New York City Apartment Construction Plummets in 2025

Apartment construction in New York City has plummeted since last year, all while the city faces “what is likely the worst housing affordability crisis in its history,” according to the New York City Charter Revision Commission.

Housing construction starts for market-rate apartments dropped from an average of 7,500 units per quarter from 2021 to 2024 to just 2,500 units per quarter this year, representing a 67 percent decrease, recent data from CoStar shows.

In addition, the total number of apartment units under construction fell from 71,000 to 47,000 in that period, according to CoStar.

So why the sudden drop in housing construction? A lot of it is due to the new 485x real estate tax abatement program, which replaced the expired 421a program last year.

Both programs were intended to incentivize housing developers to build more affordable residential projects by reducing their property tax burdens, but many of New York City’s top landlords have spoken out against the new 485x, saying it imposes unnecessarily high wage requirements and complicates blueprints.

“When you have a broad-based tax incentive, and that is succeeded by a more narrow, specific type of tax break, which leans more so on affordability of the development and the labor standard of that development, I think that is a major change,” Victor Rodriguez, CoStar’s senior director of analytics in New York City, told Commercial Observer.

“When you increase cost to a developer, they may ultimately decide the juice isn’t worth the squeeze,” Rodriguez added. “The affordability requirements are stricter. The targeted census is stricter. … When you add those together, that just means less return on investment for the would-be developer, and that’s the real change for many.”

Not to mention, New York City is one of the most expensive places to build in the world, and the cost to acquire land and to pay for union labor is “extremely high,” leading to a sharp decline in construction, Rodriguez said. 

That’s also leading to an increase in investments in existing buildings rather than new developments, as “more and more individuals are less likely to sink those costs into a city” and more likely to purchase market-rate apartment buildings because it’s a “simpler investment,” Rodriguez said. The city’s rent growth at 2.7 percent this year is also double the national average, making investors feel better about buying existing assets.

But the decrease in construction starts seems to be leaving a large dent in New York City’s apartment inventory, which grew by only 6 percent from 2020 to 2024, according to CoStar. That’s compared to the more than 20 percent growth in U.S. cities like Orlando and Austin over that time period.

Office-to-residential conversions are helping to reverse that dent little by little. As of February, New York City had 8,310 new housing units in the pipeline from conversions, a large chunk of which will come from major projects such as Apollo Global Management, SL Green Realty and RXR’s conversion of 5 Times Square into as many as 1,250 housing units, and Metro Loft Management and David Werner Real Estate Investments’ plan to turn the former Pfizer headquarters at 235 East 42nd Street into a total of 1,600 units.

“[Conversions are] solving a unique problem of getting rid of tired office inventory that will cost a fortune to reposition into a desirable asset that office tenants want to occupy,” Rodriguez said. “The city has done a great job in removing a lot of red tape, making these conversions a little bit more feasible on the bureaucracy side.”

During a time when the most sophisticated investors are buying up the city’s most coveted Class A office buildings, most of the office properties being converted into residential use are older, lower-quality buildings that would otherwise cost millions to renovate back into desirable office space.

“We’re seeing an office recovery in New York City that’s unlike anywhere else in the U.S.,” Rodriguez said. “But it’s largely focused on Class A, higher-quality office buildings, and it’s those really vintage and dated office buildings that are struggling. So rather than borrow a lot of money at an elevated interest rate to reposition your property, it’s a much simpler process to work with the city to convert your building.”

And, while conversions are certainly piling up in Manhattan, they’re likely not enough to solve the problems of affordability and availability when it comes to apartments in the city.

One thing that could help incentivize developers to use the new 485x program and begin building again is to “offer tax breaks that extend into perpetuity,” Rodriguez said.

“If you’re going to ask for deeper affordability in perpetuity, I think it’s a fair compromise to offer tax incentives that don’t expire after 30 years,” Rodriguez said. “Rezonings help, but you are eventually going to run out of land.

“It’s an extremely dense environment, so creating the possibility to add housing is a great first step, but you have to make it a real incentive,” Rodriguez added. “Otherwise, they’re going to instead develop elsewhere or partner with investors to purchase existing market-rate assets. And I think that’s what we’re seeing today.”

Robert Knakal, chairman and CEO of investment sales firm BKREA, is one of those top New York City real estate leaders looking to improve 485x.

“We need new housing and need a massive amount of it, up and down the socioeconomic spectrum,” Knakal wrote for CO in March. “The private sector can deliver as many units as we need and can do it very quickly. This would bring rents down and make New York more affordable for almost everyone. Isn’t that what all policymakers say they want? If they really want that, create an environment where it is possible.”

Some developers are a little more optimistic than others. Lev Kimyagarov, managing principal and co-founder at Development Site Advisors, said the tax program “works.”

“In fact, it fixes real flaws in the old system, aligns with today’s political and economic climate, and, most importantly, gets deals moving again,” Kimyagarov wrote for CO in April.

Apart from tax programs and rezoning matters, a lot of developers are worried about the upcoming mayoral election in New York City when it comes to new housing developments.

In fact, 40 percent of real estate professionals have cited government-related issues such as wage requirements and an onerous permitting process as the “top obstacle to development,” according to CoStar.

While some wealthy New York developers gather to plot Assemblyman Zohran Mamdani’s defeat in the race and others are resigned to work with the mayoral Democratic candidate, it seems those government-related issues will remain an even split until November.

“If today, without a democratic socialist as mayor, developers feel that the new tax incentives aren’t enticing enough, it’s unlikely that they’re going to change their tune with the presumptive mayor,” Rodriguez said. “Waiting to see what the policies are and how they [will] impact New York City is enough to have both developers, and in some cases investors, on the sidelines.”

Isabelle Durso can be reached at idurso@commercialobserver.com.