The Real Estate Board of New York to The New York State Assembly Standing Committees on Housing and Cities related to assessing the various housing needs across New York State

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REBNY thanks the committee for the opportunity to provide testimony today on New York State’s housing needs.

New York City is in the throes of a housing crisis, marked by a severe lack of new production and, consequently, an absence of affordable housing needed to meet the City’s diverse socioeconomic needs. According to the Department of City Planning: “Irrespective of the considerable spikes in 2015 and 2022 and NYC’s contribution to the region’s total permits, the overall production per capita in the region for the decade fell behind fast-growing U.S. metros, namely those in the Sunbelt like Orlando, Houston, Dallas-Fort Worth, Phoenix, and Atlanta.”

The Private Sector Must Be a Part of Solving for New York Housing Needs

Both the Mayor and Governor have set a goal of 500,000 new units in the next decade in New York City

This would require a significant increase in housing production over historic levels, targeting 50,000 new units on an annual basis. We are far from that level of production. According to REBNY’s October press release on construction activity, and the New York Building Congress 2023-2025 New York City Construction Outlook Report, New York City is on track to begin construction on approximately 11,000 new units by the end of this year, well below the roughly 50,000 units a year needed to meet the City’s needs.

Since the expiration of 421a, there’s been no uptick in not-for-profit or government development to make up for the deficit. This is because the construction of affordable housing by these actors is inherently constrained by the City budget capital allocation, Federal policy on private activity bonds, availability of municipal land, and staffing levels at the relevant City and state housing agencies.

The private sector is an important stakeholder and contributor to the production of housing. A New York Housing Conference report found that the amount of affordable housing the City can finance is typically only 20% to 30% of what the private market is building. According to research conducted by Furman Center faculty, increases in housing supply decrease or slow rent growth across a given jurisdiction and sometimes reduce rents in the surrounding area. A study by the Pew Charitable Trust echoed this finding. In addition, the Furman study shows that the chains of movements activated by new market rate housing and the alternatives that new construction gives higher-income households work to free up older and less expensive units for other people to move into. A Rand Research Report focused on supporting housing affordability echoed that increased housing production will lead to increased affordability.

New York City’s affordability crisis will persist without tools that allow supply to contend with demand.

Necessary Tools to Spur Housing Production and Increase Affordability

REBNY supports the commitment to addressing the lack of affordable housing in New York City and maximizing the public benefit derived from new City-financed housing development. To effectively tackle this crisis and develop lasting solutions, we must adopt a comprehensive approach that fosters collaboration amongst the city, state, and private sector.

We hope to see attention and movement on several previously discussed ideas. New York contends with some of the most exclusionary zoning practices in the country, given the absence of legislative tools aimed at promoting land use reform and housing production. This deficiency has resulted in a landscape with a diminished housing supply, escalating rental costs, and deepened segregation. According to a Furman Center report, when zoning restricts the quantity and density of permissible housing, heightened housing demand translates into heightened housing costs rather than increased construction.

That’s why removing the existing 12 FAR cap in the Multiple Dwelling Law (MDL) is so necessary. This one change would require zoning changes at the local level to apply new limits as appropriate. The changes at the city level will require local land use review, including applying affordability requirements under the City’s Mandatory Inclusionary Housing (MIH) program, and environmental review for items like school seats, before any limits above 12 FAR could be implemented. In addition to local public land use and environmental review, such changes to a neighborhood’s density above 12 FAR would also include final adoption by the New York City Council.

Removing regulatory barriers won’t result in more housing if the math doesn’t work. For example, converting obsolete office buildings in Manhattan into mixed-income, affordable housing would combat our housing shortage and ensure equitable contributions from high-opportunity neighborhoods. While the local zoning proposal City of Yes for Housing Opportunity will address most of the regulatory barriers to conversions outlined in the Office Adaptive Reuse Task Force’s 2023 study, State action is still necessary to create a tax incentive to spur the creation of affordable housing as the result of a

conversion. Such a tool should be voluntary and be priced to encourage uptake, in accordance with best practices from around the country in incentivizing mixed income rental housing production in what is inherently a challenging adaptive reuse project.

Importantly, the completion deadline for 421-a(16) projects must be extended. Extending the deadline from June 15, 2026 to June 15, 2030 will safeguard the construction of 33,000 units at risk due to the existing deadline, a REBNY member survey found. Making sure shovel ready projects move forward will prevent a further bottoming out of our future housing pipeline.

The lapse of the 421a program in June 2022 has further exacerbated the City’s already low rate of housing production. According to NYU Furman Center, most multifamily units, nearly 70%, completed between 2010 and 2020 were built using a 421-a exemption. Therefore, implementing a 421a replacement program is essential in boosting the statewide supply of rental housing, with its ability to cross-subsidize both market rate and affordable housing units in high-cost regions. Without an as-of-right tax abatement, affordable housing will only be built in low-income neighborhoods where land costs make construction financially feasible.

