Though 1995 data is encouraging, viewing this data in a historical context shows that housing construction activity in New York City remains sluggish. Approximately half as many units have been completed in recent years as in the late 1980s. The annual number of housing units authorized by new building permits in the last five years resembles levels reported in 1975 and 1976 when the City was in the midst of its fiscal crisis and interest and inflation rates were in double digits. Likewise, cooperative and condominium construction and conversion remains well below pre-recessionary levels.
To be sure, the events in New York's real estate market in the late 1980s were unprecedented. This real estate boom brought somewhat more new construction than in the previous decade and a flurry of cooperative and condominium conversions arising from anticipation of greater profits.
It was during these expansionary years that the City commenced a major capital program to revamp its housing inventory. In its most generous year of capital spending, the City contributed nearly $700 million in FY 92 toward rehabilitating and selling the housing stock it accumulated through tax foreclosure. Capital commitments planned for Fiscal Years 1997-2000, by contrast, range from $100 to $300 million. With waning public funding and the threat of rising interest rates, it is questionable whether the mild growth sparked in 1995 will flourish into a true recovery.
Coinciding with the bullish private market, the City of New York committed unprecedented capital improvement funds to revamp its housing inventory. In the 1992 Fiscal Year, the City's most generous year of capital spending, it contributed nearly $700 million toward rehabilitating and managing the housing stock it accumulated through its in rem tax foreclosure policies. Capital funds were also used for moderate rehabilitation of private buildings at risk of abandonment and foreclosure. In all, billions of public dollars were infused into New York City's housing in the last ten years.
New York's rental market conditions in the early 1990s were in many ways a result of events that took place in the private housing market during the previous decade. Many properties, including newly converted cooperatives and condominiums in addition to rental buildings, were burdened with heavy mortgage debts that could not be supported by stagnant and occasionally sagging rent rolls. Some owners were forced into mortgage or tax foreclosure. This, in turn, led to the collapse of the savings and loan industry and the subsequent tightening of lending standards that persisted through 1993. Given the recession, tougher lending practices, higher default rates, and lenders merging or exiting the market altogether (conditions documented by RGB's annual Mortgage Surveys), housing construction bottomed out between 1991 and 1994.
In 1995, amidst cutbacks in public sector funding, residential construction activity picked up pace, providing evidence that private developers have re-entered the housing market.
The remaining three-quarters (71%) of households in New York City reside in rental housing that comes in many varieties. More than one million rental dwellings fall under the state's rent regulation laws and are either rent stabilized or controlled. About 350,000 rentals in New York City are operated by the New York City Housing Authority or are regulated by other local or federal housing agencies, (e.g., HUD, Mitchell Lama, in rem, and loft units). The remaining half million rentals are unregulated, composed of dwellings that were never regulated, were deregulated, or are in cooperatives or condominiums. (See pie chart for a breakdown of rental and owner-occupied housing.)
With almost three-quarters of all households renting their homes, any report on New York City's housing stock must focus on its rental inventory. The number of renter-occupied dwellings in New York City shrank steadily from the early 1970s to the late 1980s. After peaking at 2.2 million rental units in 1970, the next twenty years brought reductions of more than 250,000 rental units that were demolished, converted, or rendered uninhabitable. Since the late 1980s, about half as many rentals have returned to New York City's housing inventory through new construction, rehabilitation, conversions from non-residential properties, and subdivisions. The 1993 HVS reported that there were 2,047,000 total renter-occupied units.
Though newly constructed housing is exempt from rent regulations, the rent stabilized inventory grew by 57,000 units between 1981 and 1993. This influx of stabilized housing stems primarily from rent controlled units that fall under rent stabilization rules upon vacancy. Rehabilitated and newly constructed units collecting tax exemptions and abatements also fall under stabilization.
Rent regulations are tied to the proportion of the rental stock that is vacant and available for rent. The percent of available rental units reached "emergency" levels in the late 1960s (1.2% in 1968) causing the state legislature to place post-war housing under rent regulation in New York City, while pre-war buildings remained under rent control. New York City's rental vacancy rate has remained well below the standard of 5% for decades but finally climbed above 3% in 1991 for the first time in nearly 30 years. Currently, the rental vacancy rate is 3.4% (1993 HVS).
It is difficult to attribute the small increase in rental vacancies to any one factor, though it is probably related to the larger increase in rents compared with incomes, a trend which causes families to "double-up" in order to afford rising rents. The slight increase in crowding rates since the early 1980s corroborates this theory.
Though Queens saw the most new units in 1994, Manhattan won out in 1995 comprising 29% of all new housing units constructed citywide. Queens had the second highest construction level in 1995 with 22%, while new construction in the Bronx,Brooklyn, and Staten Island each comprised 16%-17% of the total. See map
About 1,800 of the units authorized with permits in 1995 were in buildings with 5 or more dwellings. Though most of the 1,800 dwellings will be available to renters, at least one-third will be owner-occupied cooperatives and condominiums (plans for more than 600 new cooperative and condominium units were filed in 1995, see graph).
