Higher apartment vacancy levels in NYC will create more opportunity
Higher apartment vacancy levels in NYC will create more opportunity
Building more housing in and of itself will increase tenant protections and well-being.
Building more housing in and of itself will increase tenant protections and well-being.
I hinted at this in my article on California’s multifamily strategy and now I think it’s worth an explicit call out. If a tenant can find apartments that have better amenities, all else held equal, then he or she will move to those apartments. The landlord knows this, and he will do whatever he can to make sure his apartments are just as enjoyable and well serviced as the ones down the street. This helps the tenant obtain a better experience and get his needs met. Setting aside switching costs and the hassle of moving (which are real), if the tenant’s needs are altogether unmet, the tenant can move out and find somewhere better suited. If this happens at scale, rents drop, apartments services and maintenance increase, and tenant satisfaction goes up.
The vision
Supporting more housing development will empower renters because it will lead to a paradigm shift, if executed correctly. The media paints the image of the landlord as someone who cares little about services rendered to tenants and the performance of his duties. This caricature exists because on some level, some contingent of renters in NYC and NY state have dealt with housing providers like that. Those owners who resemble this description can net tenants year after year in NYC because the game is rigged. Tenants do not have enough options for their specific needs. A pair of friends will settle for a 2 bed 1 bath instead of a 2 bed 2 bath. The landlord may know that a 2 bath would be better, but it is costly to make the renovation and comparative to his peers, he is the best game in town, so he opts not to add a bathroom. Is the owner at fault for making a calculated business decision, rather than prioritizing the specific wishes of his tenants?
The paradigm shift happens when the housing provider recognizes he won’t secure the tenant’s lease unless he adds that second bedroom. Once the embargo on housing is lifted in NY, more housing units will be produced, and this could make housing abundant. Instead of the narrative around tenants feeling mistreated in the media, the media could tell stories about how tenants are treated like esteemed guests in hotels, or patrons at a restaurant. It’s hard to imagine this because NY has been the way it has been for so long.
What policy makers like Kathy Hochul and Mayor Adams are suggesting would raise the city-wide apartment vacancy rate in NYC. NYC’s vacancy rate hovers around 2.47% right now, according to the National Associate of Realtors (NAR). That increase of supply would be a good thing for investors and tenants. More vacancies would mean that more housing had been built and more profits obtained by investors and developers. Tenants could ignore those properties that don’t do a good job fulfilling their needs in ways they cannot do now because of choice constraints. That would send more traffic towards better managed properties. Good operators would be rewarded with tenant loyalty, bad managers would be punished with higher turnover, and 100% occupancy wouldn’t be taken for granted like it is in NYC today.
To drive the point home, let’s look at the current levels of occupancy for multifamily housing across cities and states. NY state counted 3 cities amongst the top 15 metro areas with the lowest vacancy rates in the United States. This underscores that extremely dense areas need attention but so do the suburbs around them. More important though is the magnitude of difference. Outside of DFW, all the high growth southern cities have vacancy levels that are at least 3x greater than that of NYC and its suburbs. Those states are seeing high job growth, high population migrations, and they are responding by building housing. Developers are earning profits for the projects and tenants have newer housing, better amenities, and responsive management companies. It’s hard to imagine NY like this, but that’s all the more reason for change to happen. When 100% occupancy isn’t guaranteed, things get better for tenants.
Do the ends justify the means?
The trouble with building substantially more for the effect of creating better tenant experiences, NIMBY groups might allege, is that the problems and difficulties caused by property development are so great that they don’t merit new housing units being built. So basically, the ends don’t justify the means. Let’s look at two examples below that I feel are commonly brought up:
Vacating apartments to build more property forces tenants to move out, “pushes tenants out”
Asking tenants of today to move is required to create spaces for the tenants of tomorrow in housing constrained markets like NYC where housing is built vertically and few open land areas remain desirable, but undeveloped. This is a tricky problem that accounts for much of the bad press that developers receive in NY. Natural vacancies do occur but given the housing deficit, it seems difficult that organic vacancies will occur quickly enough to facilitate all the renovating and building that needs to happen. So, what do you do?
People don’t like leaving their home, even if they were the ones who decided to leave. It’s annoying at best and maybe jarring at worst. So, yeah, that’s a reality. But the friction that is created during tenant move outs is not a private owner’s responsibility to manage. To the extent that managing a great building involves providing great services, the owner will do so. But if his interests have changed and he wants to vacate the property and build, he should not be limited in his capacity to do so. Also – very importantly, this friction will be reduced if there is more supply, because the challenge of finding a discounted apartment will be much easier for tenants if landlords commonly suffer from >10% vacancies in their property. We should look to the government to soften the impact of move outs and relocations instead of getting upset at property owners. Also, rezoning industrial neighborhoods to residential has been done before with great success in Williamsburg and Greenpoint. Why is it not on the agenda again? Warehouse conversions are clearly in, and this reduces disruptions to tenants.
Low density developments are reducing the housing supply in NYC
Developers in NYC have taken to building luxury condominiums in Manhattan after the lapsing of the 421-A tax abatement. According to some, it’s the only choice that still offers developers profits. In some developments, like 15 West 96th street (pictured here), the number of apartments that were in service prior to being demolished was 25% greater than the number of apartments permitted for the new building. Further, the new building contains no rental apartments just condos for sale, so the project is removing ~30 units from the rental housing supply. This trend has contributed to NYC’s rental housing supply hardly increasing at all since 1970. This is actively detrimental toward the goal of building more rental housing. These low-density projects are getting picked up because it is profitable to do so. If NY city and state leaned into producing much more housing, they could do that by providing incentives. And if those incentives worked, condo development could decrease because building multifamily could be just as profitable an endeavor.
Putting it all together
NYC and NY state leaders will support initiatives that work for most people, and in NYC most people are renters -80% in the Bronx, 76% in Manhattan, 70% in Brooklyn. That means renters must be at the center of any housing discussion. An interesting view to consider is that building more housing could become a path towards increased tenant satisfaction and empowerment. Building so much housing that multifamily vacancy levels in NYC meet or exceed the levels of other large cities would bring big change. Understanding the connection between more housing, vacancy levels, and the competitive environment more housing creates often gets overlooked. Covid in NYC was a great example of how when market conditions shift and vacancy becomes a problem, rents drop significantly, and landlords accommodate renters extremely well.
The vision behind building so much housing is to allow tenants more choices. Some things like tenant displacements, or developments that reduce the rental unit count of NYC are challenges that must be addressed or improved upon to make additional housing production more feasible. Officials should focus on accelerating rental housing production as a means of improving the wellbeing of everyone while also allocating time to smooth over the frictions encountered in the developments process.
Sources: National Association of Realtors, Gothamist, City & State, Bloomberg