How did Kingston, NY legalize a 15% reduction in rent?
How did Kingston, NY legalize a 15% reduction in rent?
A look at the path towards precedent-setting policy making and some thoughts around its impact for apartment building governance in NYC
On November 9th, 2022, the City of Kingston, NY voted to reduce rents on newly ordained rent stabilized properties in the city by 15%. This was historic because it was the first time a city government in NY state made a concerted move to reduce rents – and since NY is probably the most progressive state with housing laws, it’s likely the first time this has happened anywhere across the United States (someone fact check me, here). The rent reduction came only 90 days after a segment of the city’s buildings became rent stabilized properties. How did Kingston get here? And why does it need the government to intermediate its housing industry?
We’re not in Kansas anymore
Kingston today has changed a lot since the pandemic took hold and understanding how residents voted for rent reductions starts with understanding what happened leading up to the decision.
2020
According to Ulster County’s 2020 rental housing survey, rents grew by an aggregate of 28% in the 4 years preceding the pandemic from 2016 – 2020. The rent (across studios, 1 beds, 2 beds, and 3 beds) went from $989 to an average of $1,265. Rents were growing pre-pandemic and doing so quickly.
Covid-19 happened and home prices in Ulster County soared (and I mean, soared). Prices increased more than any other county in NY state, faster than in even NYC (see below).
During Covid, Kingston absorbed much of the NY crowd that wanted to remote work. Speculation started.
Anecdotal: NYC residents began buying in Kingston, but so did out-of-staters, as the Hudson valley grew hot. Stories like this one began multiplying and turning into real data points.
Data points: The National Association of Realtors announced that Kingston NY’s home prices grew more in the 2nd quarter of 2020, than any other region In the U.S., at 18%. This was especially notable because of the rather sluggish growth in pricing in the years prior.
The market gets even hotter: On July 4th, search volume for Airbnbs in the Hudson Valley, Catskills, Kingston NY region surged by 40% compared to the prior year.
The strain that short term rentals put on the housing stock in Kingston NY and the Hudson Valley area did not please officials and long-time residents. In October 2020, the common council calls for the creation of a special housing committee to regulate short-term housing rentals. The problem was that many airbnb stays were not short term in nature, but longer stays. Remote work was here to stay.
2021
Good Cause Eviction: The Good Cause Eviction (referred to as Good Cause) movement was picking up traction across the NY region in 2021. Albany, Newburgh, Poughkeepsie, and Hudson, NY all voted to pass Good Cause.
As a quick recap, Good Cause applies de facto rent stabilization to the housing stock. The law forces owners to renew leases to their tenants, except if there is a good cause for them not to. In the state bill, a ‘good cause’ is not ambiguous, it is a list of 10 pre-specified cases whereby the owner may choose not to renew a lease. The rent stabilization part of the bill is that the yearly rent increases on tenants are capped. Annual rent caps are increases of 5% or 1.5x yearly inflation, whichever is greater.
Good Cause reduces what owners can do with their properties, and it also limits how profitable apartment buildings can be for investors. The bill would introduce government into formerly private, landlord-tenant relationships.
2022
January
The state-wide Good Cause movement continued to build momentum into 2022. The prevalence of covid, high homelessness (55,000 in 2021 in NYC), and the ending of eviction moratoria (state + federal) gave the policy strong tailwinds that enabled it to get in the spotlight and collect widespread support.
The NYS eviction moratorium ended January 15th, 2022.
Kingston’s mayor signed Good Cause into law on January 25th, 2022.
I wrote some recommendation for owners on how to brace for Good Cause if it does pass in NYC or, in other areas here.
June
June 1st– The city of Kingston NY conducts a rental vacancy survey. This was interesting, because Ulster County, which includes Kingston, had just completed a study the year prior in 2020. Anyway, the study looked at 59 properties, comprising 1,200 apartment units, and found that only 1.57% of the units were vacant. Anything less than 5% vacancy rate is considered a housing emergency. This leaves the door open for the Common Council to make this categorization. If Kingston opts to do this, it will activate rent stabilization.
June 4th– Good Cause fails to become law at the state level. Bill sponsors and elected officials had too many competing housing priorities and covid priorities that precluded them from getting a vote on the bill. The prospect of a statewide bill evaporates for the rest of 2022. State Congress closes its legislative session for the remainder of the year.
June 30th- In response to a landlord challenge to the Good Cause law, a NY State judge ruled that Albany’s Good Cause is not legal. The judge cited conflicts with the 5% cap on rent increases with current NY state law. This explicitly annulled the city of Albany’s Good Cause rules, and it de facto neutralized the Good Cause in cities.
Kingston does not retract its law because until an appeal by the City of Albany fails, it is still fair game for Kingston’s law to exist- until explicitly struck down in a court of law.
July
Kingston officially declares a housing state of emergency, and this sets the stage for approximately 1,200 units of multifamily housing to become rent stabilized.
The policy directly mirrors NYC’s rent stabilization law because it is codified at the state level by 2019 Housing Stability and Tenant Protection Act (HSTPA). Rent stabilization applies to buildings that were built prior to 1974 and that contain more than 6 apartments. Kingston will now have a rent guidelines board with members recommended by the Common Council of the City of Kingston.
November - The rent reduction
Kingston’s Rent Guidelines Board voted 6-3 to apply a 15% reduction to the rents of tenants signing leases this year. This is the first legally mandated rent reduction in New York State history. This will apply to 64 buildings across 1,200 apartments, per The Times Union.