A replacement program for 421a should continue the concepts regarding wage policy found in earlier versions of the program including the payment of prevailing wages for building service workers and above-market rate wages for construction workers. In 2021 REBNY was pleased to be able to reach agreement with unions representing building service and construction workers on these two important pillars in the context of the Governor’s proposed 485-w. In addition, policymakers should consider the inclusion of a requirements that developers make a good faith effort to award a share of construction contracts to MWBE firms.

The Economics of Building and Operating Housing

In developing incentives for multifamily rental construction, several economic fundamentals should be kept in mind: 1) the cost of construction, 2) the cost of operating housing, and 3) the cost of money to borrow to pay for construction and operation.

Per the New York Building Congress, construction costs in New York City are 1.5 to 2x higher than anywhere else. Within the city, costs vary based on several factors, including geography, building size (stories, square footage, and unit count), and construction type. Cost drivers include high land costs due to limited density and a highly regulated land use process, hard costs such as construction labor and materials, and soft costs like permitting, design, and engineering. In addition, about 10% of construction costs go to insurance. As development costs, including construction costs increase, it becomes more challenging to also deliver lower AMI or more deeply affordable apartments in mixed income projects.

On the operating side, apartment rents must pay for operating expenses such as employee salaries, utilities, and insurance, and property taxes. In New York City, property taxes are typically the highest expense as new multifamily rental buildings pay about 30 percent of its income in property taxes. It is

important to be mindful that with “affordable” apartments, rents are set based on tenant income rather than expense, often leading to a gap between the rent collected and the cost of building and operating that affordable unit.

After expenses, owners must have enough leftover funds, or net operating income (NOI), for debt service, capital improvements, and profit. Development includes a lot of risk compared to buying bonds or investing in the stock market. Therefore, the return on risk involved in going through the gauntlet of the NYC development process must be higher than what an owner would make from investing in something less risky. For individual owners, the personal incometaxes of the property owner must also be paid out of NOI. Understanding these economics is important because lenders will not provide debt, and developers will not choose to build, if the projects do not generate adequate returns.

These same fundamentals apply to the existing housing stock.

Over the last several years, New York City’s multifamily rent stabilized housing stock has experienced multiple “shocks” that adversely impact revenue and building value, and, in turn, increase the risk of default. These shocks include extended periods of non-payment, as trackedby the National Multifamily Housing Council, and over a year of volatility with inflation and increasing interest rates. Rising interest rates have increased the amount owed to lenders and made access to new debt more expensive at the same time as property values have decreased. Therefore, debt risk has increased as the money necessary to pay that debt has decreased in the existing, stabilized building stock.

For the City’s nearly one million rent regulated units, Rent Guideline Board (RGB) increases are the only system-wide lever to adjust rent to expense growth, and they have failed to match expense growth. According to the 2023 RGB Price Index of Operating Costs (PIOC) Report, operating expenses have continued to climb, with fuel costs and insurance increasing 40% and 53%, respectively, and property taxes commanding the top expense driver year over year.Additionally, net operating income (NOI) decreased 9.1% overall. This means there is less money left to pay for debt service at a time when that debt service costs more (higher interest rates) and less money to pay for repairs when those repairs cost more (inflation). In Spring 2023, the Rent Guidelines Board found that the number of stabilized, distressed buildings increased for the fourth year in a row.

When existing housing stock falls into disrepair, or an owner can’t pay back loans, it means worse housing for existing tenants and fewer options available for people to move into. The Federal Reserve recently conducted a comprehensive studyto explore the impact of financial constraints on building maintenance and tenant welfare, which identified a correlation between financial constraints and an increase in code violations for the affected buildings. Furthermore, the study analyzed the effects of statute changes, much like the ones adopted in 2019, that reduced the expenses property owners could recover through improvement costs. As a result, a notable increase in financially constrained buildings and a subsequent rise in violations per building were observed, compared to unaffected buildings in the control group. Restricting rents contributed to a decline in overall building maintenance.

Keeping buildings in good physical condition for the people who live in them will require public policy interventions to address the increasing gap between rising expenses and severe limits on rent growth. Policies that support reinvestment in properties will ensure better quality housing for tenants.

Lastly, we strongly support policy tools that will address rent burden and help people pay the rent without destroying the economic viability of maintaining that housing for tenants. These include a Statewide Right to Counsel (S2721/A1493), fully staffing housing court to get tenants enrolled in existing programs, and filling gaps in the existing voucher programs to keep families stably housed with the adoption of the Housing Access Voucher Program (HAVP).

REBNY looks forward to working with a broad range of stakeholders, including public officials, labor unions, and other advocates, to address New York’s housing crisis.

Thank you for your consideration of these points.