Happy Tuesday, and welcome to this mostly accidental, special New York-focused edition of Rent Free. The country’s largest city has been making housing headlines for none of the right reasons these past few days. This week’s stories focus mostly on the Big Apple and its problems. That includes:
Trouble at New York Community Bank, thanks to the plummeting value of rent-stabilized buildings. A public housing agency that just got hit with a single-day record number of federal bribery indictments. A vacancy rate so low that it might as well be non-existent.
Both New York Gov. Kathy Hochul and New York City Mayor Eric Adams have proposed some positive reforms. Other lawmakers are suggesting ideas that could make New York’s housing situation much worse.
When the Capital Leaves Town
New York Community Bancorp (NYCB) has been having a rough couple of weeks since it reported on January 31 unexpected quarterly losses of $252 million and that it was setting aside over $552 million to cover future loan losses. Since then, its stock has halved in value and rating agency Moody’s downgraded its credit rating to junk. Efforts to shore up investor confidence have only done so much.
A lot of things are going wrong for NYCB. One major contributing factor to its problems is New York’s rent control regulations.
NYCB is a major lender to the owners of rent-stabilized buildings—buildings where maximum rents and rent increases are set by regulation. It holds about $37 billion in multi-family loans, about half of which are rent-stabilized units.
These rent-stabilized units have been plummeting in value thanks to higher operating costs and interest rates colliding with 2019 regulatory changes that prevent building owners from raising rents to cover these higher costs.
Before 2019, landlords could remove their units from rent stabilization when monthly rents went above $2,800 and the current tenant moved out—a policy called “vacancy decontrol.” Landlords were also allowed to pass on the costs of building repairs to tenants and raise rents. In 2019, the New York Legislature amended the rent stabilization law to eliminate vacancy decontrol and limit the ability of landlords to pass on the costs of unit upgrades and building repairs to tenants.
That means, today, landlords are only able to raise rents by the amount set by the Rent Guidelines Board, which consistently only allows rent increases well below the costs of inflation.
“What [lawmakers] were doing is eliminating the only mechanism that was allowing these buildings to operate financially. All these loans on these buildings are inverted,” says Jay Martin, executive director of the Community Housing Improvement Program (CHIP), a trade association of building owners.
With the future potential rents at these buildings suddenly curtailed by regulation, the value of these buildings has dropped substantially.
CHIP released a report last week showing plummeting values of rent-stabilized buildings. Some two-thirds of rent-stabilized buildings are worth less than their valuations in 2018. Some individual buildings are selling for between 50 percent and 75 percent less than their last sale.
NYCB lent a lot of money to building owners prior to these huge drops in valuation and is now stuck with underperforming loans and assets.
Martin says many buildings are no longer able to operate profitably or finance needed repairs. Either government subsidies or changes to the state’s rent stabilization law to entice private investment are needed to keep these buildings afloat. Some building owners are leasing out their entire buildings to non-profits. Some are talking about walking away from their buildings entirely.
It’s a remarkable situation indeed when residential real estate in one of the most expensive cities in the world can’t turn a profit without government subsidies.
In one sense, this is an example of rent control doing what rent control supporters want it to do. The 2019 regulatory regime is doing a pretty comprehensive job of keeping rents below market rates and preventing landlords from taking their properties off the market.
But because the law can’t also force the value of rent-stabilized buildings to stay the same or force investors to sink money into money-losing buildings, the capital needed to maintain these buildings is going elsewhere. Banks and building owners are suffering the consequences now. Soon enough, tenants in dilapidated, unprofitable units will too.
New York City’s Public Housing Corruption Problem
While New York’s rent stabilization scheme might be running afoul of the laws of economics, its public housing is running afoul of the actual law.
Last week, U.S. Attorney for the Southern District of New York Damian Williams made a big splash when he announced indictments against 70 current or former public housing employees—a single-day Department of Justice (DOJ) record.
The 400-plus DOJ page complaint details a series of petty bribery schemes whereby managers and superintendents at the New York City Housing Authority (NYCHA)—which owns and operates public housing in the city—would extort payments from contractors for the right to perform smaller-dollar, no-bid jobs worth under $10,000.
The defendants “allegedly used their jobs at NYCHA to line their own pockets,” said Williams in a press release, committing his office to “cleaning up the corruption that has plagued NYCHA for far too long.”
The charges made a lot of headlines, but tenants of New York’s public housing developments were totally unfazed.
“That’s how housing works,” said one public housing tenant to The New York Times. “It’s all about money. The people running it always want to get a kickback.”
