Lincoln Restler’s vacancy proposal is a red flag for real estate
Will the industry and its detractors ever get on the same page about empty space?
Lincoln Restler is not a socialist. He doesn’t want to socialize private property for affordable housing and pet projects, as some New York City politicians do.
But the City Council candidate has hatched a plan to force landlords to keep reducing the rent on vacant apartments and storefronts until a tenant signs a lease.
“I’m not saying this proposal is a panacea,” Restler, a Brooklyn native and former aide to Mayor Bill de Blasio, said in a recent interview. “But we have a very serious problem with the commercial vacancies that have resulted [from the pandemic] and a larger spike in residential vacancies. And we need new and bold solutions.”
Restler’s proposal might barely register on real estate’s radar. He does not even hold office, and in any case, the industry has been beating back commercial rent control schemes for decades.
But real estate was on the winning side of other issues before it got thumped on rent stabilization and saw major rezonings die in Bushwick, the South Bronx and Sunset Park. Moreover, Restler is a proven campaigner with a solid chance to win. To ignore his plan would be a risk.
It would also be a missed opportunity — for real estate and its enemies — to get policymaking right for a change.
Although Restler is an activist, he is not an ideologue. Make a rational argument and he will at least listen, which cannot be said for those who cast all landlords and developers as evil. Restler might not take real estate’s money, but he would take a meeting.
RESPECT THE DATA
For fans of more regulation, the plan offers a chance to rethink how they approach real estate policy. Restler said his plan might not be perfect but would start a conversation.
It will also start an argument. Landlords are suffering from pandemic vacancies and nonpaying tenants, and rather than offer aid, Restler would make them slash rents.
That point — made by a prominent real estate figure, who declined to comment on the record — is understandable. But this is not about who deserves what. Rather, it’s about making policy that works.
That requires looking at data and letting go of false assumptions.
Many New Yorkers believe there are too many vacancies and that rents never go down. Restler points to the surge in apartment vacancies since Covid struck. Why, he asked, haven’t rents fallen by more than 1 percent? Why aren’t landlords dropping prices enough so the city’s 60,000 homeless people and perhaps twice as many doubled-up New Yorkers can afford a home of their own?
It turns out that rents have fallen by far more than 1 percent. Jonathan Miller, a longtime tracker of city rents, said net effective rent in August was down 11.4 percent on studios and 11.7 percent on one-bedroom apartments, year-over-year. That suggests rents are dropping as supply increases, exactly as economists would expect.
While some people believe New York City rents defy gravity, others are taking advantage of the reductions.
“I am so excited for my move back to NYC in October!” artist Joe Ovelman wrote on LinkedIn last month. “I couldn’t be happier about the drop in rent prices.”
An apparent paradox in the city’s perpetual housing debate is that many units are vacant, yet it’s hard to find affordable housing.
Restler was wrong about rents not falling, but he is right that a huge percentage of New Yorkers are rent-burdened. This he attributes to developers oversupplying luxury units and undersupplying affordable ones.
“Luxury development has overwhelmed our communities while developers have totally failed to build the housing we need,” said Restler, who hopes to represent Downtown Brooklyn and Williamsburg, where pricy apartment towers have sprung up like beanstalks.
Regulation is needed to correct this market failure, he argues.
Markets require regulation. But knowing if they truly failed, and if so, why, is crucial. In New York, two caveats are worth mentioning.
First, the rent burden in New York City is real, but comparisons to other places are imperfect because the city’s transit system, which offers unlimited rides for $1,500 a year, renders car ownership (an estimated $8,000 a year) unnecessary. That frees up more of a household’s budget for housing. Texas Monthly recently calculated that when transportation costs are factored in, development-friendly Houston is less affordable than New York.
Second, between rent stabilization and public housing, about 60 percent of the city’s rental units are priced below market-rate, ensuring that their vacancy rates remain low.
The artificial divide between rent-regulated and market-rate apartments makes the city’s housing market harder to assess. But in any market it is good for renters if vacancy is high. With no laxity, it would be hard to find a place to live and rents would be steep. That is why New York State law deems vacancy of less than 5 percent to be a “housing emergency.”
Yet Restler saw vacancies rising toward 5 percent and pitched a measure to drive the rate down. He is not alone among activists who seek to end the housing emergency by perpetuating the low vacancy rate that defines it.
