Record New York Apartment Rents? Blame Policymakers, Not Landlords.

New York City’s market-rate apartment rents are reaching levels that would have seemed unimaginable just a few years ago. In February, the median rent in Manhattan reached $5,000 per month for the first time in history. Brooklyn also set a new record, with median rents climbing to nearly $4,300 a month.

At the same time, vacancy rates in Manhattan remain below 2 percent. Economists generally view a 5 percent vacancy rate as a balanced housing market. When vacancy falls below that level, upward pressure on rents begins to build. When it drops below 2 percent, the market becomes brutally competitive for tenants. Apartments disappear quickly, choices become limited, and rents inevitably move higher.

None of this should surprise anyone.

New York City’s housing affordability crisis is not the result of mysterious market forces or greedy landlords. It is the direct and predictable consequence of public policy that has systematically restricted housing supply for decades.

When policy suppresses supply in a city where demand remains strong, prices rise. That is not ideology. It is basic economics.

One of the most destructive policies contributing to the problem is the current structure of rent regulation. Rent stabilization was originally intended to preserve affordable housing and protect tenants from excessive rent increases. But the way the system operates today has created powerful disincentives for property owners to reinvest in regulated units once they become vacant.

When an apartment becomes vacant, owners frequently face renovation costs that far exceed the rent they are legally permitted to charge afterward. Faced with that reality, many owners simply cannot justify making the investment required to bring the apartment back to market.

The Housing Stability and Tenant Protection Act of 2019 was a severe policy overreach that has had devastating consequences for the quality and availability of New York’s housing stock.

The predictable result is that tens of thousands of apartments now sit empty. Estimates suggest that between 60,000 and 80,000 rent-stabilized apartments across New York City are currently vacant. In a city where vacancy rates are below 2 percent, that number is staggering.

To put that in perspective, New York City typically produces only about 20,000 to 30,000 new housing units in a good year. So, the number of stabilized apartments sitting vacant today could represent several years’ worth of new housing supply.

Those apartments physically exist, but they are not available to renters. They have effectively been removed from the housing stock.

At the same time, rent regulation also creates significant misallocation of housing. A family of five may remain in a two-bedroom apartment that no longer fits their needs because moving would mean losing their regulated rent. Meanwhile, the proverbial little old lady may be living alone in a three-bedroom apartment for the same reason.

Both situations are entirely rational responses to the incentives created by policy. But together they produce a housing stock that is badly mismatched with the needs of the people who live in it. Apartments are not moving to the households that would naturally occupy them in a normal market. That further constrains supply.

Compounding the problem is the failure of the city’s primary housing incentive program, 485x. For decades, New York City relied on tax incentive programs to encourage the construction of rental housing. Without those incentives, the math simply does not work for large-scale housing development.

Between 2010 and 2020, roughly 70 percent of all new multifamily rental housing built in buildings with four or more units in New York City was developed using the 421a tax abatement program or its successor versions. Those programs were not perfect, but they worked. Large buildings were built and tens of thousands of new apartments were added to the housing supply. The replacement program, 485x, is not achieving the same results.

Developers across the city have been clear about the problem. The mandated wage structures and layered affordability requirements embedded in the 485x program make many projects financially unfeasible. Instead of encouraging the construction of large buildings that add meaningful supply, the policy is pushing developers to design projects specifically to avoid the program’s cost triggers. In many cases, projects are simply not moving forward at all.

The result is exactly what basic economics would predict.

Housing supply is growing far more slowly than demand. And, when supply cannot keep up with demand, rents rise. 

Investors understand this dynamic very clearly. One of the most revealing signals in the market today is what is happening to capitalization rates on market-rate apartment buildings. Cap rates are compressing, not expanding. Why? Because investors increasingly believe that rents will continue to rise at strong rates for years to come. When buyers expect sustained rent growth, they are willing to pay higher prices for those buildings today.

Ironically, the very policies intended to make housing more affordable are creating the conditions that encourage investors to bet on rapidly rising rents. Policymakers frequently talk about affordability as their central objective. They hold hearings, release reports, and pass new regulations designed to protect tenants.

But the actual results of those policies tell a very different story.

Tens of thousands of regulated apartments sit vacant. New housing construction has slowed dramatically. Vacancy rates remain critically low. And rents continue to reach all-time highs — and will likely continue to do so.

You cannot regulate your way into affordability if those regulations suppress supply. Housing markets follow the same laws of economics as every other market. When supply is constrained and demand remains strong, prices rise.

If New Yorkers feel like rents have become impossibly high, they should not blame the market or their landlord. They should blame the policies — and the policymakers — that created them.

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