“Our trust level has been very low. This just confirms,” said Manuel Martinez, a tenant association president to a WYNC reporter.
According to Howard Husock, a scholar with the American Enterprise Institute, the NYCHA directly managing units that it also owns is an arrangement that lends itself to corruption. He suggests an expansion of a program that’s turned over some public housing projects to private management companies.
“Private management has a great virtue: If it fails to maintain the premises, NYCHA can find someone else to do the job,” he writes.
Nowhere Else to Go
At the root of New York City’s housing problems is that there really just isn’t enough housing, and the housing that does exist is really old.
That’s the impression one gets from the city’s latest biennial vacancy survey which found that the net rental vacancy rate in the city was just 1.41 percent. As a rule of thumb, a 5 to 8 percent vacancy rate is considered healthy. The survey reports that 54 percent of New York City’s housing was built before 1947 and that 80 percent of it was built before 1974.
This is a sharp decrease in the vacancy rate from the 2021 report, which found the city had a mid-pandemic vacancy rate of nearly 5 percent. The pandemic is well and truly over now, and with it apparently, a brief collapse in demand for living in New York City.
That might be the one silver lining from the report.
A rock-bottom vacancy rate disproves the gloomiest assumptions about the fate of New York, and large cities generally, during and after the pandemic. The subway might still be falling apart and no one really knows what to do with office real estate. Nevertheless, people still want to live in the city and are paying a premium to do it. That should be enough to stave off the much-discussed “doom loop.”
Resurgent demand for living in New York City does mean that the city’s supply and affordability problems aren’t going to be fixed by falling demand. The city needs a lot more housing. It also needs more functional housing, where rents aren’t set by government fiat and lower-income tenants have options besides corruptly mismanaged public housing.
Saying Yes, Doubling Down
How likely is it that New York fixes its largely policy-created housing problems? There’s some cause for optimism.
Gov. Kathy Hochul has proposed a number of modest YIMBY reforms this year, including renewing a tax credit for affordable housing construction that had expired and providing subsidies to localities that adopt “pro-housing” policies.
In New York City, Mayor Eric Adams’ City of Yes package of zoning reforms is slowly making its way through the process. The city council has already passed one set of City of Yes reforms that make it easier to add solar panels and other green features to buildings. The more substantial changes related to businesses and housing are still working their way through the city council.
Still, the Empire State is behind the curve in terms of implementing YIMBY zoning reforms. The temptation to make things worse by doubling down on rent stabilization and public housing is also there.
In the Legislature, there’s an active “good cause” eviction bill that would effectively impose rent control on almost all housing in the state. Lawmakers are also proposing the creation of a “Social Housing Development Authority” that would build government-owned housing developments.
The Manhattan Institute’s Eric Kober has a good run-down of the housing policies (good, bad, and ugly) on offer this Legislative session.
Quick Links
A bill that would cap annual rent increases in Washington state at 7 percent each year is advancing in the Legislature. Washington currently has no statewide rent control policy and forbids local governments from adopting their own regulations. On the other hand, a Virginia bill that would have allowed localities to adopt their own rent control policies has stalled in the Virginia Legislature. Nashville, Tennessee, is considering a suite of zoning reforms that would allow residential construction in commercial zones, clean up regulations around accessory dwelling units, and eliminate lot area minimums for residential multi-family districts, reports The Tennessean. The Illinois Legislature is considering a bill that would prohibit mid-sized and larger localities from creating single-family-only districts. The town of Bryan, Ohio, has agreed to drop criminal charges against Pastor Chris Avell in exchange for the pastor discontinuing residential uses at his commercially zoned church, Dad’s Place. Avell had been hit with 18 criminal charges related to allowing homeless people to sleep in his church. Avell has agreed to make safety upgrades at the church for services they plan to continue there. “Ministries like Dad’s Place provide vital public services to their communities,” said Jeremy Dys, a lawyer representing Avell, in a press release. “We will continue our conversations with city officials in hopes that we can find a final resolution where Dad’s Place can continue to serve those in need in its community.” A mix of density bonuses and emergency permit streamlining is enabling for-profit developers in Los Angeles, California, to build no-frills, unsubsidized apartments with rents low enough to technically count as “affordable” units. Read the CalMatters story on the policies that accidentally made these buildings possible and what they say about the potential for zoning reform. San Francisco, California, is facing $190 million in surprise homeless hotel costs, as the federal government backs out of covering a portion of the program, reports the San Francisco Chronicle.
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