Manhattan had the highest increase in permits for new dwellings in 1995, more than doubling from 428 apartments in 1994 to 1,129 this year. Judging from cooperative and condominium data for 1995, about half of the 1,129 units are in multifamily rental buildings. Queens (738) and Staten Island (1,472) also saw increases in new units permitted, 32% and 16% respectively, while the Bronx and Brooklyn remained virtually unchanged at respectively 853 and 943 units.
The number of units issued new permits in the first three months of 1996 was 17% higher than the comparable period in 1995. About one-fifth of these are in buildings with 5 or more units. Sustaining this pace throughout 1996 would lead to more than 6,000 new units permitted this year, the highest number since 1990.
While the increase in permits in 1995 and early 1996 is encouraging, putting these figures into historical perspective shows that comparatively little new construction has taken place in recent years, especially in multifamily buildings. Throughout the 1980s, roughly 10,000 units were permitted each year and more than 20,000 were authorized in 1985 alone, a surge attributed to pending legislation to restrict much of Manhattan from 421-a eligibility. Further, permits issued in the 1980s pale in comparison to the number issued between 1960 and 1974 when as many as 70,000 units were authorized for construction in a single year (1961 and 1962). The Department of City Planning finds that the 1961-1962 surge was due to builders and developers rushing to file plans for new construction before new zoning regulations took effect.[1] See graph
The percent of units issued permits in buildings with five or more units has steadily declined since the late 1980s when one-half of units issued permits were in multifamily (five or more units) buildings. In the last five years, the proportion has ranged from one-quarter to one-third of permitted units. New construction in Manhattan remains almost exclusively large buildings with 100 or more units, while new buildings in the outer boroughs typically contain 1-4 dwellings. Throughout the last decade, about one-quarter to one-third of all new units issued permits have been in Staten Island where few permits are for buildings with more than four dwellings.
Since fewer new units are being built, it is not surprising that the number of units receiving 421-a benefits for the first time have been declining somewhat steadily since the late 1980s when 8,000 to 10,000 apartments were issued preliminary certificates annually. In 1995, 2,284 apartments were issued preliminary certificates for 421-a benefits, the highest annual number issued since 1992 when 2,650 units first entered the program.
By 1994, more than 17,000 apartments were benefiting from 421-a exemptions, providing an estimate of newly constructed units that temporarily fall under the stabilization system.
All new residential units, including converted or subdivided properties, relieve the housing shortage and resulting upward pressure on rents by providing additional dwellings for households to move into. While new construction data is readily available, conversion activity is more difficult to measure. The Department of Buildings requires owners to submit applications before commencing such work; however, much conversion activity is done illegally without permits from the City. Even when owners obtain permits, this data is difficult to compile and is not classified into distinct categories such as rehabilitation, subdivisions, or the like. Rather, the type of construction activity must be inferred from the inspection records maintained by the Department. The RGB staff intends to work with the Buildings Department this year to assemble this data for use in future reports.
Until then, the RGB continues to rely on certificates of occupancy and the number of vacant in rem buildings as indicators of newly constructed and returned dwellings and J-51 tax benefits as a measure of rehabilitation activity to assess New York City's housing performance in a given year.
The City of New York has been responsible for returning hundreds of uninhabitable buildings to the housing inventory in the last decade by rehabilitating vacant in rem housing and turning over the management responsibilities, as well as the ownership, to private and non-profit entities.
Through 1990, the City owned more vacant than occupied dwellings in its Centrally Managed system. The total number of vacant units the City had accumulated peaked at over 56,000 units in the mid-1980s, but fell to just over 10,000 in recent years. Because these figures represent City-owned units in the Centrally Managed stock, they mask thousands of additional dwellings that the City rehabilitated through its DAMP (Division of Alternative Management) programs and through various preservation programs aimed at privately owned properties.
As under the 421-a program, apartments in rental properties receiving J-51 tax abatements and exemptions are subject to rent regulation during the benefit period. Eligible rehabilitation activities include Major Capital Improvements (MCIs), substantial rehabilitation, conversions from non-residential to residential properties, and moderate rehabilitation. Renovations qualifying as MCIs receive a tax exemption on the increase in assessed value due to renovation or rehabilitation for 14 years (10 years of full exemption followed by a 4-year phase-out period designed for a less abrupt transition to full taxation) and abatements on existing taxes up to 90% of the reasonable cost of rehabilitation at 8-1/3% per year up to 20 years.
Moderate rehabilitation projects, which require a significant improvement to at least one major building-wide system, receive a 34-year tax exemption and abatements for up to 20 years to a ceiling of 100% of the reasonable cost. Government assisted housing receives "enriched" benefits including tax exemption for 34 years on the increase in assessed value and an abatement of 12.5% annually up to the actual claimed cost for as many as 20 years. Enriched exemption and abatements benefits are also available for conversions of Class A multiple dwellings and rehabilitation of Class A buildings that are not entirely vacant.
