Show Me The Money: The Misalignment In Rent Regulation Prevents The Production Of Housing

As housing affordability has become a flashpoint nationwide, state legislatures across the country have introduced over 60 rent control-related bills, adding to the rent regulations already implemented by more than 200 local governments, according to the National Apartment Association (NAA).

While 33 states preempt local governments from adopting rent regulation laws, New York, California, the District of Columbia, Maine, Maryland, Minnesota, New Jersey, and Oregon have rent control policies in place at the state or local level.

New York City’s history with rent regulation dates to the post-World War II era. Today, more than 1 million of New York City’s 2.27 million rental units are rent stabilized, which means they are governed by a complex set of restrictive regulations with rents set annually by the Rent Guidelines Board (RGB).

Tenants and Landlords Can Both Benefit from Effective Housing Policies

Although discussions about rent laws divide advocates and owners into two camps—pro-tenant or pro-landlord—I argue that the debate isn’t about that. From a macro perspective, it’s about whether one believes in ‘government regulation’ or the ‘free market’ in general.

While it may appear that tenants benefit from rent regulations, there is actually a negative impact that one can argue outweighs the benefits. Policies that discourage a reasonable return on an investment, result in deferred maintenance in existing buildings and a shortage of housing, both of which hurt tenants.

Most housing providers agree with the NAA’s position on rent regulation, which states: “Rent control distorts the housing market by acting as a deterrent and disincentive to develop rental housing and expedites the deterioration of existing housing stock. While done under the guise of preserving affordable housing, the policy hurts the very community it purports to help by limiting accessibility and affordability.”

I also believe that the demand for housing can’t be met by passing more regulations, but by increasing the supply. It’s estimated that 560,000 new housing units will be needed in New York City by 2030. Without a massive intervention to incentivize big capital to invest and reinvest in New York City, we will never build enough housing to serve the local population.

Where Regulation Has Failed as a Housing Policy in New York City

Rent regulation in its current form in New York City, has no income test, which means that anyone can live in a rent-stabilized unit. Of the City’s 1 million rent stabilized units, some are occupied by lower-income individuals and families that need assistance, but some are not. Therefore, the pressure on rents for free-market units (only 45% of the City’s total rental units) is substantially higher than it would be without regulation. Most concerning is the Housing Stability and Tenant Protection Act (HSTPA) of 2019, which introduced additional regulations for rent stabilized apartments.

Below are some features of New York City’s rent-stabilized housing laws:

• A high earner, with multiple homes could rent a three-bedroom rent stabilized apartment indefinitely because there is no income test, instead of a growing family of modest means who really needs rent protection.
• The Rent Guidelines Board (RGB) sets rents annually. Therefore, landlords can not increase rents and do not receive public money or tax credits to offset the cost of providing these units at a discount. Net revenue of buildings containing rent-stabilized units declined by 9.1% between 2020 and 2021 across the roughly 15,000 buildings surveyed. As a result, the RGB has proposed a rent increase of between 2 and 5 percent for one-year leases on stabilized apartments and between 4 and 7 percent for two-year leases, with a final vote is expected in June.
• Rents for stabilized units are depressed and for the most part do not sustain the cost to operate. Using RGB survey data from 2021, we calculated that the average stabilized rent in 2023 citywide was $1,555, with average expenses, excluding the cost of debt, rising to 77% of rent, which is the highest in 14 years because of inflation. In contrast, the lack of new supply has driven up rents for market rate apartments. Average free market rents in Manhattan rose to $5,379 in May, up 8.1% from the previous year; average Brooklyn rents rose 10% year-over-year to $4,118; and average rents in Northwest Queens rose 11.1% to $3,662 over the same period, according to the Elliman Report.
• An estimated 42,000 units are vacant as a result of the passage of the Housing Stability and Tenant Protection Act (HSTPA) of 2019. HSTPA removed incentives to rehabilitate rent stabilized units when they are vacated by long-term tenants because the law doesn’t allow for adequate rent increases to cover the cost of renovations.

HSTPA has rocked the multifamily market. Investment sales in rent-stabilized housing dropped by 50% from $6 billion in sales in 2015 to $3 billion in sales in 2022. Rent stabilized buildings only accounted for 14% of the investment sales in Q1 2023 versus 78% for predominantly free market buildings, according to Ariel Property Advisors’ Q1 2023 Multifamily Quarter in Review. Also, pricing has declined. The average $/SF and $/unit in rent stabilized buildings with 10 or more units fell in Q1 2023 to the lowest level since Q1 2014. Finally, lending to the rent-stabilized segment is challenging today as there are too many uncertainties.

Without a Plan, What Does the Future Hold?

To address the housing crisis, Gov. Kathy Hochul and Mayor Eric Adams introduced a menu of proposals to encourage new housing development. Regrettably, the New York State Legislature just ended its session without approving any of them.

In her New York Housing Compact, the governor had advocated for the following:

• Approving a successor to the 421a tax abatement, which expired in June 2022 but is needed to encourage the development of affordable housing in New York City. Housing construction is costly in New York City, with property taxes eating up a third of the rental income compared to 13 percent elsewhere in the country. Using the 421-a program, developers leveraged private capital to build 68% of the City’s multifamily apartments (117,042 rental units) between 2010 and 2020, according to the NYU Furman Center. Unfortunately, there is a misconception among critics of 421a that the city is ‘losing’ property tax money by providing property tax incentives to develop residential rentals. However, when we look closely we see that vacant land produces few tax dollars, therefore, the property tax abatement given on a rental building is not a loss, it’s a gain by creating affordable housing units, jobs and future property tax payments.
• Resurrecting a 421g-type tax incentive to encourage the conversion of office buildings to housing. In the 1990s, 13% of Lower Manhattan’s office buildings were converted to housing, adding about 13,000 units with the 421g incentive and an additional 17,000 units without it, according to an analysis by the Citizens Budget Commission.
• Rezoning more areas of New York City and the state to allow for residential development. Re-zoning initiatives could provide a cost effective strategy for the city to develop rentals.
• Lifting the ​“floor area ratio” (FAR) cap by amending the State law that limits the maximum density of residential floor area ratio to 12.0 in New York City.

In response to soaring free market rents caused by the low supply of housing, a core group of lawmakers instead pushed for Good Cause Eviction, a regulation that would, in effect, impose universal rent control on all free market rental units statewide. This proposed law would have a devastating effect on the housing market.

Capital Is Key to Addressing the Housing Emergency

Land trades and prices have declined consistently, mostly because it’s not financially feasible to build rental housing without a government incentive like 421a. At the same time, many lawmakers keep harping on regulation as the key and ignore the supply constraint, using the word ‘affordability’ without providing the means and path to develop affordable housing. Our big picture as a city should be to balance the need for housing by incentivizing big money to come here and build, own and operate rental buildings in a profitable way compared to other states. To create and sustain more housing in New York City, an influx of capital will be needed. After all, we live in a competitive world where capital has options.