The Modern Economic Squeeze: How We Got Here, What’s Breaking, and What Happens Next

The Setup: How Rent-Regulated Housing Was Capitalized

The economic pressure building inside New York City’s rent-regulated housing stock today is not subtle, and it is not primarily the result of bad operators. It is the product of timing, leverage, and a regulatory regime that hardened just as the cost of capital reset. To understand what is happening now, it helps to start with how these buildings were financed in the years leading up to the pandemic.

Between roughly 2015 and early 2020, New York City multifamily - especially rent-stabilized housing - was treated by capital markets as a quasi-bond. Interest rates were low, global capital was abundant, and regulated housing was viewed as stable, defensive, and safe. Cap rates compressed aggressively. Assets routinely traded at sub-5% caps, and in some cases closer to 4%, even when rent growth was modest. Lenders were comfortable with leverage in the 65% to 75% range because debt was cheap and refinancing risk appeared minimal.

At the same time, underwriting assumptions quietly stretched. Many deals assumed steady RGB increases, frictionless renewals, and modest but reliable NOI growth. Even after the 2019 HSTPA sharply curtailed rent-recapture mechanisms, capital markets largely priced regulated housing as if those restrictions would be softened or worked around over time. That did not happen.

When the pandemic arrived, two things occurred simultaneously. First, interest rates dropped even further, reinforcing the belief that low-cost debt was a permanent feature of the landscape. Second, valuations froze in place at elevated levels. Buildings that might otherwise have repriced were temporarily insulated by forbearance, emergency programs, and historically cheap capital.

The Rate Shock

Then the environment changed - fast.

Starting in 2022, interest rates rose at a speed the modern multifamily market had never experienced. Loans that had been originated at 3% to 4% matured into a refinancing market demanding 6.5% to 7.5%, sometimes higher. Debt service on the same loan balance often doubled. For highly leveraged buildings, this was not a margin issue - it was an existential one.

Under normal circumstances, rising debt costs can be absorbed by rising rents or repositioning. In rent-regulated New York City housing, neither option exists. Rent growth is capped by policy. Repricing units to market is not possible. Expense inflation, however, is very real. Insurance premiums jumped. Labor costs rose. Utilities increased. Compliance costs multiplied. Required capital expenditures—façades, roofs, boilers, emissions compliance - could not be deferred indefinitely.

This is the central squeeze: revenues are fixed or slowly rising by regulation, while expenses and debt service reprice rapidly upward.

The Warning Signs

At this point, the red flags become unmistakable.

Red Flag #1: Debt Service Coverage Collapses

Buildings that once underwrote to a 1.25x DSCR at origination find themselves at 0.9x or worse under refinance terms. This is not a paper problem. It means the property cannot support its own debt from operations. Lenders see this immediately.

Red Flag #2: There Is No Path to Growth

Owners cannot “grow out” of the problem. There is no operational fix. You cannot raise rents to offset higher interest rates. You cannot meaningfully recapture capital through improvements. You cannot cut your way to solvency without triggering violations. The traditional real estate levers are locked.

Red Flag #3: Cash Burn Replaces Cash Flow

Owners begin funding debt service from reserves or equity. Maintenance is triaged. Capital projects are delayed. This phase can last a year or two, but it is not a solution - it is a countdown.

As this pressure builds, owners turn to lenders. Some receive short-term extensions, temporary interest-only periods, or covenant relief. But lenders are not in the business of subsidizing structurally insolvent assets. They will extend only if they believe the building can support itself long-term. Many cannot.

A Familiar Historical Pattern

This is where history quietly reasserts itself.

In the 1970s, New York City experienced a similar mismatch between regulated rents, rising costs, and capital withdrawal. Then, as now, many owners found themselves unable to justify continued investment. The result was widespread deferred maintenance, abandonment, and eventual transfer of ownership to the city or preservation entities. Today’s situation is not as dramatic - yet - but the early mechanics are recognizable.

Likely Outcomes

The likely outcomes follow a familiar pattern.

In the best case, equity is wiped out but the asset survives. The lender restructures the loan, writes down principal, or transfers the building to a new owner who underwrites it as long-term infrastructure rather than growth equity. These buildings continue operating, but the original investors are gone.

In the more common case, assets trade in distress. Sale prices reset to reflect actual cash flow under current regulation and interest rates. Cap rates expand materially. Buyers are no longer value-add investors; they are low-leverage, yield-oriented owners, nonprofits, or preservation capital willing to accept modest returns.

In the worst cases, maintenance falters, compliance slips, and the city intervenes. Taxes go unpaid. Violations accumulate. Buildings enter regulatory receivership or city ownership. This is the path that most closely echoes the 1970s, though on a smaller scale.

The Bottom Line

What makes this moment especially unforgiving is that the pain is concentrated. It does not hit all multifamily equally. It hits hardest where three conditions overlap: heavy rent regulation, high leverage, and peak-era valuations. Market-rate buildings can reprice. Low-leverage owners can absorb shocks. But highly levered regulated buildings have no buffer.

The uncomfortable truth is that this is not a normal real estate cycle. It is a balance-sheet reckoning. Buildings were capitalized as if cheap debt and regulatory flexibility were permanent. Neither was.

For owners who treated regulated housing as infrastructure - low leverage, long horizon, modest expectations - this period is survivable. For those who treated it as growth equity, the outcome is increasingly predetermined.

That is the squeeze. And it is already working its way through the system.