When Policy Impacts Use, Bad Things Can Happen
This morning on my walk to work, I stopped by the film developing shop to drop off my roll of 36 photos I took this weekend, walked into the video rental store to return the movies I rented last week and visited the typewriter store to see if I could get a replacement ribbon for my Underwood.
You must now be thinking that I cut and pasted the intro to this column from one I wrote in the 1980s. (Although it would have had to be a literal cut-and-paste job involving scissors and rubber cement.) While advances in technology have made several things obsolete, supply and demand within a free market system dictates what survives and what doesn’t. However, public policy can artificially alter this supply/demand dynamic. Lobbying groups often impact public policy, and unions are among the most powerful lobbying groups in New York. Perhaps if the film developing business or typewriter manufacturers had powerful union representation, these businesses might still be prevalent all over the city. It is this union influence that is the only plausible explanation for the recently passed legislation by the New York City Council, subsequently signed by the mayor, creating a two-year moratorium on the ability of owners of buildings used as hotels to convert their properties to alternative uses. This position is supported by the fact that there was no public outcry to protect local neighborhood hotels, or any hotels for that matter. Who would support such legislation other than the folks who are trying to protect the jobs in those properties?
New York has some fairly crazy laws. Eating while swimming in the ocean is against the law. It is against some town ordinances to camp out for more than 72 hours per month, even on your own property, without a permit. And, during concerts, it is illegal to eat peanuts while walking backwards on the sidewalk. This recent moratorium on hotel conversions seems to be right up there with these other zany laws.
There are presently about 110,000 hotel rooms in New York City and the type, and geographical diversity, of this stock has been changing significantly in favor of the customer. Almost 15,000 new rooms are either planned or are presently under construction. Add to this supply the tens of thousands of residential that which have become de facto hotel rooms through Airbnb and there is clearly no risk of a constrained supply of rooms. So, why would preservation of existing rooms be necessary?
The first three kooky laws mentioned above don’t have much potential for unintended consequences. However, the moratorium on hotel conversions has potential for significant unintended consequences, which could include the following.
Over the long term, natural market forces have effectively allocated the use of buildings within the marketplace. Use 141 East 44th Street as an example of the market’s dexterity. It was built as a residential apartment house decades ago. In the 1950s, when office space was in short supply, the building was vacated and converted to an office building. Due to the nature of the office space in the property, it couldn’t keep up with market office rents and, with the hotel market surging, the building was sold in the 1990s and converted to a hotel. Restricting a change of use exacerbates a misallocation of our total square footage.
Conversion of hotels to residential space (the most common use conversion) creates desperately needed housing units, generates construction jobs, creates transfer tax income for the city and state and generally leads to higher real estate taxes. If conversions are prohibited, the housing units, jobs and additional revenue are not realized.
And what is the impact this legislation could have on investment? Relative economic and political stability are among the main reasons why foreign capital seeks investment in the U.S., and New York is a prime destination for this capital. Arbitrarily prohibiting property owners from being able to change a property’s use to any other use allowed by zoning reduces the attractiveness of all real estate investments. What prohibition is going to be next?
The legality of this legislation has also been called into question. Does this legislation effectively create a “taking” without compensation, which is a contradiction to the Constitution?
As a real estate professional, finding the logic in this new law is challenging. Particularly with so much potential downside, why would the City Council and the Mayor pass this legislation? The strength of policy influencers seems to be the only answer.