Resi conversions in CA & empty promises in NY

Residential conversion - another case of: If California is doing it, why can't NY?

In September, CA Governor Gavin Newsom signed Senate Bill 6 (SB 6) & Assembly Bill 2011 (AB 2011), into legislation to allow developers to bypass zoning rules across California and build residential projects in areas previously reserved for commercial uses.  

SB 6 and AB 2011 are important for California housing development because of how broad their scope is.  The bills authorize developers to build on any parcel of commercially zoned land, save for land with built structures on them (strict no-knockdown policy) or lots that are adjacent to industrial properties. That yields a whopping 159,000 eligible sites across California. According to a market sizing and economic feasibility study done by Urban Footprint, this policy would enable the creation of 1.6 – 2.4 million housing units in the next 10 years. This is significant because Governor Newsom has a goal of building 2.4 million households over the next 8 years. If 240,000 residences are created annually under this program, it would meet 75% of the 310,00 annual new units that are required to be on track with California goals. Some folks are getting pretty excited about this bill!

Source: Urban Foot Print. Much of this analysis rests on the initial estimation for number of commercially zoned, but unoccupied sites

There are 3 core reasons why the program is expected to succeed:

1. As-of-right development. In California, much like NY, real estate projects that require spot re-zonings because they don’t conform with existing use will require discretionary hearings to be held and diverse opinions to be shared to come to a decision on whether to re-zone the parcel(s). This is where the political dance usually begins, and local officials try to negotiate with developers to capture more benefits. This can take years. Except this project has ministerial approval. That means that if the project meets all the requirements laid out here, it would move forward nearly automatically, with very few ways for local officials to bar the development from passing if it checks all the boxes labeled in the bill.

   1. Putting this into context: If NY’s Innovation QNS project, the proposed 2,845-unit project in Astoria Queens possessed ministerial approval, it would have begun construction in 2020 when its plans were drawn up. Instead, it has spent two years gathering feedback from officials and community members (read: discretionary hearings) to tee up its required permissions.

2. No environmental review. AB 2011 allows the new development to sidestep California’s onerous environmental review requirement, CEQA. This is the most time intensive part of the development process by far.

3. Strong infrastructure of housing development laws. AB 2011 is not an orphan policy. It exists within a family of other interrelated and accretive pieces of legislation that promote housing and prevent local towns/cities from trying to mar projects via the use of technicalities. California has ratcheted up the amount of pro-development housing bills in the last few years and this has set an important foundation for legislators today to build on. SB 35 allowed developers to build without going through discretionary hearings if their projects met state guidelines for housing AND the local city failed to submit a state-approved housing plan. Put differently, SB 35 paved the way for the as-of-right development in AB 2011.

Outside of authorizing a widespread re-zoning, Governor Newsom in California lead an effort to convert hotels and other housing into affordable housing / temporary housing to address the growing specter of homelessness (who were higher risk for getting Covid-19) in California. The results of the program were standout. Some of the successes from the first year of the program are below:

• $800M of funds raised to acquire, convert, and rehabilitate properties in dwellings.

• 94 properties purchased.

• 5,911 units were placed into service.

• 8,264 individuals housed.

How about New York’s residential conversion efforts?

New York City leaders have also taken a stab at enabling residential property development on non-residentially zoned land.

In 2021, former NY Governor Andrew Cuomo signed the Housing Our Neighbors with Dignity Act (HONDA) to authorize the conversion of empty hotels into 100% affordable housing. At that time, the number of covid infections was starting to stabilize, but travel was at a standstill and thousands of hotel rooms were closed as hotels across the city shut their doors. On the other hand, 55,000 people were living in NYC without access to permanent housing. As described in the NY Times, the blend of a covid pandemic with housing crises was eerily similar to the situation in California.

Governor Kathy Hochul built on this program in June of this year when it became clear that Cuomo’s legislation was unfeasible. Neither program worked. Progress has been slow. No conversion projects have been completed since the inaugural bill passed in the summer of 2021 by Cuomo. Developer Isaac Chetrit has made plans to convert the Stewart Hotel in New York near Madison Square Garden into residential apartments. But this property can be converted because current zoning is aligned with its intended use and so it does not leverage Hochul’s bill. Despite what officials say and do, there are real obstacles that prevent the proliferation of more conversions.

Why didn’t the conversion efforts work in NY?

1. Insufficient political collaboration: the zoning rules were not flexed or bent to accommodate the surging un-housed populations. The problem here is not the zoning, itself, rather it is that state agents were not able to collaborate in ways that yielded exemptions from the zoning. This also helps explain the slow pace. By May 2022, NY state, a year into its program had received only 1 application for the program. A year into its program California had bought nearly 100 sites and housed nearly 10,000 people.

2. Union opposition: In Manhattan, where most of the hotels in NY 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. Unions can create political noise prior to a property acquisition but also after an acquisition is complete, while the projects seek to obtain an okay from the City Council.

3. 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 the cost.

4. Community push-back: when it comes to building large, affordable housing projects, few districts show excitement. This was demonstrated in Chinatown in the summer when residents shot down two proposed shelters being built.

A look into the future

California lays out a compelling story about how a progressive state with its fair share of NIMBYism is using commercial to residential conversions to bolster its housing policy. NY has been embracing the wrong policies for some time, and the contrast with California is eye opening and provides a clear “what if NY had done it differently” alternative story line. Mayor Adams and Governor Hochul seem to be aware of this and that is why they are pitching the legalizing of basement units (Hochul’s soft launch), the exemption of environmental reviews for projects smaller than 200 units, and perhaps even increasing FAR for affordable housing projects.

Sources: Urban footprint, Holland & Knight Law, Office of Governor Gavin Newsom, CA YIMBY, Perkins Coie, Quartz, and City and State