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Rent Control Laws – What does it mean for the NYC market?

On June 14th, 2019 New York Governor Andrew Cuomo signed the Housing Stability and Tenant Protection Act of 2019 into law. The law forever alters New York’s rent-stabilization protocols, opens it up for expansion throughout the entire state, and helps protect tenants on the cusp of being evicted. This law has the potential to cause ground-shaking effects throughout the city and the state, and insiders in all aspects of the real estate industry are concerned about the ramifications. This law radically puts rent regulations in the hands of the tenants. 

What changed?

Prior to this act, landlords could pass 6% of costs associated with improving their buildings onto their tenants. Under the new law, a cap of 2% will be instituted. This disincentivizes building owners to invest in improving their own properties. This will cause a ripple effect for contractors, plumbers, carpenters, home improvement retail outlets and building suppliers. Many landlords and investors have already directly stated that they will no longer maintain their buildings as well as they used to, since there is no direct incentive to improve their own properties. These regulations encourage minimal compliance from the institutional investors that provide these properties to the tenants of the city. Many of the cities buildings are almost 100 years old and are growing more and more expensive to maintain. Developers will most likely be taking their money and placing them into other projects, such as commercial, or even to other cities entirely. 

Part of the design of the bill was the help bring more affordable housing and protection for tenants, but it may have a completely opposite effect. This bill may ironically discourage any future development of affordable housing. Developers are incentivized to set aside 30 percent of their units in new buildings to subsidize for lower income renters. These units become rent-stabilized. Developers have been building these buildings due to incentives, and because of the possibility that rent-stabilized units may not stay that way. With this new law in action, the Governor has turned brand new buildings into depreciating assets. It is no longer possible that subsidized units will become de-regulated. 

Landlords have long counted on the vacancy bonus as part of their business models. Landlords used to be able to add 5 to 20 percent to the rent when there is a change in tenant. Landlords were previously allowed to remove units from regulation once they hit the current market price in rent. Now they will be forced to keep these apartments regulated and can no longer expect additional income once a unit becomes vacant. This completely eradicates any desire for the building owner to renovate these units, meaning it’ll become increasingly difficult for people to find apartments in good shape. 

What are the effects of the bill?

This legislation is already causing an exodus of capital from the city and has already severely hurt the market for multifamily units in the New York City area. In 1988 a study estimated that rent controls resulted in a $4 billion loss of taxable residential property in New York. Adjusted for inflation, that works out to be around $8 billion in today’s economy. Economists almost universally agree that rent ceilings reduce both the quality and the quantity of housing. During World War II in New York City, rent controls were implemented. This made landlords unable to increase rents for maintenance or repairs, until owners eventually abandoned buildings by the thousands during the late 1960’s. This drove out middle class residents and left the poor in squalor in deteriorating apartments. The US economy is doing very good right now, but expect the fallout from the rent regulation to accelerate during the next recession. That’s what happened in the late 60’s in this same city, and we can only hope that it doesn’t happen again. 

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