A recent report indicates the absence of new rental housing development in New York City may jeopardize the city’s future economic development, and the real estate industry is stepping up to the plate to change that.
The 2005 New York City Housing and Vacancy Survey showed that the city has a 33.3 percent home ownership rate, up from 32.7 percent in 2002. But perhaps more revealing, the survey showed a loss of 16,000 rent-controlled units and that the number of rent-stabilized apartments increased by only 1,000.
There goes the (affordable) neighborhood? Not necessarily, but real estate experts agree on a need for more rental housing.
“There’s never enough — like ‘never too rich, never too thin’ — there’s never enough housing,” said Barry Gosin, CEO of Newmark Knight Frank and a commercial broker who said he is serving as adviser to an innovative and large new rental housing project that has not yet been announced.
While the city has formed a commission to modify its 421a tax abatement, which provides a property tax break for construction of housing in certain areas of New York City, it is also working with the Real Estate Board of New York and property developers to come up with other incentives for rental housing.
“Obviously there’s a concern that you can’t buy a piece of land today at the land prices and build a rental apartment building when you throw in construction costs and the tax policies of the city of New York in terms of how they assess property,” said Steven Spinola, president of the real estate board.
Spinola said any program to encourage more rental housing — both market-rate and affordable — might include two different tax assessment formulae: one for condominiums and one for rentals.
Industry experts say that, at any one time, there is a portion of the population seeking rentals for more flexibility, and not everyone wants to invest in a condominium.
“Condominiums have become very popular, because people also see it as a favorable investment,” said Andrew Oliver, a managing director and principal at investment banking firm Sonnenblick-Goldman. “But if the market turns, a condominium can become an illiquid investment.”
Also, many people, including the next generation of young residents the city would like to attract, are priced out of the current condominium market.
“As more and more people come into the city, especially young people looking to start their careers, there needs to be more affordable housing and rental units for them just to be able to live and work in the city,” said Nick LaPorte, executive director of the Associated Builders and Owners of Greater New York, a building trade organization. “Otherwise, they’ll leave for the suburbs or never come to the New York City area at all.”
That means companies may begin looking elsewhere, the suburbs in New Jersey or Upstate New York, for instance, to locate closer to their employees, Gosin said.
“The best thing for the New York City office market, aside from continuing to improve the school system, would be to create an incredible stock of low- and middle-income housing,” he said. “Because if people are here to be employed, it will make it more attractive for companies to be here.”
Earlier this year, Mayor Michael Bloomberg pledged to build 92,000 new affordable homes and preserve 73,000 existing affordable homes by 2013. Those 165,000 apartments and houses will be enough to house half a million people, the mayor said. Some will be rentals and others co-operatives. Preserving homes means stanching the conversion of the existing 250,000 units of government-assisted housing in the city to market-rate units.
But residential developers have been lamenting for years that market-rate rental apartments are no longer feasible in New York City, and even affordable rentals — which can receive a mix of tax abatements, government subsidies, zoning bonuses, and other incentives — can be an unattractive proposition in the current hot real estate market.
Making things more difficult is that while the prices of condominiums have flattened, the cost of land in New York City isn’t going down.
“It’s just so hard to build affordable apartments in the city right now,” said LaPorte, whose group has many members involved in building and managing affordable housing in metropolitan areas. “Basically, because the cost of land and labor, as well as construction materials, is so expensive that you need help from the government.”
Bruce Becker, president of Becker + Becker Associates, served as developer, architect, and planner on the Octagon, a 500-unit luxury rental development that opened on Roosevelt Island April 17. Becker said he developed the complex on land leased from the state’s Roosevelt Island Operating Corporation, which made the project feasible.
Sonnenblick-Goldman handled financing for the project, Oliver said, and raised $150 million to get it off the ground. “The developer had some tax credits,” he said. “There were old buildings on the property that he renovated, so he got a historic tax credit. He was able to sell and count that as equity. He also built a very environmentally-friendly building, so he got green tax credits. And he put in a daycare for even more credits.”
While Becker opted out of the 80/20 program — a city program that uses tax-exempt bonds to finance the construction of multifamily rental housing as long as 20 percent are affordable for low-income tenants — he did choose to dedicate 100 of the units as affordable for middle-income residents.
The project is chock full of amenities, from a swimming pool, tennis courts, fitness center, and 24-hour doorman, while apartments with luxury finishes start at $1,570 a month for a studio with home office. The demand is there, Becker said. As of mid-April, 130 units had been rented. “I’m glad we got started when we did, because the costs have escalated significantly since then,” he said. “I would say the project wouldn’t be viable today on the same ground-lease terms.”
Emily Youssouf, president of the New York City Housing Development Corporation, which issues bonds for affordable housing, said there are a number of financing programs available to developers planning affordable housing. One of the latest, begun about 18 months ago, is a 50/30/20 program, which enables developers to obtain low-cost financing for their projects in return for offering a blend of market-rate, middle-income, and low-income housing.
“What we like about this program is we’re economically integrating buildings,” Youssouf said. “Then you can economically integrate a neighborhood, and that stabilizes it. You go into these buildings, and you can’t tell which apartment is 50, which is 20, which tenants belong where.”
Some were skeptical about the program. Oliver said it helps somewhat, but most of those projects are being done north of 100th Street in Manhattan, because it’s the only place land is cheap enough to do them.
Gosin said the 50/30/20 program can work especially if combined with other incentives such as zoning overrides where the city gives away air rights for free, thereby undercutting high land costs.
“The one I’m involved in will create an enormous amount of housing, but part of it is market housing,” Gosin said. “This will probably be rentals, but one way to do it is to allow market condominiums to be at the tops of buildings where the best views are, and allow additional air rights, in exchange for building some moderate- and low-income housing.
“It’s zoning, very aggressive and generous zoning, with some government funding and some tax relief,” he said.
Spinola said rentals can be done with condominiums, but it requires a complicated legal process where a building must be a condop.
Gosin said that, in a perfect world, more could be done to promote rentals. “Perhaps one thing to look at would be wider berths of areas where you could transfer air rights,” he said. “So you could transfer rights from one location to another, though they’re not necessarily adjacent to one another.”
Upkeep needed as much as new buildings
Preventing a shortage of rentals in the city means maintaining existing housing as well as constructing new buildings. Many of the government incentives that exist and that are being explored aim to help preserve existing affordable housing.
“If all you did was new construction and didn’t help preserve what’s already there, you would always be in a losing situation,” said Emily Youssouf, president of the New York City Housing Development Corporation. “So we have a lot of programs that target preservation as well.”
Maintaining and improving existing rental buildings is a niche that some developers are profiting from.
Ioannis “John” Danalis, principal of Blue Star Properties, for example, said his company specializes in buying under-performing rental buildings, removing low-rent tenants, spiffing up the buildings, and maintaining them as market rentals — instead of converting them to condominiums.
“Each property is different,” said Danalis, a landlord with buildings in Greenwich Village, Soho, and Tribeca, among other neighborhoods. “Some properties need major capital improvements, and by doing that, you’re increasing the rent roll you’ll be able to charge the tenants. At the same time, you’re minimizing your costs, so at the end of the day, there’s more money in your pocket.”
Depending on the extent of capital improvements, there are tax abatements available, Danalis said. And with rents projected to increase by 15 to 20 percent in the coming year, he said the projects make sense.