “My career is over,” Peterson says. “Now
it’s just a question of: What’s my legacy going to be? Is it going to be that I
abandoned the ship when it was sinking, or that I stayed and fought?”

Last year, New York buildings with at least one rent-­stabilized apartment sold
on average for $203,000 a unit, down 34% since 2019, according to Maverick Real
Estate Partners, a New York investment manager. By contrast, the price of
nonregulated apartments rose 23%. The value of rent-stabilized units declined by
as much as $75 billion, Maverick found. In December the Federal Deposit
Insurance Corp. unloaded $15 billion in loans backed primarily by New York
rent-stabilized apartments—at a 40% discount. Last week, amid concern over real
estate exposure, shares of New York Community Bancorp Inc.—which holds about $37
billion in apartment loans, half backed by rent-regulated units—dropped 38% in a
single day. “A lot of owners I’m speaking with want to walk away from
buildings,” says Lazer Sternhell, chief executive officer of Cignature Realty
Associates Inc. in the city.

Expand

658 W. 188TH ST. Bought:for $23.1 million (September 2015). Sold for $10.7
million (August 2023).Photographer: Timothy Fadek for Bloomberg Markets

These losses highlight an escalating battle over a kind of affordable housing
that provides a foothold for the working class in one of the world’s most
expensive cities. To landlords such as Lewis Barbanel, owner of Barberry Rose
Management Inc., in Woodmere, New York, tighter rent regulation violates their
private property rights and will only worsen the housing shortage by
discouraging renovation and construction. His company sold 21 rent-stabilized
buildings last year at a loss. Barberry parted with one building in Harlem for
$3.8 million, 59% less than the company paid in 2016. “The politicians are
defunding these buildings,” says Barbanel, who’s shifting his investments to New
Jersey and elsewhere. “They’re trying to create a situation where the owners
fail.”

But to tenants, apartment owners are merely paying the price for reckless
borrowing that relied on skyrocketing rents that were bound to spark opposition.
The new laws shouldn’t have come as a surprise to property investors, says Cea
Weaver, campaign coordinator of Housing Justice for All, who helped lead the
fight. “We weren’t being very secret that we were trying to change the rules,
nor were the lawmakers in Albany,” Weaver says. “I don’t know if it was hubris
or not, but laws change, and that impacts markets.”



Rent control is having something of a comeback after losing favor across more
than a generation. In 2019, Oregon became the first state to pass a statewide
rent control law, which capped annual hikes at 7% plus inflation. Later the same
year, California limited increases to 10%. Two dozen states last year considered
caps, according to the National Multifamily Housing Council, a trade group for
landlords.

Countries including Canada, India and Sweden all have regulation. As rents are
climbing in big cities worldwide, governments have looked to expand protections,
with mixed results. Denmark instituted a two-year cap in 2023. Berlin in 2020
enacted a five-year freeze, among the world’s most stringent measures. But
Germany’s Federal Constitutional Court overturned it the next year.

As a rule, economists hate rent control, saying it distorts markets, leading to
housing shortages and higher rents in market-rate buildings. The rules benefit
longtime tenants at the expense of newcomers, and they’re an inefficient way to
help those who need it most, scholars have found. The International Monetary
Fund late last year called on Ireland to abandon its price caps in designated
“rent pressure zones” such as Dublin, because restrictions are worsening the
housing shortage. Instead, the agency suggested targeted subsidies for poor
renters.

Expand

124 W. 112TH STREET. Bought for $2.8 million (December 2018). Sold for $1.2
million (December 2021).Photographer: Timothy Fadek for Bloomberg Markets

But Chris Herbert, managing director of Harvard University’s Joint Center for
Housing Studies, says the market is failing renters. In classical economics,
rising prices should be leading to more construction and moderating rents. But
scarce land in attractive cities and zoning rules cause persistent shortages. In
this environment, Herbert says, milder rent control, such as tying increases to
inflation, could be a compromise.

New York’s history shows the ebb and flow of rent regulation amid shifts in the
relative power of landlords and tenants. Two-thirds of the city’s residents rent
their homes, double the nationwide rate, giving tenants greater political sway
than in much of the US. New York’s efforts have roots in 19th century attempts
to improve the lot of immigrants crowded into dilapidated tenements.



New York has had some form of rent regulation since 1943, when the federal
government imposed price controls to combat inflation during World War II. After
those protections expired in the early 1950s, the state enacted its own
measures, which applied to pre-1947 buildings. That older system, known as rent
control, severely restricts what tenants pay for as long as they occupy the
unit, a feature that’s led some renters to organize their life around an
unbelievably cheap real estate deal, sometimes stoking outrage or envy when
there are reports of someone affluent or famous living for a song. Only 16,000
of those rent-controlled ­apartments remain.

