With 'affordable housing' buildings for sale, tenants worry

With dozens of 20-story apartment towers looming behind her, Lashonda Carmichael looks out over a frozen inlet to the bay and the world beyond Brooklyn.

"This is where I come for peace of mind," she says as she balances her 2-year-old son on her hip.

Since she was a child, Ms. Carmichael has roamed these shores on the edge of this massive, affordable housing complex where she grew up. Most New Yorkers know it as Starrett City. Global economic forces now threaten to disrupt her calm and that of the almost 14,000 other tenants, almost 90 percent of whom pay rents below market rates.

That's because the complex is still on the auction block for a whopping $1.3 billion, despite Friday's decision by the federal government to block the sale. While the decision is a major blow to the proposed buyers, they insist they are committed to making the deal work.

Starrett City, although privately owned, is the nation's largest affordable housing complex because of various state and federal low-interest mortgages and subsidies.

In many residents' estimations, it's also the most successful – a racially and ethnically diverse, well-maintained community that operates with its own schools, parks, power plant, and shopping center. They see it as a safe city within a city. Most tenants pay up to $1,200 monthly for the apartments. But the proposed $1.3 billion price tag has fueled tenants' concerns that rents may skyrocket.

"I just hope I'll be able to pay the rent," says Fred MacKenzie, a retired garment industry worker who has lived here since 1993. "That's the world today, those with the money buy what they want, and I can't stop them."

Economists chalk up Starrett City's high price to the billions of investment dollars pouring into the nation's commercial housing market from places like Australia, India, and China. That money is now driving prices for apartment buildings in hot real estate markets such as New York to historic highs. In November, investors paid a record $5.4 billion for Peter Cooper Village and Stuyvesant Town, adjacent affordable housing complexes in Manhattan.

"We have not lived through this kind of an era before where so much of the capital of the US and the world is commingled," says Shekar Narasimhan, managing partner of Beekman Advisors in McLean, Va. And that, he says, has fundamentally changed the economics of investing in apartment houses. It used to be that investors used a property's rental income to calculate its value. Now, they calculate it by the building's potential future worth on the real estate market and compare that to other investments, say in stocks or bonds. As a result, Mr. Narasimhan says, prices have "become disconnected from reality."

The record prices investors are now willing to pay are generating fears that new owners may raise rents in places like Starrett City to help pay for them. If that happens, many working and middle-class families who have made Starrett City home since it opened in the 1970s may not be able to afford it.

"This trend obviously could result in the displacement of some lower income families, and it's been particularly hard on the elderly and those with fixed incomes," says Conrad Eagan, president and CEO of National Housing Conference, a nonprofit that advocates affordable policies. "Many families had anticipated they could stay [in their apartments] for a long period of time, and then suddenly they find the property being sold out from under them."

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