Perhaps nothing captures the collective consciousness of New Yorkers more than housing. We are simply obsessed with it, eager to trade war stories about our respective real estate plights.
But the harsh reality today is that housing costs are the biggest barrier to affordably living in New York City for many lower-income individuals and, even more so, the middle class.
Indeed, since 1970, inflation-adjusted rents here have risen by approximately 80% while incomes have risen only 2%. This divergence has led to a higher percentage of New Yorkers living in unaffordable housing situations – in which households must spend more than 30% of their gross income on housing costs. In the same period, the share of New York renters living in unaffordable housing has increased from 28% to over 55%. And, while these rising rents affect all residents, a recent study from NYU’s Furman Center reveals that they disproportionately squeeze middle-class renters.
Unfortunately, the city’s housing stock has not kept pace with its growing population. This ensures that these housing challenges will continue, especially given the city’s fixed geographic boundaries and local regulatory constraints that impede new construction.
Mayor de Blasio has focused on bringing more affordable housing to New York City. With a goal of building or preserving 200,000 housing units within 10 years, the administration has, to date, built or preserved 53,000 units. The construction of many of these units, however, was accelerated by developers prior to the lapse of desired tax incentives to spur real estate development – tax incentives that have since stalled at the state level until construction unions and the real estate developers agree on wages. The City itself is turning to mandatory inclusionary zoning rules that require new apartment buildings to include affordable units in exchange for expanded development rights.
The bottom line is that for New York City’s growth to remain unimpeded, and for the city to continue to be a magnet for worldwide talent as well as a major urban innovation and technology center, housing must be a major priority. This is particularly essential in an era during which incomes remain relatively flat and many tech start-ups’ compensation includes stock in lieu of higher salaries, thereby restricting their employees’ ability to pay more for housing.
More specifically, we need to accept that current technologies, such as building and street sensors, and emerging innovations —everything from new design and fabrications to autonomous cars— are affecting our urban landscape in new and exciting ways and will continue to do so. Accordingly, we need to think holistically about housing in New York City and reassess all available tools as well as any outdated programs and regulations, and the administration of government housing programs.
The Current Housing Situation
The City’s 8.4 million residents occupy approximately 3.2 million housing units. New Yorkers own slightly less than 33% (or a little more than 1 million) of these units, with ownership directly proportional to annual household income. For example, almost 60% of households with annual incomes of $150,000 or more own their housing unit whereas only 20% of households with incomes of $35,000 to $49,999 own theirs.
The remaining two-thirds of housing units are rentals. Of these rentals, only 39% charge market rates. Another 47% of rental units are rent-regulated, with limits placed on rent increases. The remaining 14% of rentals are public housing and therefore heavily regulated by government.
All told, over 40% of all New York City housing is either rent-stabilized, government subsidized or rent controlled – thus supporting 40% of the city’s population who would not otherwise be able to live here.
Another outgrowth of the current situation is the increasing number of overcrowded housing units. A recent city controller report revealed 272,000 overcrowded units, housing nearly 1.5 million residents as of 2013 – a nearly 20% increase from 2005.
Zoning and Regulation
Despite being a growing and increasingly more technologically connected urban environment, New York is guided by a zoning code first approved 100 years ago. The first of its kind in 1916, the code sought to facilitate the development of a healthier city during a period when many people lived in grimy tenement buildings. Of course, the zoning code has evolved over time, including a major overhaul in 1961 to reflect city power broker Robert Moses’s vision of providing for a greater number of cars and public spaces.
Numerous re-zonings also occurred under Mayor Bloomberg, followed by targeted revisions under Mayor de Blasio. But the code remains complex, difficult to navigate and expensive to change, as well as seemingly contrary to the city’s changing demographics and industry makeup, including the needs of the middle class.
New York City’s land use code breaks up the five boroughs into 126 different zoning districts, regulating development such that construction that is in any way not in line with each district’s regulations requires a variance and, all too often, a long, complex and expensive process to obtain it. Moreover, the city government and community boards often diverge on interpreting rules, including allowable density, further hindering the process. In short, the myriad of zoning rules restrict construction and make it more difficult to build housing.
Common sense dictates that the process ought to be less opaque, less complicated and more understandable. Besides, the zoning code remains outdated, especially in the context of a city that is becoming a more environmentally green urban center with an increasingly more efficient carbon footprint that can increasingly accommodate residences located near workplaces. Technology and emerging innovations facilitate an increased capacity to rethink community needs in ways that current zoning codes ignore.