Rent stabilization, which dates to 1969, covers roughly 1 million apartments,
housing a quarter of the city’s population. (Most units have no income
restrictions.) Each year landlords submit reports on their income and expenses
to the ­mayor-appointed Rent Guidelines Board, which uses the information to
help determine how much owners can raise rents. In New York City, tenants paid a
third less for rent-­stabilized apartments than they would have for equivalent
market-rate apartments, an annual discount adding up to $5.4 billion, according
to a 2023 paper from researchers at George Washington University, the University
of North Texas and Johns Hopkins University.



In the more market-oriented 1990s, city and state ­lawmakers voted to relax the
rules. Landlords could then raise rents by 20% each time a tenant moved out.
They could set their own rents once they rose past a certain threshold. For many
buildings, owners could also raise monthly rents by $1 for every $40 in
renovations, meaning a landlord who invested $60,000 in a vacant apartment could
increase the rent by $1,500 on the next tenant.

This system made regulated apartments far more appealing. “A rent-stabilized
unit was viewed as an embedded option to increase rents,” says Shimon Shkury,
president of brokerage Ariel Property Advisors.

A new class of investors flocked to a market historically dominated by
established local real estate families. These latecomers included smaller
companies such as Peterson’s as well as some of the biggest names on Wall
Street. In 2015, Blackstone Inc. led the $5.3 billion purchase of
rent-­stabilized Stuyvesant Town and Peter Cooper Village. Blackstone, which has
since spent more than $375 million in improvements, says it remains confident in
the investment.

Expand

519 W. 143RD ST. Bought for $9.3 million (May 2016). Sold for $3.8 million
(September 2023).Photographer: Timothy Fadek for Bloomberg Markets

But the city’s soaring housing prices provoked a backlash. Then-Mayor Bill de
Blasio and New York Attorney General Letitia James said looser controls provided
incentives to harass tenants and promoted gentrification and the deregulation of
hundreds of thousands of apartments. A bloc of progressive state lawmakers swept
into office, setting the stage for the 2019 changes that distressed building
owners. The timing was especially tough for landlords, who soon after had to
contend with unpaid rent during the Covid-19 pandemic, along with rising
insurance costs and interest rates.

Some tenant advocates welcome the drop in prices for regulated apartments. With
government help, nonprofits or tenants could buy buildings at lower prices, as
they did in the 1980s, says Sam Stein, a senior policy analyst for Community
Service Society of New York. They could then charge more affordable rents.

Landlords have tried, unsuccessfully, to get the US Supreme Court to intervene
on their behalf by ruling against the 2019 rent laws. On social media, Jay
Martin, executive director of a trade group called the Community Housing
Improvement Program, describes opponents as communists and has pledged a
“scorched earth” strategy this year to fight them. “There’s too much at stake,”
he said recently on X, formerly Twitter. “We must do everything possible to stop
individuals destroying New York’s housing.”



Tay Raymond, 35, grew up on West 116th Street, down the block from the famed
soul food restaurant Amy Ruth’s as well as a building where condos sell for $1
million. On this same street, Raymond’s three-bedroom now rents for $1,300,
about a third of the cost of the unit down the hall. But, in January, there was
a gaping hole in her bathroom ceiling that had been a problem for years, and she
says mice and roaches run rampant. “They want us to self-evict,” says Raymond,
who sells vintage clothing online. “Either because we’re not getting the repairs
we need or because we’re afraid of getting priced out.”

In 2018 her landlord, a private equity firm called Sugar Hill Capital Partners
LLC, contracted to buy 53 small apartment buildings for more than $250 million
in the company’s largest deal. Sugar Hill figured each unit would need at least
$60,000 in renovations, enough to upgrade plumbing and electrical systems. But
once New York state clamped down on renovation-­related rent increases, Sugar
Hill could pass on only $15,000 per apartment.

Expand

Tay Raymond outside her rent-stabilized apartment on W. 116th Street in
Manhattan.Photographer: Timothy Fadek for Bloomberg Markets

At the end of 2022, Sugar Hill agreed to sell 13 of its buildings at a 54%
discount to the price the company had paid. Managing Partner Margaret Grossman
says she’d like to sell the rest of the rent-stabilized portfolio, including
Raymond’s building, and focus on new projects such as a luxury apartment
building in Brooklyn featuring a rooftop deck with an apple orchard. Grossman
says that the inability to charge enough rent makes it difficult for Sugar Hill
to invest in buildings but that it does all it can to make repairs. (The company
fixed the hole in Raymond’s ceiling after an inquiry about it for this article.)

Victoria Bausch lives with a roommate so she can afford her rent-stabilized
apartment in Washington Heights. Last year her rent jumped $300, to $3,300, part
of a boroughwide runup that took Manhattan rates to record highs.

