Supply & demand imbalances create opportunities for developers and policy makers
Previews:
NYC rents are at an all-time high
Local Law 97 has a new loophole
Hotel/office conversions are still very hard
100 Years Ago Today:
Everything and nothing has changed (Union Square, New York, NY, 1922)
Record-breaking NYC rents will likely keep rising
In June, the average Manhattan rent reached $5,000, a record-first. The median rent hit $4,050 indicating that the average is not just skewed by luxury rentals. NYC’s shortage of apartments has been a key factor in driving rents up. Thanks to the below, that supply is not poised to grow anytime soon:
Conversions of existing buildings - hotels, offices- for multifamily purposes is extremely difficult.
42,000 apartments sit vacant because it would not be economical for owners to renovate and rent them, further constraining supply unless a change in 2019’s HSTPA happens.
A scarce supply of apartments and a growing demand for units should lead to higher rents for a sustained amount of time.
Thanks for reading Romain’s Newsletter! Subscribe for free to receive new posts and support my work.
Solution for those worried about Local Law 97
“New York’s landmark climate law” Local Law 97 (LL97) is not new but the energy credit incentive that allows building owners to sidestep the required retrofitting may have gone under your radar.
Local Law 97 is a comprehensive mandate that existing buildings and new projects abide by an energy and carbon emissions standard - about 50,000 buildings citywide will be effected, an estimated 60% of all building stock in NYC.
The law threatens fines if buildings >25,000 SF do not reduce carbon emissions levels starting in 2024, with a goal to reduce building emissions in NYC by 40% in 2030.
Though real energy savings could be gleaned, owners would also face steep retrofit costs, and are directly impacted by this piece of legislation.
The work-around:
News was announced a few weeks ago that, instead of making energy efficient building upgrades, owners will be able to buy “renewable energy credits” (RECs). These credits will be used to fund clean energy projects like the Champlain Hudson Power Express (CHPE), which; together with wind & solar farms in Upstate NY, will deliver approximately 33% more megawatt hours to the NYC grid than the city currently consumes.
Also good: Multifamily buildings with more than 35% of units under rent stabilization are exempt from LL97 requirements for now.
The CHPE will deliver hydropower from Canada to Queens, NY for use in NYC
According to Byron Stigge, director of Level Infrastructure, paying fines for failing to comply with LL97 would cost roughly $1 per building square foot, starting in 2030. Buying RECs would be cheaper than the fines imposed on buildings owners, and both of these options would be considerably cheaper than upgrading / retrofitting buildings. Paying for something when you never thought you would have to isn’t thrilling, but the introduction of RECs and the exemptions of most rent regulated buildings make this just a little bit more palatable.
Multifamily conversion problems
NY officials have tried to make it easier to convert hotels and offices into multifamily units. Former governor Andrew Cuomo signed a bill last year encouraging nonprofits to convert hotels into affordable housing. Governor Hochul took up the bill this year and made some important improvements to it in response to the difficulties the original bill didn’t address.
Yet, since Hochul’s bill passed, only one developer has made plans for a hotel conversion. Isaac Chetrit will convert the Stewart Hotel near MSG to residential apartments. But this property can be converted as-of right and does not leverage Hochul’s bill. Despite what officials say and do, there are real obstacles that prevent the proliferation of more conversions. Key difficulties are below:
Union opposition: In Manhattan, where most of the hotels that are viable for conversions lie, an estimated 85% of hotels use union labor. The unions will not likely approve any move that means eliminating their jobs.
Cost prohibitive: The termination of the 421-g tax abatement removes much of the economic incentives to make a conversion feasible. The housing requirement that kitchenettes be installed in each unit only adds to this.
Community push-back: when it comes to building large, affordable housing projects, few districts show excitement. This was demonstrated in Chinatown recently when residents shot down two proposed shelters being built.
The current circumstances aren’t optimal for anyone, including office building owners. Office buildings are 16% vacant, costing the city $600M in annual property tax revenue. Owners of those office buildings are hurting, but they can’t sell their properties without taking haircuts on pricing because few buyers (besides Silverstein Properties) are viewing those properties as conversion opportunities. Chris Shank, managing partner at Savanna Fund, says “The bottom 20 [percent of office space] is going to be ripe for alternative use,” but incentives need to line up so that alternative uses can be unlocked.
