New York’s $72.45 Question: When Policy Prices Housing Out of Reach

There is a number quietly shaping the future of housing in New York City: $72.45 per hour. 

That is the minimum all-in compensation required for construction workers on certain residential projects over 150 units under the state’s 2-year-old 485x development incentive. At first glance, it may seem like just another regulatory detail. In reality, it is one of the most powerful and least discussed forces constraining housing production in our city today.

To understand the significance of $72.45 per hour, you have to put it in context. That figure translates to roughly $150,000 per year on a full-time basis. That is not a typical wage in New York City — that is an upper-tier income. And, yet, under current policy, it has effectively become a mandated floor for large-scale residential construction.

What makes this even more striking is how it compares to other professions. Many architects, engineers, accountants and financial analysts — people with advanced degrees and years of training — earn less than that on an hourly basis. Registered nurses, teachers, police officers, and firefighters (the backbone of our city) typically earn less. Even many attorneys outside of the largest firms do not consistently reach that level.

This is not an argument about what construction workers “deserve.” It is an observation about economic reality. When a wage floor for one category of work materially exceeds the earnings of most other professions in the same city, it is no longer just a labor issue. It becomes a structural issue that affects the feasibility of entire industries.

In this case, that industry is housing development.

Construction labor is one of the largest cost components in any residential project. When wage requirements are pushed to levels like $72.45 per hour, total construction costs rise dramatically. Developers do not absorb those costs out of goodwill or excess profit. They respond rationally. Projects either become smaller, get redesigned, or simply do not get built at all, which is the worst of all outcomes.

We are already seeing this play out in real time. Developers across the city are spending enormous amounts of time trying to avoid triggering these wage thresholds. Sites that could support 150, 200 or 300 units are being carved up into smaller projects (often 99 units) simply to remain below the line. Instead of maximizing housing production, policy is actively encouraging the opposite.

But the distortion does not stop at unit count. It ripples through the entire development equation.

When a developer builds one 300-unit building, there is one foundation, one lobby, one set of elevators, one roof, one mechanical system and one construction mobilization. When that same site is split into three 99-unit buildings, many of those elements are duplicated. You now have multiple foundations, multiple cores, multiple mechanical systems and repeated soft costs (architects, engineers, permits and mobilization) layered on top of each other.

Those redundancies are not marginal. They add significantly to construction costs.

The result is a materially higher cost per unit. And when the cost per unit rises, something has to give. In most cases, that “something” is the price a developer can afford to pay for the land.

Land value is not arbitrary. It is a residual: what is left over after all costs are accounted for and a reasonable return is achieved. When construction costs increase due to wage mandates and inefficiencies from artificially smaller buildings, the residual shrinks. That means the amount left over that the developer can pay for the land declines.

And when land values decline, sellers take notice.

Property owners are not compelled to sell into a market where pricing does not meet their expectations. Many will simply decide not to sell. They will wait for better conditions, better pricing or a more rational policy. That is entirely rational behavior. But when sellers don’t sell, transactions don’t happen. And, when transactions don’t happen, projects don’t get started, and housing units are not built.

This is how a wage policy aimed at one segment of the market cascades into a reduction in housing production.

Fewer transactions. Fewer sites traded. Fewer projects launched. Fewer units built. All while demand continues to grow.

The unintended consequence of policies like 485x’s pay requirement is that they do not just raise wages. Importantly, they raise barriers. When the cost of building crosses a certain threshold, capital steps back. Lenders get more conservative. Equity demands higher returns. Marginal projects, which often include all-important workforce and middle-income housing, simply disappear.

What remains are only the projects that can support the highest rents or the deepest subsidies. Everything in between gets squeezed out. That is how you end up with a housing market that is simultaneously undersupplied and unaffordable. This is exactly what we have in New York City today. 

It is important to recognize that this is not how labor markets typically function. In most industries, wages are determined by supply, demand, skill level and productivity. Here, wages are being set by policy at a level that overrides those dynamics, and the ripple effects are profound.

Again, this is not about being for or against organized labor. New York has a long and important history of unionized construction, and that has played a role in building one of the greatest cities in the world. But there is a difference between supporting fair wages and imposing wage structures that make the next generation of housing economically unviable. Policy should be designed to encourage production, not suppress it.

If the goal is to create more housing (and it should be), then we have to align incentives with that objective. Right now, we are doing the opposite. We are attaching cost structures to projects that make them harder to build, and then we are acting surprised when production falls short — or when 41 of 42 building permits issued since 485x went into effect are for buildings under 100 units. 

The $72.45 question is ultimately a simple one: Do we want more housing, or do we want to make housing more expensive to build? Because we cannot have both.

Until this disconnect is addressed, we will continue to see rational actors respond rationally. Developers will keep building smaller. Landowners will keep holding. Capital will keep moving to less constrained markets. And New York City will continue to fall further behind in addressing its housing needs.

In the end, the laws of economics are not suggestions. They are constraints. And when policy ignores those constraints, the outcome is entirely predictable.

Less land trading. Fewer buildings. Fewer housing options for residents. Higher rents. And a city that becomes increasingly unaffordable for the very people it depends on most.

Robert Knakal is founder, chairman and CEO of BK Real Estate Advisors.