WHITE PAPER: The Three Key Real Estate Issues to Watch
As the New York City real estate market fights it way back from the pandemic, there are three key issues to watch which could have a major impact on the how buildings are built and operated in New York City: 1) The expiration of Affordable New York 2) Good Cause Eviction and 3) the proposals for the conversion of office or hotels to residential.
The political landscape which will help shape these issues has no doubt changed over the years, with a major shift to the left in Albany. There is now a Democratic super majority in the New York State Senate with a 43-20 position. After Governor Cuomo seemingly stepped aside to let the Housing Stability and Tenant Protection Act of 2019 pass, it seems the State Senate may very well be driving many of these issues.
For starters, The Affordable New York 421a plan expires in June of next year. Under this program, thousands of new units were created. However, critics of the plan say that too many of the developers utilized option C, where 30% of the affordable units were at 130% of the Annual Medium Income. Those affordable units are available to those families making over $100,000 who could in turn pay $3,397 for a two bedroom. Some would not consider those type of units truly affordable.
Those looking to overhaul this plan want more deeply affordable units. On top of that, I’m hearing that prevailing wage could be back on the table. Previously that labor was only required for projects in Manhattan south of 96th Street or along the Brooklyn and Queens waterfront. Trades are pushing to expand this for the whole city. Combined with greater requirements for affordability, any drastic revisions to this 421-a plan could bring a halt to construction.
Given the current state of the City and occupancy, land prices in Manhattan have already dropped 40% from before COVID-19. Construction lenders are understandably weary. That all being said, New York City no doubt needs deeply affordable housing, but without proper subsidies it just won’t get built. The fully affordable projects generally apply to land that sells for under $50/BSF where developers are only earning fees on the construction as opposed to developer’s profit. Clearly landowners in more desirable areas will not throw in the towel to sell at these levels out of the goodness of their hearts.
Meanwhile, the discussion of Good Cause eviction in the State Senate is an equally scary proposition. The name certainly seems like a worthy cause, but let there be no mistaking – this is universal rent control. Under the proposal, landlords would only be able to increase their market rate rents by the lesser of CPI or three percent each year by the greater of three percent or 1.5x CPI unless they go to court and petition for a higher increase. Given the landscape of the landlord tenant courts, I certainly wouldn’t see landlords rushing in to do so if this was ever passed; it would likely be expensive and futile. Luckily, we are hearing that the State has too much on their plate this year and with the eviction moratorium being extended until August, there isn’t a great need at the present.
Regardless, the more regulation that applies here the less likely that developers will build new product or investors will renovate old product. If you look at any of the urban land studies, the answer to having more affordable housing is to build more units!
One salvation for landlords might be RSA & CHIP’s court case deriving from the Housing Stability and Tenant Protection Act, which makes the argument that government is unfairly shifting the burden to provide affordable housing to the private sector without compensation. If Good Cause is passed, it would certainly support this case. It will be very interesting to see if this case makes it to the Supreme Court. Right now it is sitting in the Federal Court of Appeals.
On the good idea front is allowing the conversion of commercial or hotel buildings to residential. Our Governor came out with a proposal to allow the conversion of office or hotel buildings to residential provided that 25% was affordable. That ultimately was not adopted into the State budget with exception of $100,000,000. Senator Gianaris is now proposing that the money be spent to buy a building or two to let a not-for-profit run as fully affordable units. That unfortunately won’t get them far. The cheapest Manhattan office building that sold since the pandemic still went for over $600/SF. Once you factor in renovation costs of $300-400, they might get 200 units if they’re lucky, a drop in the bucket.
I actually do like the idea of bringing the SROs back. Mayoral hopeful Andrew Yang mentioned this. By allowing some of these now defunct hotels, built narrow and deep on the lot with multiple rooms per floor, to now allow permanent housing seems a lot more sensible to me.
That being said, Yang also proposed $32 billion for affordable housing. Based on Howard Husack’s NY Post OpEd, his plan is very light on details and could lead to more spending with not much to show for it in the way of new housing.
Above all, having a strong mayor at the helm will be key to New York City’s future and having a pragmatic voice at the table. I am hopeful that we will have a record turnout for the primaries on June 22, which could be the most important race in New York City’s history.