Shares of firms tied to NYC real estate tank over fears of Mamdani’s rent freeze: ‘Zohran effect’

Shares of firms with exposure to New York City’s real-estate market were hammered Wednesday as investors panicked over the growing prospect of rent-freeze advocate Zohran Mamdani winning City Hall.

Vornado Realty Trust and SL Green, two of the Big Apple’s largest developers, each plunged more than 5%.

Other real estate investment trusts (REITs) with heavy ties to the city also suffered. Equity Residential and Empire State Realty Trust fell 3% and 4%, respectively. LXP Industrial Trust was down 2.5%.

Investors also sold off shares in New York banks with major real estate portfolios.

Flagstar Financial and Dime Community Bank fell 5% and 4%, respectively, while Flushing Financial slipped 3%.

Flagstar, formerly known as New York Community Bancorp., and Dime Community have a major exposure to rent-regulated multi-family in New York, according to analysts.

Mamdani, the 33-year-old self-avowed democratic socialist, has vowed to freeze rent on all rent-stabilized apartments in the Big Apple.

Analysts have warned the move could hurt building owners already grappling with higher costs, as constraints on their ability to raise rents might make it more difficult for some to repay their debt.

“Politicians continue to march down a perilous path for rent-regulated multi-family with allowable rent increases lagging expense growth,” brokerage Stephens said.

New York’s real estate sector has already been reeling under pressure as higher interest rates strained borrowers while the post-pandemic adoption of remote working left office buildings vacant.

Mamdani’s policies could lead to “more selective corporate spending/hiring in the city and more out-migration of individuals and families, reducing the need or growth of office leasing,” Mizuho analyst Vikran Malhotra wrote in a note to clients on Wednesday, dubbing it the “Zohran effect.”

SL Green owns 25.3 million square feet of property – 96.6% of which is in Manhattan, including 95.1% of commercial property and 1.4% of residential property. Vornado holds 75.1% of its square footage in New York.

Meanwhile, an estimated $16 billion to $18 billion of Flagstar’s multi-family loan portfolio would be impacted by a rent freeze, according to Deutsche Bank analyst Bernard von-Gizycki.

That number drops to $11 billion to $12 billion when accounting only for buildings where more than half of the units would be affected, according to Morgan Stanley analyst Manan Gosalia.

Flagstar’s stock is “likely to see incremental downside pressure” over Mamdani’s “freeze the rent” campaign, Citi analyst Ben Gerlinger said.

However, the longer-term impact on the bank’s stock “is likely very minimal,” he added.

Current regulations already limit price hikes below the pace of cost increases, said Barclays analyst Jared Shaw, adding that “we do not see this prospect as something that would change the investment thesis.”

Nontethless, Florida’s Republican Gov. Ron DeSantis predicted Mamdani’s rent freeze program would only worsen the exodus of wealthy New Yorkers to the Sunshine State.

“If this socialist mayor candidate wins, you’re gonna see real estate value skyrocket even more in Palm Beach, because people are gonna get out of that city,” the Republican said. 

“As bad as (Bill) de Blasio was, this guy is gonna be way, way worse.”

Mamdani, who has also pledged to create city-owned grocery stores and provide free buses, became the front-runner to move into Gracie Mansion after routing former Gov. Andrew Cuomo in the Democratic primary Tuesday.

The Queens assemblyman is expected to win the Democratic nomination when results of the ranked-choice tallies are announced Tuesday. 

He will have to beat incumbent Mayor Eric Adams, a Democrat, who is running as an independent and Republican candidate Curtis Sliwa. Cuomo has not announced whether he intends to stay in the race as an independent.