On a recent evening, Bausch joins about 15 other tenants in the lobby of her St.
Nicholas Avenue building, which includes both regulated and unregulated
apartments. There’s a Wall Street executive paying more than $4,500 a month, as
well as a retired bus driver and a school administrator. The crowd complains of
poor maintenance: water damage in some apartments, as well as a lack of hot
water and too little heat. Over the past two years they’ve filed hundreds of
complaints with the city. They also would like to roll back what they consider
illegal rent increases.

Bausch, an event planner who used to work in theater, has good news: In a
settlement with the state attorney general’s office, the building put her unit
back into the rent-­stabilization program and reduced her rent. “If things keep
going the way they are, we’re going to be priced out of New York City, and I’m
not willing to let that happen,” she says.

Expand

Bausch in her Washington Heights apartment.Photographer: Timothy Fadek for
Bloomberg Markets

Peterson’s City Skyline Realty, which last year appeared on a government list of
landlords with the most code violations, owns the building. He says that his
company promptly addresses complaints and that the city’s tally unfairly
penalizes large property owners. The rent ­settlement related to a previous
owner, he says.

A 49-year-old Utah native who wears matching golf shirts and hats, Peterson
usually has the outgoing bearing of the Mormon missionary he once was when he
knocked on doors in declining postindustrial towns in upstate New York. He
remembers better days not long ago. In 2014 he bought a building in the Bronx
for $8 million and sold it only four years later for a 50% profit.

Peterson hasn’t quite given up on his role as a New York City landlord. On his
visit to Washington Heights, he warns a bodega worker about an apparent gas leak
and makes small talk with teenagers. Adding a note of dark humor about his
deteriorating business, he tells one of his building super­intendents, “You make
more money from this building than I do.”

In one of the strange twists of rent regulation that worry economists, Peterson
is among the landlords leaving apartments empty because it doesn’t make sense to
repair and rent them out at current rates. Thousands of apartments are vacant,
according to government and industry estimates.

On West 164th Street, no one has lived in the dead-­pigeon apartment for more
than two years. Like other units, it needs $100,000 in renovations, including
new plumbing, electrical wiring and lead remediation, Peterson says. He figures
he can’t make the economics work without raising the rent. “We should have two
tenants in here and be collecting $2,500 a month,” he says, wondering why the
city’s politicians have turned against him. “Why the hell wouldn’t they want me
to do that?”

Clark covers real estate from New York; Gopal, from Boston.

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Up Next
Meet the DIY Diggers Who Can’t Stop Making ‘Hobby Tunnels’





Hobby tunneler Eric Sutterlin shows off part of his homemade underground
labyrinth in Wisconsin.

Photographer: Micah McMullin, courtesy of Eric Sutterlin 

Citylab
Design


MEET THE DIY DIGGERS WHO CAN’T STOP MAKING ‘HOBBY TUNNELS’

TikTok’s “Tunnel Girl” has focused fresh attention on the amateur excavators who
build their own underground infrastructure — often in defiance of local laws. 

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By Teresa Xie
February 3, 2024 at 3:00 AM HST
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Listen

6:31

Two years ago, Bryan Ritchie was shoveling dirt to put a walking path around his
house in Huiroa, New Zealand, when he just felt the “urge to keep going.”

An environmental restoration specialist during the week, Ritchie, 58, now spends
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tunneling. His hole now descends 16 feet underground and runs for 82 feet,
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Ritchie isn’t digging with any destination in mind; he digs for the pure joy and
meditation that comes with it.

“I just feel like a kid again,” Ritchie said. “It really puts me in the moment
and relieves stress.”

Expand

Bryan Ritchie’s tunneling habit is part therapy, part exercise.Photo courtesy of
Bryan Ritchie

Ritchie has descended into the curious depths of hobby tunneling. This largely
unseen subculture of amateur burrowers emerged into the news recently, thanks in
part a TikTok creator known as Tunnel Girl. The Northern Virginia woman, who
goes by the online handle Kala, began posting videos showing her progress
excavating a 22-foot deep tunnel under her house. However, the project has been
in a standstill since late December, when officials in the town of Herndon
issued Tunnel Girl a stop work order and generated heavy media coverage.

Another extralegal dig made headlines in January following the discovery of a
60-foot-long secret tunnel beneath a synagogue in Crown Heights, Brooklyn, which
destabilized adjacent buildings and led to several arrests.



Those incidents arrived amidst a surge of online interest in DIY tunnels: Since
January 2022, the number of Reddit members in an online community devoted to
digging has grown more than 325%, according to Subreddit Stats, while the hobby
tunneling subreddit blew up more than 4,800% in the same time period. There,
users swap tips on tools and techniques, share videos of excavations and comment
on the achievements of other hobbyists.

