T
he rent-stabilized market's struggles have claimed a major casualty, with the transfer of $540 million in CMBS debt tied to two Upper East Side rental buildings, Yorkshire and Lexington Towers. The portfolio, comprising 808 units, has been taken over by special servicing due to financial difficulties. The deal also includes $175 million in mezzanine debt.

    Yorkshire, with 692 units, is the larger building, about one-third of which are rent-stabilized. Lexington's 149 units have around half regulated. Since the 2019 rent law change, nearly all rent-stabilized landlords have faced challenges due to the hardened cap on revenues and rising expenses and interest rates.

    A specific subset of landlords who relied on converting rent-stabilized units to free-market by renovating them have been hit particularly hard. Chetrit and Gluck had planned to renovate 311 units, but it's unclear how many they managed to execute. Financial data shows net cash flow has suffered due to falling occupancy and rising expenses.

    The buildings were 97% full in mid-2022, but by December 2023, they were only 89% leased. Revenue fell 24%, while expenses jumped 16%. Chetrit and Gluck could renegotiate new terms with the servicer, but it's unclear what would help. The loan isn't due until June 2027, and the sponsors are already paying a low interest rate of 3%. To boost performance, Chetrit needs to plug vacancies, which should be feasible given New York City's strong demand for rental units. However, the 2019 law's cap on rent increases can make it financially infeasible to bring empty apartments up to code.