A closely watched report from the city Rent Guidelines Board released Thursday showed signs of flagging financial health for buildings that include apartments subject to rent regulation.

The RGB’s latest Income and Expense Report finds that net operating income declined by 9.1% between 2020 and 2021, while expenses increased by slightly more than 3%. 

The board also found that the share of buildings in financial distress rose to almost 9% in 2021 from about 6% the previous year.

The annual report begins the New York City spring ritual of reports and often raucous public hearings that ends each June with the mayor-appointed RGB setting maximum permitted rent increases on new leases in the coming year. 

Landlord groups seized on the report to call for a large, possibly double-digit, increase in rents. Tenant groups disputed its significance since the biggest decline occurred in Manhattan buildings in highly desirable neighborhoods, while pointing to new census data that showed Manhattan’s population rebounding.

“The report does not account for the tens of millions of dollars landlords have since reaped in profits from driving rents to unprecedented levels throughout the five boroughs,” said The Legal Aid Society, which serves as lawyer for many tenants, in a statement. “These findings do not reflect the current struggles facing local tenants, particularly the increase in eviction filings and executed evictions, as well as high inflation and New York City’s skyrocketing cost of living.”

The key number in the report is net operating income, which is the income a landlord has after paying operating expenses but before making mortgage payments, paying debt service for other loans, or putting money aside for capital improvements.

The 9.1% drop is the third in four years, and exceeded the previous record decline that followed the 2001 terrorist attack on the World Trade Center. The costs of fuel, energy and insurance drove up landlords’ expenses.

Rental income dropped by 1% amid a mix of pandemic-related factors. Many tenants weren’t paying rent during an eviction moratorium that ended in January 2022, while others had their rent covered by the federal Emergency Rental Assistance Program, or ERAP.

The biggest decline occurred in what the report calls “core Manhattan,” where net operating income dropped by 21%. But the drop occurred throughout the city, in every borough, and in buildings with some rent-regulated apartments along with those entirely composed of such units.

“Building owners are not only struggling, but the health of the city’s rent-stabilized affordable housing stock is spiraling into deterioration,” said Vito Signorile, vice president of the Rent Stabilization Association, an association of larger landlords.

The financial stress documented in the report comes after years of financial stress that started before the pandemic. New York City has approximately 1 million rent-stabilized apartments, mostly built before 1974 but also including some more recently built subsidized and tax-abated apartments.

State law reforms in 2019 prohibited removing apartments from rent regulation in most circumstances and sharply limited landlords’ ability to raise rents through improvements. Since then, property values on buildings that include regulated units have sunk between 20% and 65%, according to an analysis by Maverick Real Estate Partners.

The recent failure of Signature Bank has also shaken the industry, since it was the major lender to regulated buildings. Worse, New York Community Bank declined to take over those loans when it bought most of the other loans made by Signature. Its CEO said the bank, which is also a lender to regulated buildings, did not want to increase its exposure to the sector.

With interest rates much higher than even a year ago, landlords have great difficulty refinancing their loans when they come due.

The Federal Deposit Insurance Corp. hired a firm on Wednesday to sell the loans to a financial institution. The worst-case scenario would be a sale to a private equity or hedge fund, known as the most aggressive financial institutions in maximizing profits.

“You will have owners who are only interested in making money. Therefore, less maintenance, less spending on repairs and if they can get a tenant out they will try legally, maybe illegally,” said Jay Martin, executive director of CHIP, which represents small- and medium-sized landlords of rent-regulated apartments. “And people who know how to operate buildings with longterm tenants won’t be involved.”

The Legal Aid Society called for a freeze on rents even after the report. Landlords want a big increase.

“These numbers would say that nothing less than a double-digit rent increase is needed to keep those buildings solvent,” said Martin.

But he also argued for outside help to bridge the gap.

“We need government to lower costs and help renters so the need for a massive rent increase isn’t as pressing,” he added.