Rethinking Rent Regulation
Robert Knakal Feb. 20, 2013, 9 a.m.
One of the most prominent needs in the New York City real estate market is affordable housing.
With the expected growth in our population over the next couple of decades, it is imperative that work-force housing exist. This is housing for police officers, firemen, teachers and the scores of other workers who make this city run. An insufficient supply of affordable housing for these folks is a critical issue for the economic well-being of the city that future local administrations will have to address.
Most of our elected officials continually, and inaccurately, refer to our rent-regulation system an “affordable housing” program. Rent control and rent stabilization do not create affordable units as options for our current work force.
In fact, rent regulation actually does just the opposite, as it reduces the number of options for new residents coming into the marketplace. There are 3.3 million dwelling units in NYC, but someone new coming into town looking for an apartment really has only 2.3 million “choices,” as 1 million units remain stuck in the rent-regulation system.
This constraint on supply means that market-level rents are artificially high due to the artificially low rents paid by folks who have been in apartments for a long time. Study after study shows that in the absence of price controls, market prices are lowered. Getting rid of rent regulation would mean more choice and lower rents for the overwhelming majority of New Yorkers. It would also mean lower property taxes for those in free-market properties, as currently regulated properties would begin to contribute an appropriate level of taxes.
No I haven’t lost my mind—I don’t expect rent regulation to go away anytime soon. But the program’s existence undeniably exacerbates the housing problems we have here. Until the nonregulated residents of New York realize that they are paying higher rents and higher property taxes than they should be because they are the ones subsidizing rent-regulated tenants, and they become vocal about it to local politicians, rent regulation isn’t going anywhere.
Another negative aspect of rent regulation is that the benefits of subsidized rent levels create motivation for occupants of these units not to move, regardless of whether the unit’s size is appropriate for them or not. Therefore, we have little old ladies living in three-bedroom apartments by themselves and families of four or five living in one- or two-bedroom apartments. This misallocation of our housing stock is not good for the city.
Furthermore, the fact that these rent subsidies are given out based on inertia rather than need, as there is no means testing on rent regulation, means that this program does not address the affordability issue.
So how does the city create the affordable work-force housing that is so desperately needed?
One idea would be to bring back the 421a program in its original form to create needed affordable units. Changes to this program were precipitated by elected officials who don’t fully understand the program.
Another idea is to create a citywide 421g-type program to incentivize the private sector to convert obsolete office buildings into affordable housing. There is an oversupply of office space presently, and removing some excess space would simultaneously strengthen the office-space market and create affordable housing.
Lastly, the city could stimulate the creation of additional affordable housing units by providing FAR bonuses. Giving FAR bonuses in ratios of 3 to 1, or 4 to 1, to developers doesn’t cost the city a dime. It just takes the political will to address those who will inevitably complain that larger buildings are blocking out the sun or are creating negative impacts on the quality of life.
If these no-cost incentives are created properly, it is very likely that affordable units will be created by the private sector, eliminating the need for the government to try to figure out how to provide these units and creating a more livable city.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services; in his career he has brokered the sale of more than 1,300 properties with a market value in excess of $9 billion.