New York City's apartment shortage is set to get even worse

NEW YORK (BLOOMBERG) -- New Yorkers are reaching a breaking point with the city’s housing market, facing the tightest squeeze in more than five decades with little relief in sight.

A rental vacancy rate of just 1.4% is pushing the cost of living in New York City higher. There’s little reason to see light at the end of the tunnel: Elevated borrowing costs, meant to quell inflation, have cast a deep chill on development across the five boroughs.

Last month, developers filed 36 permits for multifamily buildings, which, excluding the period of Covid lockdowns in 2020, was the lowest monthly count for May in a decade, data from the New York City Department of Buildings showed. And last year, permits for about 15,500 apartment units were filed, the lowest since 2016, according to the Department of City Planning.

Experts fear it all adds up to a bleak reality for the most populous US city: Soon, New York may price out all but the very wealthy. And that, in turn, will have consequences for the city’s roughly $315 billion of taxable commercial real estate that is already facing a reckoning from a post-pandemic shift to remote work, to say nothing of the strains on an underfunded public transit system as middle-income households are pushed farther afield.

“Even people who never used to think about housing that much because it wasn’t so bad for them are now screaming from the rooftops,” said Alicia Glen, who was deputy mayor for housing and economic development in Mayor Bill de Blasio’s administration.

The affordability crunch has become particularly stark in New York where asking rents have surged 33% from pre-pandemic levels and the median sales price has climbed 24%. Even a brief period of underbuilding threatens to make the city’s housing shortage worse. And some of the reasons development has stalled — high interest rates and lenders pulling back — may not let up soon.

“We’ve got to reinvent what our cities look like and what our cities are all about,” said Stijn Van Nieuwerburgh, a professor of finance and real estate at Columbia Business School who warned in 2022 that New York and other major cities risked falling into an “urban doom loop” as office vacancies soared.

“That’s going to require a concerted public effort as well as a lot of private investment,” he said. “It’s just that it’s really challenging right now with the high interest rates.”

For the units that are being built in New York City, there’s a greater risk that affordable residences won’t be a huge part of the developments. A key tax break that helped to incentivize developers to add affordable units to their projects expired in 2022 and builders are wary of its recent replacement.

That means plans for massive developments along the Williamsburg and Astoria waterfronts are changing. The battle over the tax break — previously called 421-a and replaced by a new provision named 485-x — has drawn scrutiny from both sides, but adds another risk to New York’s housing shortage.

The housing crunch ranks high on the radar of policymakers. In April, Governor Kathy Hochul proposed a budget that included the 485-x tax break and an incentive to encourage developers to convert buildings to residential ones. New York City Mayor Eric Adams has also proposed zoning changes to make way for “a little more housing in every neighborhood.”

But building has failed to keep up with demand. From 2010 to 2023, the number of jobs in the city rose by 25%, outpacing the city’s housing stock growth of 7%, according to the New York State Department of Labor and US Census Bureau data.

In late 2022, Adams set a “moonshot” goal of 500,000 more homes over the course of a decade. The goal was ambitious given that the most housing approved in any decade since 1963 were the 297,000 units planned between 2012 and 2022 under former mayors Michael Bloomberg and de Blasio. Last year, roughly 16,300 units were proposed, according to the Department of City Planning.

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“If you really want to make a dent in this thing, you’ve got to go way beyond traditional numbers,” Glen said. “You’ve got to think differently. You’ve got to think bigger. You’ve got to really be willing to get into some pretty serious, tough negotiations with a lot of stakeholders.”

TAX INCENTIVES RETURN
Developers have been very reluctant to start new projects since the middle of 2022, when they could no longer get tax abatements for building affordable units under 421-a. The tax break became a huge sticking point for the industry and lawmakers. Eventually, Hochul agreed to extend the timeline for completing projects under 421-a.

The 421-a extension could fuel a bump in construction. Members of the Real Estate Board of New York said in late 2022 that 33,000 potential units were endangered by the original deadline and needed more time.

And Hochul introduced a new program, called 485-x. Whether that spurs development remains an open question. Proponents argue that it’s helpful, even if it’s not everything developers wanted. But some real estate investors say new wage requirements will make it too costly to build certain buildings, especially since the new tax break lowers the average income level of tenants and the rent that can be charged.

Two Trees Management is now in a tricky spot with a massive development in Williamsburg and is considering reworking its initial proposal. Plans for River Ring called for a pair of towers on the waterfront with more than 1,000 units, a quarter of those considered affordable.

While one building qualifies for 421-a, it would be tough to get it done by 2031 as the developer works on another property nearby, according to Dave Lombino, a managing director at Two Trees. The developer would need to pursue 485-x for the second River Ring tower, but it’s now considering a mix of condos and market-rate rentals for that building, leaving out hundreds of affordable and senior housing units it initially planned.

