Soaring Apartment Rents Aren't Curbing NYC Real Estate's Policy Fears

The economic winds are turning in favor of the New York real estate community, but that is doing little to quell concerns about just what kinds of policies the state's lawmakers are looking to implement.

“The governor, in my view, has been tremendous to the real estate community in the same way Mayor [Eric] Adams is recognizing the contribution that the industry makes to the city in a way that I think is quite obvious, but has been overlooked, unrecognized and ignored for far too long,” MAG Partners CEO MaryAnne Gilmartin said at Bisnow’s New York City 2022 Commercial Real Estate Forecast event last week. 

“Unfortunately, on 421-a, I'm not as optimistic because the governor's program, which I think is a solid proposal, doesn't change the dysfunction of the legislature,” Gilmartin said. "We all know that this happens not in New York City, but in Albany, and that the governor's ability to impact the outcome of this incentive program is on the margins and at the end."

The legislature's position toward the real estate industry, the approach of Adams and New York City’s ability to recover from the series of blows it has been dealt were top of mind for panelists at the event, including state Sen. Brian Kavanagh and several prominent developers. But the future of the soon-to-expire Affordable New York tax break is emerging as one of the most pressing issues for the industry.

Gov. Kathy Hochul released her plan earlier this month for replacing the program, which is set to expire this summer. Her proposal would adjust the income requirements for affordable units and potentially make them permanently rent-stabilized. It is shaping up to be the next battleground for the future of development in the city; progressive critics are already slamming the proposal as a developer handout.

“I think that there's fundamentally a lack of understanding and recognition of the critical nature of that tax program," said Gilmartin, whose company has managed to source three deals where development can begin in time to make use of the program.

The coming deadline means the future of the tax break is urgent, but it is just one issue that is causing unease throughout the real estate industry amid some indications real estate is turning a corner, the panelists said.

There is a sense of cautious optimism about Adams' and Hochul's view on the real estate industry. Adams' appointments related to economic development and housing include multiple real estate industry executives, and Hochul has seen ample donations from the industry to her election campaign.

Apartment rents are also again breaking new records, with tenants paying a median price of $3,400 in Manhattan last month — a record for December, according to appraisal firm Miller Samuel. The housing shortage is likely to ensure healthy returns for multifamily developers for years yet — the Real Estate Board of New York estimates the city needs 560,000 new units by 2030 to keep up with its predicted population and job growth.

But the housing shortage that is driving up rents represents a housing crisis real estate players worry will stymie growth in the city overall. Plus, fears remain about how both Adams and Hochul will address the issues of crime, affordable housing and quality of life in the city — and whether real estate will face new taxes or regulations amid a hostile political environment.

“There's a lot to unravel and unwind from the past eight years,” Rudin Management Co. Executive Vice President Michael Rudin said. "So far, Mayor Adams has said a lot of great things, and we'll see sort of where it goes."

Occupancy at the Rudin's residential portfolio is back above 97%, he said, after plunging in the worst of the crisis.

"The residential market is on fire, I don’t think there is any question on investor confidence, and there is a tremendous amount of lending happening,'' he said. “But the need across all levels of housing is great, and you need to figure out ways to incentivize developers.”

Many in real estate have accused lawmakers of demonizing real estate and enacting ineffective policies that punish the industry.

Kavanagh, whose district includes Lower Manhattan, Dumbo and Brooklyn Heights, sponsored New York rent reform laws in 2019, which curtailed many landlords’ ability to raise rents in stabilized units, a deeply unpopular slate of legislation among city landlords. He is a co-sponsor of the so-called good cause eviction bill that would give tenants the right to a lease renewal in most instances, which has been met with scorn from the industry.  

He told the audience that the drafting of laws in Albany is now very different from when Republicans controlled the Senate prior to 2019.

"I know there are some people in this room who have had concerns about how far Democrats want to go on certain measures,” he said at Bisnow's event. “[Policymaking] used to be very much a matter of horse-trading between different groups that really wanted different things. We now tend to put together packages of things that reflect our perceptions of various interests at stake.”

He said the inaugurations of Hochul and Adams marked a new era of cooperation between the state and city governments, which he said will make a positive difference for the five boroughs.

“The conversation on 421-a is already ongoing,” he said. “Those of us in the legislature are committed to working with both the mayor and the governor. The Cuomo years, for better or worse, featured a governor that, as a general matter, viewed New York City with quite a bit of hostility. So it did make it hard to have rational conversations.”

Kavanagh has proposed creating a state-funded Section 8 housing program that would fund $1B in tenant vouchers to subsidize rent. He said he also pushed for regulatory flexibility for hotels to be converted into permanent housing, but could not reach a deal with the de Blasio administration.

“We need to loosen certain restrictions on people's ability to build," Kavanagh said. "We need to invest much more in effective interventions on the housing side.”

For many panelists, that issue of crime and quality of life imperils the city’s future growth. Adams last week released his plan to end gun violence, which will put more police officers on duty in the 30 of the city's 77 precincts where 80% of the city's violence is taking place, per Reuters. 

Real estate owners have for months pointed to a rise in violent crime as a major cause of people being reluctant to return to their offices in the city. Beatrice Sibblies, managing partner of BOS Development, is largely developing in East Harlem, where she said the presence of methadone clinics and needle exchanges has spooked workers at the building next to one of her development sites.

"They now have to physically walk their staff back and forth from the Metro North station. Most of the projects I’m looking at are in East Harlem and we literally came off that conference call and talked about updating our pro forma for security, adding security to our numbers and it is making us rethink whether or not we will do that project," Sibblies said. "Now we are fully aware, we need to be clear with our investor base."

Sibblies said the issue is also about a crisis of mental health and equity, and she pointed to the lack of vision in state and local housing policies as a key reason why the problems of crime and homelessness are only getting worse.

“We deal with housing policy as one-size-fits-all, and we try in the revisions to 421-a to solve all the world's problems,” Sibblies said.

In reference to a lack of supportive housing for the mentally ill, she asked Kavanagh directly: “What are we doing to create discrete pools of capital, discrete sources of subsidies to attack this thing head-on? It is driving the entire market down, because then those mentally ill people get on the train and sleep. And I can't even send my daughter on the train by herself."