New York's Multifamily Developers Say They’re ‘Fighting For The Right’ To Build

New York City developers trying to meet Mayor Eric Adams’ moonshot goal of 500,000 new homes in the next decade say they won't come close if there aren't major changes to the current political environment.

In addition to the most difficult financing environment in a decade, developers said at Bisnow's New York Multifamily Development and Investment conference this week that outdated zoning regulations, the lack of available subsidies and understaffed city agencies are combining to stifle almost all new housing development. The budget proposals released last week by the state legislature made it clear that relief this year is going to be difficult to come by.

“There's this real sort of fundamental disconnect with what's going on in Albany right now,” said Alicia Glen, the former deputy mayor for housing and economic development, now the founder and managing principal at development firm MSquared. “Real estate is, in many ways, almost as local as politics is. The two are intertwined for a reason: Real estate is fundamentally a political exercise.”

While Gov. Kathy Hochul proposed replacing the expired 421-a tax abatement on rental housing in her budget this year, the plans released by Democrats leading the state Senate and Assembly last week don't include the program. The developers and policy experts on stage at the conference said without the program, almost no new rental housing is getting built.

Just 22 new multifamily developments were proposed in February with 432 units between them, according to new data from the Real Estate Board of New York. The only filing with more than 100 units last month was luxury rental developer GDC Properties' 134-55 45th Road in Long Island City, which accounted for more than 30% of the proposed units that month.

Between 2010 and 2020, nearly 70% of all multifamily properties were built using 421-a, with an additional 21% using a different subsidy, according to data from the NYU Furman Center. Only 10% were built without any subsidy at all.

A rush to break ground before the tax break’s expiration led to 254 foundation applications filed with the Department of Buildings in the first half of 2022, but just 186 — a 58% decline — in the second half of the year.

Majority affordable developers said they are getting more interest from market-rate developers unfamiliar with negotiating deals using other types of subsidies. But pushing more developers to chase the same pool of money is creating intense competition and may further constrict housing development, said Andrea Kretchmer, a principal at developer specialized in affordable housing, Xenolith Partners.

“Right now, there's not enough subsidy and there are too few people to give it away,” Kretchmer said. “So it's very, very competitive, and we as an industry are struggling to get enough units built because there isn't enough money to go around.”

A ‘Big Dark Cloud’ Over NYC Multifamily Developers

Adding local political opposition to the overall climate for developers means housing will continue to be an issue, developers and owners said.

“Oftentimes as a developer, you feel like you're on an island where you have a local council member that has their agenda, the city agencies have theirs, the community boards have theirs, and you're getting pulled in all these directions,” said Emmanuel Kokinakis, Mega Contracting principal and development manager.

Recent pushes for setting aside higher volumes of units in multifamily developments as income-restricted — like at Silverstein’s Innovation QNS or Bruce Teitelbaum’s planned One45 development in Harlem — are leaving an increasing number of developers unable to make deals pencil, resulting in less housing. The perception that for-profit developers are only out for profit is part of the problem, Kretchmer said. 

“I earn a developer fee over a certain period of time, and I have to keep that machine churning. It's like a conveyor belt just closing, closing, closing so that you can earn your fee. It's not really sustainable in this environment,” she said. “We're fighting for the right to do the work ... That's maybe not socially advisable, and also maybe not so financially feasible.”

Anti-development attitudes among New York City Council members are particularly harmful to the pro-housing policy platforms that many of them openly want to support, Glen said. The push for developers like Teitelbaum to make their projects 100% affordable flies in the face of studies that show a mix of incomes generates the best housing outcomes.

“Not only is 421-a important in terms of developing much needed multifamily rental housing in New York City, it's also the only mechanism that really works in terms of developing any sort of mixed-income housing in neighborhoods of high opportunity,” Glen said. “The notion that we would continue to advocate for more money to concentrate low-income people is, to me, like, where has everybody been for the past 45 years that we've been trying to undo that?”

Developers believe that understaffing at city agencies crucial to approving housing developments will likely worsen in the coming years as city revenues linked to real estate decline.

“There's a little bit of a revenue storm brewing,” L+M Development Partners President Spencer Orkus said.

Fewer transactions mean reduced transfer taxes, high vacancy rates in commercial properties will mean property assessments drop, and stock market woes mean fewer and smaller Wall Street bonuses to draw taxes from. 

Additionally, Orkus said, owners have been deferring maintenance on properties and chewing through their operating reserves as they pay higher insurance bills. That may lead to more requests for debt service deferrals — which will have a knock-on effect for credit ratings, further reducing the industry’s ability to build.

“It's a big dark cloud over your real estate right now,” he said.

Conversions Also Need Legislative Aid

Many have pegged NYC’s many aging office buildings as a possible housing crisis solution. Developers and politicians have been in discussions for months over how to increase the feasibility of conversions, because as it stands, conversions won’t work for most buildings.

“People perhaps think that office-to-resi conversion is a scalable strategy. It's not necessarily scalable," said Richard Coles, a managing partner at Vanbarton Group. “You have to look for that needle in the haystack where the asset works.”

One problem facing older office buildings that could become conversions are requirements that rooms must have windows that open out onto the same lot, per New York State’s multiple dwelling law. While Adams said this week that bedrooms don’t need windows, developers and experts at Bisnow’s event disagreed.

There are better solutions to the housing crisis than building windowless boxes, said Brooks McDaniel, a senior vice president for building repositioning at STO Building Group. Deep office buildings with large floor plates could cut a chunk out of the building’s centers, creating an internal courtyard, or slice out a portion of the front of the building to create a c-shape. But even if owners and developers wanted to collaborate on conversions, experts said, there’s a bigger obstacle: existing zoning regulations.

Developers don’t need to get permission for residential conversions for Lower Manhattan properties built before 1977 and located south of Murray Street, per NYC Planning. But if a similar building completed prior to 1977 exists elsewhere in the city, or if a property located in one of the eligible community districts was completed after 1977, the City Planning Commission needs to sign off on proposed conversions.

That rule has already prevented housing development, like Vanbarton’s 175 Water St., Coles said. The building was developed in the '80s and thus can't be entirely converted according to current rules.

“We could not convert it entirely to residential, so we lost the ability to deliver what would have been upwards of 700 additional apartment units in that submarket," he said.

Despite only affecting New York City, that particular zoning law is actually in the state legislature’s control, REBNY Senior Vice President of Planning Basha Gerhards said.

“It's the multiple dwelling law that controls our local zoning,” she said. “It’s Albany controlling what New York City can do, and setting this artificial date in place, meaning New York City's long history of adaptive reuse and ability to reuse buildings in different ways and in creative ways has been artificially kneecapped.”