At a spot in Astoria overlooking the East River and Manhattan, the Durst Organization is scrapping the final phase of its Halletts Point development that was supposed to bring in 870 units. President Douglas Durst said that even market-rate rents wouldn’t be high enough to pay required wages under the new 485-x rules and argued that New York’s tax system “discourages” development.

“It’s heartbreaking that the land will remain an empty lot during a housing crisis,” he said.

Critics such as Glen, the former deputy mayor, see the industry’s warnings as a negotiation tactic to get more favorable treatment when the tax break comes up again in annual budget talks. What Durst means “is he can’t make as much money as he used to make,” said Glen, who now heads the development firm MSquared.

GROWING NEIGHBORHOODS
Long Island City, once an industrial area of mostly low-slung buildings, has spent the past decade evolving. Since 2010, no other neighborhood saw more apartments go up — 18,500 units in total — as warehouses and parking lots became massive towers. And that boom lured in more residents, with the neighborhood’s population more than doubling during that same time period.

The area “used to feel a little bit quiet,” recalled Patrick Smith, a real estate agent with Corcoran Group who moved there from Astoria in 2006.

“There were very few shops, very few restaurants, very few services, no supermarkets,” he said. Now, “the street life is much more vibrant.”

But the development boom has priced out certain residents. The median asking rent in Long Island City jumped 56% from April 2010 to April 2024, according to StreetEasy.

Other neighborhoods such as downtown Brooklyn, Williamsburg and Greenpoint have also boomed in the past decade. But some groups advocating for more development are pushing to see rezoning that reaches beyond areas like those, and touches poorer parts of the city to help alleviate cost pressures there.

“We see a lot of neighborhoods that have just been off the hook to produce any new housing,” said Rachel Fee, executive director of the New York Housing Conference, an affordable housing policy group. “We think it’s really needed to bring back some of those small multifamily buildings that used to get built, especially in the outer boroughs.”

In some ways, rising housing costs in all five boroughs are prompting a shift in attitudes.

“So many people are struggling with housing insecurity, seeing it and feeling it, and getting radicalized,” said Annemarie Gray, executive director of Open New York, a nonprofit advocacy group that pushes for more development.

The mayor is seeking ways to spur more building. His “City of Yes for Housing Opportunity” proposal is expected to enable the creation of between 58,000 and 109,000 additional units by 2039, according to a Department of City Planning estimate. And some of the changes — eliminating a parking minimum to accompany new units and allowing more residential units above ground-floor commercial spots — are aimed to smooth out a lengthy and complicated process to build.

CONVERSIONS
One way to more quickly produce housing in New York City is by converting existing commercial space. It’s how nearly 6,000 units were greenlit in the Financial District since 2010, according to a Bloomberg analysis of city data. Conversions also brought several thousand more homes to other parts of the city.

The state and city are both seeking ways to encourage more conversions. Hochul’s housing law includes tax breaks for projects that are started by the middle of 2031 and include affordable units. The city is offering office owners that could turn their properties into 50 or more housing units an easy route to convert the buildings through an accelerator program to navigate getting government approvals. As of late June, 69 buildings were part of the program.

“We’re headed in the right direction,” said Joey Chilelli, managing director of Vanbarton Group, which started leasing late last year at its most recent conversion, the 588-unit Pearl House in the Financial District. “It does unlock a lot more opportunity and what will come of that is more housing put on the market.”

The city’s Department of Housing Preservation and Development is in the midst of reworking its zoning rules to increase the number of buildings across the city that could be eligible for conversions.

One of the next frontiers may be roughly 40 blocks on Manhattan’s west side that include the once-bustling Garment District. The 2018 rezoning of the neighborhood to convert underutilized industrial spaces into offices failed to gain traction as employers began giving up square footage during the pandemic. A residential rezoning process for the area — expected to be completed by the end of the year — is projected to lead to the creation of roughly 4,000 units of housing, plus retail businesses to serve the new residents.

Vanbarton has evaluated potential conversions in Midtown South and elsewhere, considering them to be “a significant part of our business and strategy” that will be boosted by the proposed zoning changes, Chilelli said.

But conversions aren’t always an easy fix. Taking an old office building once roamed by workers and making it a palatable living space is complicated and often expensive. Conversions may be the “flavor of the month, flavor of the year, potentially flavor of the decade,” according to Nathan Berman, whose Metro Loft has converted buildings in the Financial District. But that doesn’t mean they’re easy to complete.

Cities including New York need to get creative though if officials really want to address the housing challenges, according to Columbia’s Van Nieuwerburgh.

“We have a massive housing shortage and we need some government subsidies, we need some regulatory relief so that more density can take place, we need new housing types,” he said. “We need an all-of-the-above approach.”

This story originally appeared on Bloomberg.com.