Crisis Leads to Legislative Housing Reform
How California's Lights The Way For How NYC Can Act
Close to two months after the advent of the Los Angeles fires, which The California Department of Forestry and Fire Protection estimates burnt down close to 16,000 structures, sales of former homes – now burnt lots, have begun. Zillow is now home to some new property listings, where brokers clearly state that the properties for sale have been impacted by the fires – and that buyers can get a chance to "Be a part of the rebuild," or to purchase properties that have "already undergone stage 2 debris removal." Two months after the fire, the tragedy of events has forced impacted parties to accept reality and make difficult decisions in the name or pragmatism.
At a time when both county and state struggle with homelessness, affordability of groceries, affordability of housing, and healthcare costs, the effects of the fire will exacerbate the housing problems in Los Angeles because it has reduced the housing supply by approximately 16,000 structures (many of them residences). Since California legalized the construction of Accessory Dwelling Units in 2016, about ~10,000 ADUs have been built in Los Angeles County from 2017-2021. Assuming that 3/4 of the "structures" in the L.A. fire were homes would mean that more residences were destroyed in the three-week-long fire in 2025 than ADUs were built in the four-year period following their legalization in 2016.
In response to this crisis, California officials are pitching ideas to quicken the pace of new housing development to restore and rebuild damaged homes. Some policies inspired by this crisis have been interesting. Los Angeles County doesn't allow architects to self-certify certain projects like NYC currently does, and the City Council in L.A. is now considering enabling that. Governor Newsom passed an executive order to waive certain environmental reviews and considerations to speed up development. The governor also doubled down on prior legislation to further simplify the process of turning state-owned lands into affordable housing (one of the results has been this neat portal that allows for easy viewing of all available projects and RFP submissions).
These rules would not only speed up the pace of new property development if they were implemented, but they would also serve to create value for property owners. Reducing the time required for administrative approvals of new projects makes properties more valuable. If developers can complete projects more quickly, it reduces their carrying costs and enables them to pay more for land (or pocket more profit), which puts more money in sellers' pockets. When faced with property and/or financial distress from banks, any additional increase in property value will help owners exit their distress.
Does NYC Need a Fire?
New York City has about 26 times (26,000 people per square mile) the population density of the Pacific Palisades in Los Angeles, where the bulk of the recent fires occurred. Because of the heightened density in NYC, the fallout from a comparable fire that burns 16,000 structures in NYC would be orders of magnitude more disastrous than Los Angeles's fire. Instead of mostly single-family residences (SFRs) burning down, entire apartment buildings could come crashing down. That would
A fire that engulfs more than 16,000 structures in NYC would destroy hundreds of thousands of apartments and plunge the housing market into much deeper chaos than it is now.
Tenants: Where would tenants and owner-occupants who'd lost their homes go? SFR owners in the Palisades will not hurt as much as rent stabilized tenants who make $40,000 a year in a household of 3.
Building owners: How many exceptions might exist in the fine print of their insurance policy coverage? For rent-stabilized owners, would filing for insurance even make sense? How would insurers value the properties? For owners with personally guaranteed debt, how accurate are the appraisers in their value estimate of the property?
Lenders: Would they be able to withstand another shock to their portfolios if the non-recourse debt isn't paid back and insurance doesn't offer anything close to the principal amount?
Some NYC property owners from legacy 2nd or 3rd generation real estate families believe that the Bronx will have to burn again before substantive legislation gets passed to improve NYC's housing landscape. That line of thinking rests on urban decay. When urban decay settles into NYC and crime rates grow, the thinking goes, that triggers elected officials to try and clean things up. But, urban decay is slow and gradual, which means legislation could trickle in slowly, tentatively. On the other hand, a fire moves fast and spurs on quick reforms.
California's fire showcases how quickly and innovative things can get in the face of tragedy, and it's not the first time a fire has spurred on drastic reform in a major city. A similar sequence occurred in the Triangle Shirtwaist Factory fire in Greenwich Village, New York. In 1911, A 10-story factory building caught fire, and because of the lack of egress and ingress in the property and poor fire codes, the workers in the building were trapped and could not exit, and 146 of them died from the fire. Following that incident, the Factory Investigating Commission passed 38 new laws directly in the aftermath of the fire to address child labor laws, general working week hours, and fire safety codes. Tragedies bring people together and make passing changes and legislation easier when the alternative is to risk having the tragedy happen again.
The only problem is that California residents and 20th Century New Yorkers paid a steep price to complete these changes.
Can NYC Reform Its Housing Without a Fire?
With upcoming elections at the mayoral and gubernatorial level, there are some trigger points to motivate/spur change. Former NY Governor Andrew Cuomo signed off on the Housing Stability and Tenant Protection Act (HSTPA) in 2019, and that has felt like a near-fatal blow to building owners and vendors who service the industry. Now that Cuomo is officially running for Mayor, he will have to acknowledge that decision and speak about his housing plan for NYC. The mayoral election can offer a path for some meaningful housing reform, and it will be interesting to follow along. But, the true seat of power for the housing system exists at the state level where state agencies like HCR govern and make critical decisions regarding rent regulations. It will be interesting to learn of new challengers to Kathy Hochul and their housing policies.
Whether it is the new governor or the new Mayor who brings sweeping reform, NYC desperately needs leaders with the same motivation levels as legislators usually exhibit after fires occur. What Los Angeles is doing to respond to the recent tragedy lights the way for how NYC can answer its own crisis. NYC just needs to pretend its own fire is coming.
I am bullish on NYC multifamily
Call me at 646 326 2220 to discuss
Best Regards,
Romain