The only hotel-residential conversion project in NYC right now, The Stewart Hotel
Rents hit all time high in Manhattan
Rents hit all time high in Manhattan
Rents hit all time high in Manhattan
Supply & demand imbalances create opportunities for developers and policy makers
Previews:
NYC rents are at an all-time high
Local Law 97 has a new loophole
Hotel/office conversions are still very hard
100 Years Ago Today:
Everything and nothing has changed (Union Square, New York, NY, 1922)
Record-breaking NYC rents will likely keep rising
In June, the average Manhattan rent reached $5,000, a record-first. The median rent hit $4,050 indicating that the average is not just skewed by luxury rentals. NYC’s shortage of apartments has been a key factor in driving rents up. Thanks to the below, that supply is not poised to grow anytime soon:
The expiration of the 421A tax abatement, which was responsible for 56% of all apartment units built in the last 8 years, will dull the incentive for developers to build more.
Conversions of existing buildings - hotels, offices- for multifamily purposes is extremely difficult.
42,000 apartments sit vacant because it would not be economical for owners to renovate and rent them, further constraining supply unless a change in 2019’s HSTPA happens.
Also…
Interest rates on mortgages are climbing, which makes the affordability of homes even more out of reach, converting buyers into renters. Nationally for the month of June, home purchases were down 29% year over year. This means many of those not buying will look to rent.
A scarce supply of apartments and a growing demand for units should lead to higher rents for a sustained amount of time.
Thanks for reading Romain’s Newsletter! Subscribe for free to receive new posts and support my work.
Solution for those worried about Local Law 97
“New York’s landmark climate law” Local Law 97 (LL97) is not new but the energy credit incentive that allows building owners to sidestep the required retrofitting may have gone under your radar.
Recap of Local Law 97 (LL97)
Local Law 97 is a comprehensive mandate that existing buildings and new projects abide by an energy and carbon emissions standard - about 50,000 buildings citywide will be effected, an estimated 60% of all building stock in NYC.
The law threatens fines if buildings >25,000 SF do not reduce carbon emissions levels starting in 2024, with a goal to reduce building emissions in NYC by 40% in 2030.
Though real energy savings could be gleaned, owners would also face steep retrofit costs, and are directly impacted by this piece of legislation.
The work-around:
News was announced a few weeks ago that, instead of making energy efficient building upgrades, owners will be able to buy “renewable energy credits” (RECs). These credits will be used to fund clean energy projects like the Champlain Hudson Power Express (CHPE), which; together with wind & solar farms in Upstate NY, will deliver approximately 33% more megawatt hours to the NYC grid than the city currently consumes.
Also good: Multifamily buildings with more than 35% of units under rent stabilization are exempt from LL97 requirements for now.
The CHPE will deliver hydropower from Canada to Queens, NY for use in NYC
According to Byron Stigge, director of Level Infrastructure, paying fines for failing to comply with LL97 would cost roughly $1 per building square foot, starting in 2030. Buying RECs would be cheaper than the fines imposed on buildings owners, and both of these options would be considerably cheaper than upgrading / retrofitting buildings. Paying for something when you never thought you would have to isn’t thrilling, but the introduction of RECs and the exemptions of most rent regulated buildings make this just a little bit more palatable.
Multifamily conversion problems
NY officials have tried to make it easier to convert hotels and offices into multifamily units. Former governor Andrew Cuomo signed a bill last year encouraging nonprofits to convert hotels into affordable housing. Governor Hochul took up the bill this year and made some important improvements to it in response to the difficulties the original bill didn’t address.
Yet, since Hochul’s bill passed, only one developer has made plans for a hotel conversion. Isaac Chetrit will convert the Stewart Hotel near MSG to residential apartments. But this property can be converted as-of right and does not leverage Hochul’s bill. Despite what officials say and do, there are real obstacles that prevent the proliferation of more conversions. Key difficulties are below:
Union opposition: In Manhattan, where most of the hotels that are viable for conversions lie, an estimated 85% of hotels use union labor. The unions will not likely approve any move that means eliminating their jobs.
Cost prohibitive: The termination of the 421-g tax abatement removes much of the economic incentives to make a conversion feasible. The housing requirement that kitchenettes be installed in each unit only adds to this.
Community push-back: when it comes to building large, affordable housing projects, few districts show excitement. This was demonstrated in Chinatown recently when residents shot down two proposed shelters being built.
The current circumstances aren’t optimal for anyone, including office building owners. Office buildings are 16% vacant, costing the city $600M in annual property tax revenue. Owners of those office buildings are hurting, but they can’t sell their properties without taking haircuts on pricing because few buyers (besides Silverstein Properties) are viewing those properties as conversion opportunities. Chris Shank, managing partner at Savanna Fund, says “The bottom 20 [percent of office space] is going to be ripe for alternative use,” but incentives need to line up so that alternative uses can be unlocked.
The only hotel-residential conversion project in NYC right now, The Stewart Hotel
Sources: New York Focus, Bloomberg News, City and State