Preserving the Old?
The increasing number of landmarked buildings also restricts the ability to build more housing units in New York City. In the first 25 years following its establishment in 1965, the New York City Landmarks Preservation Commission designated fewer than 1,000 buildings as landmarks. Today, the commission has jurisdiction over 35,000 buildings in 139 historic districts. In a significant portion of Manhattan, the commission must approve most external changes. As a result, little affordable housing gets constructed in these historic districts. There is no easy way to balance the benefits of providing more desirable space with the desire to preserve a beautiful older city and its history. But now is the time to proactively explore just how we might do so.
Supply and Demand
Restrictions on new housing supply make it more difficult for the city to meet demand and maintain reasonable housing pricing. The basic economics are straightforward: Building more housing units eases the impact of rising demand on prices and makes the city more affordable. According to urban economist Edward Glaeser, a growth in housing supply will drive a growing city population, while housing restrictions could, over time, lead to a declining population.
Given New York City’s geographical constraints, with scarce and therefore expensive land, an emphasis on greater density would recalibrate this imbalance. Taller buildings can simply provide for more housing. Even an additional floor or two on a non-high rise building — consider a four-story building expanded to five or six stories — can substantially alter the housing landscape. Even then, many New Yorkers can still choose to live in non-high rise neighborhoods, but the greater density simultaneously moderates housing prices and provides opportunities for others with different preferences or lower means to live in New York City. No doubt, a city that moderates its housing pricing can embrace a more diverse growing population.
According to a recent city controller report, there are over 1,000 city-owned vacant lots in the five boroughs that could be used as locations for more housing units. Many such sites are located within the Bronx and Queens. Given the dearth of inexpensive land in New York City, we should seek to utilize such lands as well as private lots as expeditiously as possible.
Rise of Singles
With more singles living in New York City but a housing stock designed for families, we should permit and build more micro units. Such apartments are generally smaller than 400 square feet, in buildings with communal space for lounges and kitchens. A new micro unit development was successfully launched last year as an experiment and garnered greater interest than expected.
But outdated regulations still thwart development of such housing designs even though they reflect new urban lifestyle and demographic changes. Codes also prohibit more than three unrelated people from living together in a housing unit. Given a large number of unrelated persons already sharing apartments in New York City, eliminating such regulations would provide another way to increase density.
To Finance or Not
The most acrimonious discussion on housing has focused on tax programs, particularly the lapsed 421-a tax abatements whereby qualifying projects can reap tax cuts of up to 95%, costing the city over $1 billion annually.
The application of 421-a tax breaks has been an unfortunate legacy of public tax policy that was originally designed to slow population loss in the 1970s. It is especially unfortunate when some real estate projects receive 421-a abatements and then sell multi-million dollar penthouse apartments. Moreover, this policy does not take into account the margins that real estate developers would or would not derive absent the tax break.
Here’s the problem: the city’s inequitable property tax system has simply made it much less feasible to build rental housing without a tax break. The effective tax rate for rental buildings is three to five times the rate for single family homes, co-ops or condos. These higher costs inevitably get pushed onto tenants in the form of higher rents. And, since real estate developers naturally seek the highest possible profit margins, they will simply build condos instead of buildings for affordable housing without the 421-a tax break.
Indeed, since the lapse of 421-a, developers have not moved forward with any such affordable rental buildings. For these reasons, New York City does need to address its property tax system, though admittedly there is very little political appetite to do so and the ultimate passage of new regulations would likely be difficult.
Beyond the outdated programs and regulations, many affordable housing developers still express frustration navigating city and state programs at agencies responsible for affordable housing. One example: tax-exempt bonds to support new affordable housing construction in the city are unavailable even though the state has not fully allocated its volume of housing bonds. Further, groups within relevant agencies function in silos and provide limited feedback, forcing developers to manage various proposals across multiple entities as opposed to one holistic, efficient government approach for housing.
No doubt, it will take a Herculean effort to conquer New York’s housing challenges and meet its housing needs for the 21st century. But there is no question that current regulations and policies are outdated for today’s environment and wholly inadequate for the technologies and innovations that will dramatically affect New York City’s urban landscape in the coming years. Much as New York City took the lead in adopting the country’s first zoning code, we should again take the lead in adapting to the needs of a growing, socially connected, technologically adept, increasingly green-focused and demographically changing population.
Gertler is chief executive officer of Ulysses Ventures, a private investment fund in New York City. He is a former city economic development official.