Among the stars of this underground world is Colin Furze, a British YouTuber who
documented the multi-year process of digging a secret tunnel connecting an
underground bunker he’d built in 2015 to his shed. When Furze started the
project in 2018, he was careful not to alert the neighbors, using a silent
hydraulic press machine to help with the excavation. His two-plus-hour-long
magnum opus (titled “IT TOOK ME 3 YEARS TO DIG.......” ) has more than 21
million views on YouTube.

“It was good fun,” Furze said. “But I’d never really advise anybody to copy or
do anything like that, because everybody’s situation is going to be different.
Enthusiastic people take on these jobs, because they don’t see all the red tape.
They just see some ground and think, ‘I’m just gonna dig it, and I’m just gonna
keep going.’”







Furze’s tunnel is no slapdash amateur effort: He welded an elaborate steel
structure to reinforce his creation and rigged up a mine cart on rails to help
haul out tons of earth and rubble. Upon inspection, the UK city of Stamford even
granted him retroactive planning permission for his tunnel. Furze’s next project
is to build a similar one connecting his shed to his house.



The roots of hobby tunneling go far deeper than the age of social media. In the
1880s, the 5th Duke of Portland employed 1,500 men to excavate several miles of
tunnels, plus a subterranean ballroom, under his estate near Sheffield in the
UK. A century later, Irish civil engineer William Lyttle — known as “The Mole
Man” — spent 40 years creating a network of tunnels beneath his home in East
London’s Hackney neighborhood. In 2006, Lyttle was evicted from his house after
neighbors complained about sinkholes in the pavement. When pressed about the
source of his fascination, Lyttle responded, “People ask what the big secret is.
And you know what? There isn’t one.”

Leanne Wijnsma, an Amsterdam-based artist and designer, has tapped the human
urge to burrow in her work. Her 2015 project Escape consists of a series of
hand-dug tunnels in cities around the world. By digging for hours in places
highly visible to the public, Wijnsma’s piece explores how tunneling can be an
act of escape from urban life. “It was a response to this world in which
everything seems possible, and in which we’re always connected and available,”
Wijnsma said. “People feel powerless, I think. And with digging you can feel
like you have control.”

Here’s a video from Wijnsma’s Escape series that chronicles a 2013 dig in an
Amsterdam park.







Those determined to expand underground face any number of regulatory barriers,
beginning with obtaining a building permit from local authorities. Broadly
speaking, one should think of tunneling as an illicit hobby, according to Arnold
Dix, president of the International Tunneling and Underground Space Association.

“There might be some countries where it’s not illegal, but that’s only because
no one’s ever thought of it,” Dix said.

The risks go beyond the legal penalties, Dix says. A few months ago, he led the
rescue of 41 construction workers who were stuck in a collapsed tunnel in
Uttarkashi, India, for two weeks. “Professional tunneling people like me are not
saying, ‘Don’t do this, kids, because we’re grownups, and we won’t get hurt,’”
he said. “We die as well — regularly — and we do all sorts of work before we
dig.”

Other dangers include hitting a water pipe and drowning, being exposed to
poisonous gases like carbon monoxide and having loose rocks fall on your head.
“If something goes wrong, almost certainly you won’t be injured,” Dix said.
“You’ll be killed.”



That hasn’t dissuaded tunnel enthusiasts like Eric Sutterlin, who has created a
1,100-foot underground labyrinth in western Wisconsin. He’s confident that the
sandstone complex, which he has dubbed Sandland, is unlikely to collapse.

“Digging in bedrock is hugely different than digging in soil, sand, or loose
sediment,” Sutterlin said in an email. “The Jordan sandstone in which we are
digging is comprised of grains of sand cemented together well enough to keep the
ceiling together as stone bedrock, yet the grains still easily come apart (in
most layers) so we can chisel tunnels.”

Expand

What lies beneath: Sandland’s “Donut Room” boasts mood lighting.Photographer:
Micah McMullin, courtesy of Eric Sutterlin
Expand

Sutterlin estimates that he’s hauled out 15,100 cubic feet of sand (so far) to
create Sandland.Photographer: Micah McMullin, courtesy of Eric Sutterlin

Sandland began as a project in 2011, when Sutterlin purchased a small rural
property specifically for recreational tunneling. Over the years, other cave and
tunnel fans have volunteered to help expand and maintain the network, using
electric demolition hammers to carve out features like the “Globe Maze,” a curvy
slide connecting a series of rooms. “Sandland’s mission and vision is to provide
visitors with the experience of crawling and walking through many different
shapes and sizes of tunnels, getting disoriented, and discovering something new
and exciting around each corner,” said Sutterlin.

While Dix strongly discourages hobby tunneling, he said that people should at
least first look up their area’s codes of practice for mine work, which covers
safety basics like structural support, ventilation and emergency evacuation. And
when he’s asked for an activity prospective diggers might try as an alternative,
Dix can only compare it to one thing: shooting heroin.

“It makes you feel good, and then all of a sudden you die,” he said.





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