Hochul Has High Hopes for NY’s Housing Deal, but Developers Need to Do Some Math

The leaders of the state senate and assembly were by her side this time, and Mayor Eric Adams was there too, beaming at Hochul as no mayor has beamed at a New York governor in recent memory.

The deal contains a lot of carrots and almost none of the sticks Hochul had on her housing agenda 18 months ago. 

It will incentivize mixed-income housing construction and office-to-residential conversions through new tax abatements for developers, and it also rolls back a component of the state’s landmark 2019 tenant protection act that rent-stabilized landlords say has become a thorn in their side while also adding new rules to tamp down the city’s sky-high rents in unregulated buildings. 

Even with the jubilant feeling of Hochul’s Tuesday victory lap, both sides of the real estate coin weren’t exactly popping champagne over the housing plan. Advocates think that the provision to help save tenants from eviction notices was a “sham” while developers feel her long-awaited replacement for the 421a tax abatement doesn’t make deals pencil out to spur more affordable housing.

“It’s hard with the labor numbers where they are,” Scott Rechler, CEO of developer RXR, said about the newly created 485x tax break. “And in some of our projects that are in the areas where 60 percent [area median income] is the affordability you need to meet, that may make it too difficult to make the numbers work.”

The Real Estate Board of New York estimates the wage provisions baked into 485x will increase construction labor costs by about 20 percent on average, though the effects will vary by building size and location, among other factors. Plus, income-restricted units will need to meet a deeper level of affordability to qualify, and that means less revenue over the long term.

“It’s sort of death by 1,000 cuts,” said Reggie Thomas, senior vice president of government affairs at REBNY. “Not any one single piece is going to be the reason why a developer decides to build or not. It’s everything all together.”

Still, developers did have some things to celebrate in the housing plan.

The quickest effects will be felt by developers whose projects have stalled since the state’s 421a tax abatement expired in 2022, according to Daniel Bernstein, a real estate lawyer with Rosenberg & Estis. Many will take a shot at reviving those plans thanks to the seven-year extension of a modified version of the old 421a state lawmakers added into the plan.

The extension could revive up to 72 projects in New York City, comprising 33,000 housing units, that fell into jeopardy after the tax abatement expired, according to a survey by REBNY in December 2022.

Bernstein estimated the figure is likely even higher since some of his clients had large developments underway when 421a expired, though they never reported their intention to apply for it before. 

“That’ll take a little time to ramp up, but in the last 24 hours I’ve already had many conversations with people who could use the extension to easily produce thousands of units if they can get financing and resume construction,” Bernstein said.

Aside from the 421a extension, Rechler said he was excited for RXR to take advantage of the state’s new office-to-residential tax abatement. It will quicken the pace of these projects, he said, and has him reevaluating the number of apartments RXR is considering for a planned conversion of a Manhattan office building.

“The conversion piece hit right in terms of enabling people to do it and do it quickly,” Rechler said. “It gave an incentive to get it done before 2026, so people are moving at a faster pace right now.”

Rechler wasn’t alone with praise for the abatement, with SL Green (SLG) Realty CEO Marc Holliday approximating in an earnings call it would enable the conversion of between 25 million to 40 million square feet of office to housing.

Meanwhile, rent-stabilized landlords are rolling up their sleeves to look at the new “Individual Apartment Improvement” caps, which permit bigger rent increases for capital improvements in rent-stabilized buildings than the state’s 2019 tenant protection law allowed.

Rafael Cestero, the CEO of the nonprofit affordable housing lender, Community Preservation Corporation (CPC), became a major stakeholder in the city’s rent-stabilized housing stock through CPC’s acquisition, with Related Fund Management and Neighborhood Restore HDFC, of Signature Bank’s $5.8 billion rent-stabilized loan portfolio last year.

While something is better than nothing, Cestero thought the caps could’ve been more generous.

“The individual apartment improvements cap that was put in the 2019 bill was not enough,” Cestero said. “What rent-stabilized property owners are struggling with is essentially stagnant revenues in the face of ever-rising expenses. This is not going to solve all the problems, but I think it’s progress, and progress is really important.”

That’s good since it’ll be at least five years before any prospective 485x projects get underway, according to REBNY. But that gives New Yorkers a long time to wait for new units, with the lack of affordable housing “a real issue,” said Manny Pastreich, the president of 32BJ. 

A state labor coalition, including 32BJ, fought until the 11th hour to get prevailing wage requirements baked into the state’s new housing tax abatement program, and the temporary breakdown in talks with REBNY reportedly helped delay the budget’s passing by three weeks. Pastreich said the union also supported “Good Cause” tenant protections, which would stop the flow of working-class New Yorkers to New Jersey and beyond.

“More and more people can’t afford to live in the city,” Pastreich said. “Our contract covers wages, benefits, working conditions, rights on the job [and] retirement. But the number one issue that’s not covered in the four corners of our contract is housing, no question.”

In the end lawmakers found common ground on a very watered-down version of “Good Cause,” which protects tenants from capricious rent increases and guarantees lease renewals. Except anyone who lives in a newly constructed building or a luxury building or a building with fewer than 10 units or a building owned by “mom and pop” landlords is out of luck — the law doesn’t apply.

For that, lawmakers from Albany are not getting showered in accolades from tenant advocates, who don’t think it goes nearly far enough.

“Governor Hochul did not solve the housing crisis — instead she pushed through a housing deal written by the real estate industry to ensure they keep getting richer off the backs of hardworking tenants,” Housing Justice for All’s Cea Weaver said in a statement last weekend. “Now, millions of renters across the state will struggle to keep a roof over their heads as rents and evictions continue to rise.” 

Cestero, who was also former Mayor Michael Bloomberg’s pick to head the Department of Housing Preservation and Development, has a long view of the path ahead to solve the city and state’s housing crisis. 

He said the fact that there was at least some movement on housing, with Hochul trying to get a replacement for 421a on the books since it lapsed in 2022, was positive. And the fact that not everybody was thrilled showed the deal was a compromise for both sides.

“Our country was built on compromise. We don’t do it a lot these days, but this deal is the ultimate compromise,” Cestero said. “I think there is absolutely no question that this is essential to more housing production in New York, and any debate otherwise is refuted by the fact that nothing has been built in the last couple of years since 421a went away.”

With additional reporting by Nicholas Rizzi

Abigail Nehring can be reached at anehring@commercialobserver.com.