The Impact of NYS Housing Measures on NYC's CRE

The Impact of NYS Housing Measures on NYC's CRE May 3, 2024

The wait is finally over. New York State has a housing plan.

The NYS Housing Plan includes 485x, Good Cause Eviction, the lifting of the 12x FAR cap, and an incentive program for office to residential conversions. While this seems like a lot to digest. The implications for operators and developers of multifamily properties are clear. As the real estate sector digs in on the specifics, i believe we should address some of the overarching questions:

  1. Will 485x incentivize developers to build multifamily rentals?
  2. Will Good Cause chill investor appetite in NYC multifamily?
  3. Will 467M spur office to residential conversions?
  4. Will the lifting of the 12x FAR cap, unlock residential development potential to provide much needed housing for New York?

Let’s take these one by one:

1. First, extending the grandfathered 421a projects is a major boost to housing. According to REBNY’s survey, this will allow 72 projects with 33,000 units to be completed. The only catch is the popular Option C will no longer be available, which provided for 30% of the affordable units being 130% of AMI. A developer will now have to use the deeper affordability bands.

As far as the new 485x, the location and unit count will be a major factor in determining economic viability. For 150+ unit projects in Zone A (Manhattan south of 96th St, northern Brooklyn, and the Queens Waterfront) as well as Zone B (southern Brooklyn and northern Queens) will have increased labor costs, which REBNY estimates will add 20% to hard costs. Although a 40-year tax abatement is offered here, the project will also have to provide 25% of the units at 60% of AMI. This increased cost and subsidy will make many sites more challenging to pencil unless land prices decline. Condo demand will keep land values in check, so this is unlikely.

By contrast, 100-149-unit developments don’t require prevailing wage and allow 80% of AMI (roughly $42/SF rents) for 25% of the building which should yield more developments especially with an attractive 35-year abatement. Meanwhile for 11-99 units, the affordability percentage drops to 20% of the building. We expect to see many of these smaller developments. That said, it’s the larger projects that are truly needed to put a dent in the 500,000 units required to keep up with NYC’s population growth and alleviate the 1.4% vacancy rate.

2. Although regulation tends not to be favorable with investors, there is at least certainly with Good Cause eviction. At one point there was a fear that increases would be capped at 150% of CPI. The new requirement of the lesser of 10% or 5% over CPI seems more palatable and excludes buildings built after 2009 or over luxury thresholds that start at $4,142 for studios, $5,725 for 1 BRs, and $8,474s for 2BRs.

At the recent Urban Land Institute conference in New York, many institutional investors seemed okay with this saying it mirrored California’s generous increases. Many said if they could increase rents by 8% per year, they would be happy. On the flip side, could this open the door for Albany to lower the increases in the future? If so, that would be far off as this housing plan expires in 2034.

3. Out of all the provisions passed, the office to residential conversion abatement, 467M, is the most exciting and will allow for many conversions of obsolete office buildings, tightening the office vacancy rate in the process.

For starters, the first 30 years of the 35-year abatements locks property taxes at 10% of what the full residential taxes would otherwise be. This is provided that the developer files AND receives a permit by June 30, 2026. (The abatement period drops to 30 years total is filed and permits received by June 30, 2028, and 25 years if by June 30, 2031.) It requires the developer delivers 25% of units at a weighted average of 80% AMI with a band at 5% of units at 40% AMI. This applies to office buildings south of 59th Street only in Manhattan, where the majority of NYC office stock exists.

When my team modelled a 100,000-square-foot office-to-residential rental conversion, we found that the net present value of the tax abatement was almost as much as the value of the building itself. This put this more in line with the condo conversion value. For every condo developer there are many more multiples of developers who will convert to rental, many who wish to hold for the long term especially when taxes are fixed. This should also make construction financing easier to secure even for a condo when there is a rental fall back.

4. Lastly, the lifting of the 12x FAR cap by Albany is a great step. R11 and R12 zoning distinctions have been created that allow for 15x and 18x FAR provided that, yes you guessed it, 20% of the project has 80% AMI consistent with Mandatory Inclusionary Housing levels.

Now it will be the NYC’s turn to act on this. The City of Yes plan already calls for upzones and will be eager to put this into place. However, this will take time as each rezoning will require a ULURP including a community board review. Some residential neighborhoods could push back, but this should be well-received in central business districts.

Our friends at Property Scout came up with the following analysis:


 

If the city upzones solely the Central Business Districts (CBD) from R10 to R11 (with a 12.5 Floor Area Ratio as of right), you could potentially construct 18,591 additional units compared to today's zoning.

However, with a citywide upzoning of all R10 areas to R11 (12.5 FAR as of right), the potential increase in units could reach 101,053 new units.

This would absolutely put a dent in the City’s housing needs. Overall, the NYS Housing Plan is a mixed bag with has multiple implications, but above all it provides certainty. The entire CRE sector is eager to see how this plays across existing multifamily, developments sites, and office-to-residential conversion. It should be a busy next year or two as investment decisions are made on this!

Disclaimer: There is a lot of information here provided for your reference only. Please make sure and consult with legal, accounting, and zoning professionals to ensure the accuracy of this