Until they resolve that contradiction, reaching a consensus on sensible housing policy will be impossible. But it’s hard for people to grasp that having, say, 100,000 empty units — 5 percent of the 2 million rentals — would be good for the city.
As Howard Husock of the Manhattan Institute noted in a 2018 op-ed, apartments become available more rarely in New York than any U.S. city. It takes 99 months, on average, to get a Housing Authority unit, and nearly 1 in 4 rent-stabilized apartments has had the same tenant for more than 20 years.
“Just as in public housing, empty nesters with no incentive to downsize stand in the way of newcomers,” Husock wrote of rent-stabilized units. “In a city such as New York that has long been a magnet for the young and talented, these newcomers may have to live, dorm-style, with two or more roommates.”
When they do so, they often outcompete families for three-bedroom apartments. And the market grows tighter.
To be sure, Restler aims to reduce vacancies by making empty “luxury” units affordable. It is a common belief that landlords keep apartments empty for years in search of elusive high-paying tenants. In reality, it is hard to keep lenders at bay for so long. Developers borrow gobs of money to build, and if they cannot rent or sell the apartments, they are likely to default and lose the property to foreclosure.
Ultimately, a unit’s price is reduced to what the market will bear and is filled by someone who might otherwise outbid someone else for housing. That’s why supply-siders say even luxury buildings alleviate the city’s housing crunch.
But this trickle-down theory of housing does not appeal to affordability advocates. They want low-cost housing made available now, and say developers don’t provide it because luxury units are more profitable.
Developers counter that without subsidies, only luxury units are profitable, given the high cost of land and construction. Land costs depend on a property’s profit potential, which is primarily a function of the market.
PUSH AND PULL
Restler’s issues with storefront leasing are similar.
“You too often see a landlord holding on to his commercial space hoping and praying for a corporate tenant to come along,” he said. “We need to do everything we can to activate these spaces and ensure that our neighborhoods have essential services within walking distance of New Yorkers.”
Historically, though, the market has done this well. Dry cleaners, grocers, restaurants, hardware stores and the like are spread proportionally throughout the city’s commercial corridors.
“If you ask any owner, they will tell you that they want their space occupied rather than empty,” said Paimaan Lodhi, a senior vice president at the Real Estate Board of New York. “There are certainly constraints. You can’t rent a space for less than your mortgage and tax payments.”
Finding a retail tenant can take 18 months, Lodhi said. That would mandate a 50 percent rent discount under Restler’s plan.
For years, real estate interests and progressives have been talking past each other, stuck in an endless loop on these points. It is why the socialists want to seize the land and the progressives want to regulate rents. But Restler did point out something that many affordability advocates miss: For a decade, only 19 units were built for every 100 jobs created in the city. With such a supply-demand discrepancy, legislating lower rents is like trying to hold back the tide.
Luxury housing prices, however, have been falling for about five years. Projects that missed the condo boom are in trouble. The market is not perfect. But the takeaway from the past decade is that if jobs outpace housing growth, the most profitable housing is what gets built.
You too often see a landlord holding on to his commercial space hoping and praying for a corporate tenant to come along. We need to do everything we can to activate these spaces. Lincoln Restler
The question for Restler, then, is not how to legislate rents down, but how to get more modest-priced housing up. Capitalists supply generic toilet paper as well as Charmin, Toyotas as well as Teslas. In most of the country they build housing for the markets they serve. They are not different animals in New York. Trying to legislate real estate decisions, such as asking rents, rather than addressing the reasons for them is a losing game.
Most of the city’s zoning is low-scale or outdated, and projects needing new zoning are always shrunk by the City Council. On top of that, the jobs boom was so robust that housing development simply could not keep up. That’s the affordability crisis in a nutshell.
Covid has changed all that. The market is loosening up and rents are coming down. This was not how anyone wanted to ease the housing crunch, but it proves that the laws of economics remain in effect.
Understanding those laws is crucial to crafting policies that will keep improving affordability when the pandemic ends. Insisting that economics does not apply to the New York City housing market will do the opposite. If Lincoln Restler and the next generation of political leaders cannot agree with the real estate industry on a basic set of facts, the fundamental problem will remain unsolved.