I lived in Cambridge, Massachusetts from 1996-2002. The composition of the people of Cambridge is not terribly different than Manhattan. And in 1995, Rent Control was ended in the state of Massachusetts. This is a state that still has Blue Laws because in concept, people can’t police themselves on Sunday mornings from drinking alcohol. But the notions of helping others is qualitatively different than the notion that we can’t control our own lesser angels.
The impact of this decontrol in Massachusetts has been studied now for 25 years. Take a look here, here, and here. I don’t dispute that rents can rise in an environment like that but it wasn’t catastrophic, in the least. And the increased mobility of renters as time went on demonstrated that people were exploring the opportunities they generate in their lives.
Law-enforced low rent has always been married to low quality. Is that an environment that works? Instead, time and again we have read stories about decrepit buildings, bad plumbing, you name it. People throw up their hands and complain about it and blame landlords, rather than looking at the mess the laws themselves create. It’s a conversation worth exploring further.
There is just not enough depth of thought on the fact that these laws have been on the books since 1945, before my father was born. Of course, the origin of the laws becomes inconsequential. I wish that these rent control laws accomplished what they set out to do, but unfortunately they never have. These are just ongoing entitlements that create major drag on the economy.
You can read a lot here and here and here about what’s happened in the past few weeks in New York State, with an all-Democratic state legislature passing sweeping changes to rent laws.
On June 14th the Governor signed the Housing Stability and Tenant Protection act of 2019, which made unprecedented changes to rent regulations in NYC. This bill heavily favors tenants, mostly by restricting the ability of landlords to increase regulated rents. It also changes the criteria to a very high threshold for converting rental buildings to co-ops or condos, so much so that NYC conversions will likely not happen.
The key provisions in the bill include:
Rent regulation laws are now permanent. In the past they came up for renewal every four to eight years.
The following provisions that allowed landlords to increase rents are repealed:
· The removal of units from rent stabilization when the rent crosses a statutory high-rent threshold, and the unit becomes vacant or the tenant’s income has been $200,000 or higher in the preceding two years.
· The vacancy bonus provision that allows a property owner to raise rents as much as 20% each time a unit becomes vacant. Many landlords saw this as the only way to help an apartment catch up after a multi-year below-market rental. GONE.
· The longevity bonus provision that allows rents to be raised by additional amounts based on the duration of the previous tenancy.
The cap for rent increases relating to Major Capital Improvements and Individual Apartment Improvements was lowered. This limits the ability of landlords to recapture part of the investments they make in their buildings and apartments, which will make upgrades and repairs more difficult.
The “owner use” provision is now limited to a single unit for a “immediate and compelling necessity” and prevents such use if the tenant has a tenure of 15 years or more.
· Eliminates the option of eviction plans.
· Requires 51% of tenants in occupancy to agree to purchase apartments before the conversion can be effective. (Previously, only 15% of apartments were required to be sold, and purchasers could be outside investors.)
· These major changes will make conversions virtually impossible and may lead to shortages of co-ops and condos in the future.
The future of many rental buildings (Neglect, not demolition)
If landlords can’t recoup investment in property by raising rents, what is the incentive to maintain a building?
Real Estate taxes go up and rents cannot keep up. This was already the case for most rent regulated units; additional, onerous constraints put on landlords only exacerbate the situation. The quality of rent-regulated apartments will deteriorate, and there are many scenarios where landlords will prefer to keep an apartment vacant than put in a tenant that can never leave.
I can easily envision a situation where buildings become more run down. We already have seen it with the laws formerly on the books.
Sure, a tenant can’t be forced out in any way whatsoever, but the conditions could become unliveable. Without additional fines to enforce conditions, this will become harder and harder to regulate. We will have to see an endless cycle of tightening regulation.
And we will see banks lending less to landlords, as they see diminishing rental returns, ending in a repeat of the 1970’s, when landlords just abandoned buildings as they were simply losing money year after year on their holdings.
While we can’t blame our current mayor for this debacle, it does create strong disincentives to building affordable housing as well. So all of the well-meaning goals of hitting new affordable housing stock targets will definitely go by the wayside. Not that anyone expected those to be met. Again, those with rent-regulated apartments win. Anyone looking for affordable housing who doesn’t have it? They will lose.
I’m totally confused by this part. Now, a rent-stabilized tenant has guaranteed rent even if their income exceeds the threshholds they have set. What is the benefit of this?
The entire purpose of rent control and rent stabilization is to ensure that renters aren’t gouged by landlords. Why is a person who earns more than $225,000 a year getting anything but a market rate apartment? The government has gotten even more deeply involved in picking winners and losers. It just makes no sense. Of all of the changes, this one confuses me the most. It is already harder to get a rent-regulated apartment than to get into Harvard, BY A FACTOR OF 10. So how do these laws help alleviate these issues? They don’t.
The rules guarantee that there will be no more rental-to-condo conversions. It requires that 51% of renters BUY their apartments if a building wants to convert to condo. So, literally, there will be no more conversion supply. Period. I am told that abut half the new market supply over last 30 years has come from these conversions. It will speed up older office buildings converting to condo, but it will kill any rental building conversions. Any investors who are halfway into converting a building from rental are dead in their tracks.
Is this good for current condo owners? With little new supply coming from anywhere but brand new product, which is almost always by definition very high end, it will probably have a positive impact on those who already own. But it will make it harder for new buyers. There seems to be a growing permanent rental class, not just for low-income residents, but for middle- and upper-middle class as well. The opportunities for upward mobility, home ownership may be limited to other places, and not in New York City. Really bizarre.
It will accelerate the development of the Financial District’s older office buildings into condos. It will have an impact on how neighborhoods evolve, for sure.
A reduction of sales of multi-family properties with rent-regulated tenants will slow down. It won’t stop, but the math has completely changed. Invariably the “upside” that you may read about in broker-babble for investment sales has almost disappeared. The Opportunity Zones that I have written about in past months are given that designation because they are ripe for neighborhood improvement. In these areas, there is an abundance of rent regulation. So, this new legislation serves to completely negate the implied upside in investing in Opportunity Zones.
You could hardly find a better way to halt investment in New York City than to pass this legislation. To summarize, let’s name just a few second order effects, beyond landlords losing money on the properties they own:
Loss of jobs in the construction sector
Loss of tax revenue from lower sales volume of multi-family buildings
Fewer new affordable housing options
Calcification of the status quo
My work is all about empowering people, from my team, to my clients, to the public, through education, encouragement, insight, and vision. Legislation like this has no imagination. My thinking is that a different system would expand people’s vision of what’s possible for them in the world. The entitlement of low rent serves in many ways as a set of handcuffs. There is more in the world than low rent. New York City is full of hardworking people. I have faith that a little less regulation would do much more to empower them than anything else. More for another time. -Scott