In the late 1980s and early 1990s, the number of units approved for initial J-51 tax abatements and exemptions each year was typically above 100,000 units, but has declined since. The largest number of units approved for benefits in recent years was in 1992 when 143,593 units first received benefits, while only half as many dwellings (77,072) received J-51 tax benefits in 1995.
By Fiscal Year 1994, total J-51 benefits were imparted to nearly half a million rental apartments (417,140). Those apartments that were not stabilized prior to receiving tax benefits will no longer be subject to rent regulations once their tax benefits expire. Unfortunately, the data does not indicate what proportion of J-51 apartments are in regulated properties.
Conversions of rental properties to cooperatives and condominiums, on the other hand, do not lead to a net increase in housing units. Further, eviction method conversions reduce the the number of apartments available to renters. Not all households are evicted from their homes in eviction conversions, though; some residents choose to purchase their units or otherwise are allowed to remain in their homes. In addition, not all apartments in buildings that are converted to cooperatives and condominiums (through either eviction or non-eviction conversions) become owner-occupied. Many remain rentals even when they are purchased, because they are offered for rent by their owners. Nonetheless, about 250,000 dwelling units have been converted to cooperatives and condominiums through non-eviction plans and 70,000 dwellings have been converted through eviction plans since the early 1980s. Eviction conversion plans increased in 1995 (426) to nearly twice the level in 1994 (283), while non-eviction conversions inched up from 176 units last year to 201 in 1995. (See the graph which shows newly constructed and converted cooperative and condominium dwellings since 1981.)
Last year was the first time the RGB collected data on rehabilitated cooperative and condominium units. Such rehabilitations increased by more than 50% from 1994 to 1995, while most were sponsored by the City's Department of Housing Preservation and Development in both years.
Proponents of ownership claim, with much merit, that owner-occupants have more incentive to care for their properties and surrounding communities. However, purchasing a housing unit requires substantial up-front capital (conventional mortgages frequently require 20% of the purchase price as a down payment), a sizable income flow to support mortgage payments, and a relatively long-term commitment to the dwelling. Further, cooperatives often require approval of a board which can lead to income, racial, and various forms of discrimination against children and others. These obstacles preclude many New Yorkers from owning their apartments, forcing them to be "captured"by the rental market.
Because of the vast sum the City has expended on in rem properties, it finally halted its foreclosure policy in late 1993 after sixteen years of taking title to properties in tax arrears, and rehabilitating, managing, and selling thousands of City-owned properties. HPD now aims to quickly sell its occupied inventory. Since 1993, fewer than 100 properties have been vested, while several hundred buildings have been sold. The City's housing agency now has only one disposition program (Tenant Interim Lease, or TIL) that directly involves HPD in the rehabilitation of in rem properties prior to sale.
In an attempt to more aggressively recoup back taxes as well as to preserve the housing inventory, the City devised a new plan that includes an early-warning system and sales of tax liens on delinquent properties. The City expects to raise $150 million by selling select residential [2] and commercial properties with liens worth twice this amount to approved bidders. Bidders purchase the claim for unpaid taxes from the City and collect taxes from delinquent property owners. The City receives an immediate payment (though less than the value of the lien) and the purchaser receives the difference between the outstanding tax plus interest and the amount paid to the City.
This new strategy will be employed in conjunction with the City's broader plan to prevent the need for selling tax liens or vesting properties by first employing an early-warning system and allowing HPD to transfer title to third parties without taking title to delinquent properties. HPD will alternatively vest those properties that require the resources of the City, ones that have little economic value, to ensure they remain habitable. While this strategy will certainly reduce direct costs the City incurs in maintaining its housing stock, it is uncertain how it will impact marginal properties in the City's poorest neighborhoods.
In addition, a recent announcement by Fannie Mae bodes well for New York's housing stock. Fannie Mae unveiled its House New York program in which it will invest $8 billion in the five boroughs and the four New York State counties that surround the City. One billion dollars of these funds are earmarked for multifamily housing initiatives including acquisition, new construction, and rehabilitation. The plan focuses on housing in both Manhattan and smaller properties in the outer boroughs. The remaining $7 billion will be used to promote homeownership in traditional single family homes, as well as in cooperatives, condominiums, and 2- 4 family properties.
On the down side, Congress is proposing a sunset of Low Income Housing Tax Credits (LIHTC), a program designed to encourage construction and rehabilitation of residential properties by private developers begun in 1987. The sunset would apply to future allocations rather than to existing projects which would continue to receive tax benefits. States would be required to allocate all unused credits by the end of 1998. Further, proposed cuts in Section 8 certificates and vouchers could jeopardize plans for future low- and moderate-income housing, since many such projects rely on market rents to cover operating and capital costs. These economic rents are otherwise unaffordable to target families.
Reviewing patterns of new housing construction over the past few decades reveals that developers respond to government incentive and subsidy programs and to stricter zoning regulations, as well as to economic downturns, when building all types of housing. Less government assistance would surely result in fewer new developments.
2. The first lien sale excludes Class I properties, buildings that are cooperatives and condominiums, and rental properties that are considered at risk.