Per the timeline of events, Kingston’s trajectory towards rent reduction happened quickly, but there was also a bit of a build up to get there. To go from a sleepy city of 25,000 to a place with double digit annual rent increases coupled with speculative real estate investing in 2 years is a little bit unusual. It might even be unsettling to those not participating in, but feeling the impact of the changes. Interest in the Hudson Valley area of New York grew steadily in the late 2010s, and the pandemic turned that interest into a frenzy. Though many are displeased by the actions taken by its officials, the city of Kingston’s ability to respond and legislate at the pace that it did is remarkably efficient for government.
Okay, so are property owners in Kingston getting the stick?
1- The Rent Guidelines Board very nearly voted on a 30% reduction in rent. They settled on only 15%, to recognize the harm the policy would have on real estate owners.
It could have been worse.
2- Also important: the law reduces the rents on new leases signed this year, but it also allows tenants a 3-year lookback period in which to challenge yearly rent increases that have been made that were greater than 5.33% annually.
Yikes.
3- Third thing of note is that, unlike Good Cause Eviction, which has dubious legal standing at the city level because of its conflict with state law, the ability for a city to embrace rent stabilization laws and empower a legislative body like the Rent Guidelines Board (RGB) to legislate rent decreases is 100% supported by the state law. 2019’s HSTPA explicitly broadened the Emergency Tenant Protection Act (ETPA) of 1974, the rent stabilization law, to allow cities anywhere in NY to invite rent stabilization into their cities, conditioned on things like certain vacancy thresholds being met.
This will not get shut down on similar grounds that Good Cause got shut down in Albany.
This sounds bad. Can you give me some redeeming information to make me feel better?
1- Governance and enforceability of rent reduction & other reforms
Kingston leaders are far from being able to govern the regulatory landscape they are creating. With help from the state, perhaps they will get there. But that seems like something in the next few years, not tomorrow, not this year.
To ensure rents are reduced 15% from last year’s numbers would require Kingston officials to create a database of rents that start in 2021 and ensure these are not fraudulent. Workers would also need to create educational programming around these new policies so that they get adopted and are understood clearly. Finally, city representatives will need enforceability mechanisms (how punitive will the law be exactly?) so that owners understand why they need to be compliant with the rent reductions.
The enforcement of the policy will also have to consider the unique circumstances and requests that come in where owners ask to be exempted from this ruling. It’s not hard to imagine long term owners with long term tenants who have not increased rent in the last 10 years. They might want to be exempted from this ruling. Will they be? For now, the RGB application exists on a Venn diagram and there is no public facing website for the policy-making body. I think there will be a delay before the policies passed in Kingston’s legislative house see 100% adoption in the real world.
2- The law’s scope
Kingston has about ~25,000 residents. The rent reduction will only apply to about 1,200 apartments in the city, across 60 something properties. If we assume there are 2 people living in each apartment (households greater than two are more likely to be found in houses either as rentals or ownership, let’s say), that means about 2,500 people will be housed in rent stabilized units that are subject to rent reductions this year. That’s 10% of Kingston’s population. In NYC, around 28% of the city’s residents, or about 2.5 million (1000x) people live in rent stabilized housing. The Kingston policy changes things for only a small slice of the city’s population. Important to keep in mind.
Why does this matter to NYC multifamily investors?
The ominous consequence here is that the state can insert itself into major industries like housing and cause tectonic shifts in the way businesses are administered. With the passing of 2019’s HSTPA, NY state has laid down the legal framework for cities across the state to replicate what Kingston has done. Many cities won’t do this (there isn’t an overwhelming demand to live in Queensbury, NY), but they could.
There is also no explanation for how owners are supposed to manage their debts when their income has been reduced, and the fact that this effect on small owners may be on-trend. Balancing consumer protections with investor safeguards is difficult and it seems like one policy always benefits one group at the expense of another. And that’s part of the issue here. Tenants will not feel bad that owners have to mark down their rents by 15%. Picture this. Office buildings in Q2 of 2022 in NYC had vacancy rates hovering around 16% and this was very painful for office owners. This also hurt NYC’s tax base. For owners of buildings that are smaller, say 10 or 20 units in Kingston, a 15% decline means fewer absolute dollars lost than a 16% decline in occupancy in NY office buildings. But it is just as hard, if not harder because mom & pop owners have less resources available to offset those losses. One could argue that the same % decline falls harder on the small building owner because he may not have any other investments besides the one in the building. This is a major concern. Protecting smaller, “retail-sized” investors needs to be a priority that gets consideration along with tenants impacts.
Kingston’s efficient and fast housing decisions might serve as a model for other cities to follow, and so it’s important for investors to study what’s happened here to best prepare for what’s ahead. Bracing for universal rent stabilization in NY will be a given in 2023, when Good Cause Eviction is rumored to pass. Kingston is also doing some interesting things that I hope get more traction in other cities, like loosening zoning restrictions and bolstering possible FAR, reducing parking requirement- all critical things as the Hudson valley grows. Kingston’s experimentation with bold, precedent setting housing moves will be a real-live experiment on how certain policies work, and how others don’t. It will be exciting to read more about Kingston’s updated zoning plan due to be released later this November!
Sources: Bloomberg, Hudson Valley One, Daily Freeman, The Real Deal, Ulster County Rental Housing Survey, City of Kingston Rental Vacancy Survey