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Category: Multifamily Tags: Multifamily, New York, New York City, Rent Regulation, Rent Stabilization
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Rent Regulation: The History and Workings in NYC

As the Rent Stabilization Law of 2019 remains intact, what impact has it had on multifamily?

On June 14, 2019, Governor Cuomo signed the Housing Stability & Tenant Protection Act, a law regulating New York City apartment units. As the 5th anniversary approaches, we look back on New York’s history and how rent regulation has impacted multifamily.

History of Rent Regulation in New York

In the 1950s, nearly every rental unit in the city was subject to rent regulation. Today, that percentage is closer to 45% or about one million units. In the past 40 years, hundreds of thousands of stabilized units have been reintroduced to the market. Since the 1950s, NY has fallen victim to the imbalance between supply and demand, remedying it through rent regulation.

Brief Timeline of Rent Regulation in NYC

The history of rent regulation in New York City and the State is marked by a series of legislative measures and reforms. It began during World War II with nationwide price controls. It later evolved into localized efforts such as the Federal Housing & Rent Act of 1947. This act excluded post-1947 construction from rent control. In 1950, New York State enacted its own rent control laws, focusing on units built before 1947. Deregulation occurred in the 1960s due to housing shortages reduced the number of regulated units significantly. By 1974, the Emergency Tenant Protection Act sought to mitigate these losses by returning units to rent stabilization upon vacancy.

Throughout the following decades, legislation alternated between tightening and loosening regulations. The 1990s saw increased deregulation thresholds and state administration of the system. While the early 2000s introduced preferential rent and limitations on local rent control laws. The 2019 Housing Stability & Tenant Protection Act represented a significant shift, repealing vacancy decontrol. It eliminated vacancy bonuses, and enhancing tenant protections under “good cause eviction.”

Click here to read how New York City rebounded from the Pandemic. 

Where Rent Regulation Stands Today

Rent regulated units make up less than half of the city’s rental housing; apartments are classified as either rent controlled or rent stabilized. While both closely related, the former is more more widespread, covering about 45% of NYC rental units. The older rent control applies to only about 1% of units and is being phased out as tenants vacate.

The Difference Between Rent Control & Rent Stabilization

Rent control applies to apartments built prior to 1947, provided that the tenant has resided there since July 1, 1971. Upon vacancy, the unit transitions to rent stabilization if it belongs to a building with more than six units. Under this regulation, rent can be raised by 7.5% every two years, capped at a maximum base rent determined per unit to cover the landlord’s maintenance expenses. Tenants have the ability to pass their apartment to a family member when they die if the family member had been living in the apartment for at least two years.

Rent stabilization applies to apartments built prior to 1974 that have six or more units. The RBG determines the maximum annual rent for one- and two-year leases, factoring in real estate costs and the cost of living. In a narrow 5-4 vote last June, the RGB granted final approval for rent increases that apply to leases signed on or after October 1, 2023. The approved adjustments include a 3% maximum rent increase for one-year leases, with increments of 2.75% in the first year and 3.2% in the second year for two-year leases.

What happened in 2019?

Before the 2019 law, apartment building owners could enact permanent rent increases, capped at 6% annually, for stabilized apartments whose properties underwent building-wide improvements. The 2019 rent reform rolled the cap on those increased by 2% and placed a 30-year limit on them.

The 2019 law also repealed the owners’ right to deregulate vacated stabilized units if rents had surpassed a certain threshold or when rents in occupied units had surpassed that threshold and occupant incomes reached a certain level. The rent stabilization law requires landlords to renew leases except in limited circumstances, including a failure to pay rent. It also allows family members to take over a lease if they have lived in the unit for at least two years.

Supreme Court Declines Rent Stabilization Appeal: What’s Next?

For the second time in its current term, the U.S. Supreme Court has declined to hear appeals of a lower court’s ruling regarding New York’s rent stabilization law. The first was in October 2023, when the Supreme Court rejected two challenges the Community Housing Improvement Program and Rent Stabilization Association brought, claiming that the laws violated the Constitution’s “takings clause” by forcing owners to cap prices and limit their ability to evict tenants.

The most recent decline in February 2024 focused on rent-stabilized tenants’ right to a lease renewal. While this news isn’t great for owners, Justice Clarence Thomas left open the possibility that the nation’s highest court may eventually hear a challenge to rent regulation. In a statement accompanying the decision not to hear the appeal, Thomas wrote that the constitutionality of NYC’s rent law “is an important and pressing question,” adding that “in an appropriate future case, we should grant certiorari to address this important question.”

In April 2024, Assembly Speaker Carl Heastie confirmed that bringing back rent increases for individual apartment improvements of rent stabilized apartments is on the negotiating table. This includes rollbacks of the 2019 Housing Stability and Tenant Protection Act, a new tax incentive for developers to build affordable housing in New York City, and new tenant protections for non-stabilized apartments. The suggested bill would permit landlords of rent stabilized units to raise the rent on apartments vacated by long-term tenants to federally-determined “fair-market” rates.

A Ticking Time Bomb: Affordable Housing + Rent Regulation

Affordable housing remains a significant issue in NYC, but the current rent law does not allow owners to recoup enough for repair costs through rent increases. This leaves roughly one million rent regulated housing with many opportunities for profit forestalled, neglected, and in disrepair as landlords cannot maintain their profit margins.

According to a 2015 report by The Economist, those living in rent regulated units in New York have higher median incomes than those in free market apartments, due to the fact that these individuals were in a better position to track down and secure rent regulated apartments.

Image showing the 2024 Breakdown of Regulated Units in New York City

Regulated Rent Increases vs. Inflation

In Q1 2023, the RGB issued a report indicating that rents would have to rise by 8.35% for one-year leases and 15.75% on two-year leases to maintain landlords’ net operating income.

Graph showing regulated rent increases vs. inflation

Landlord groups maintain that capping rents materially below inflation leads to operating losses, undercuts the financial means to make improvements or even conduct routine maintenance, and encourages landlords to “warehouse” units off the market entirely rather than lock in unfavorable lease terms.

Rent hikes for individual apartment improvements or MCI are limited to $83/month. 

Capital Markets Overview

Over the past six months, distress has become more prevalent in the apartment market, especially in rent regulated units. In New York, the delinquency rate has nearly doubled since the second half of 2023, after remaining largely unchanged since 2001.Graph of outstanding debt free market vs. rent regulated unitsOutstanding debt by submarket

Significant rent regulated multifamily debt was refinanced in 2021 and 2022 at very low rates, which provides much-needed debt service relief to a subset of owners. However, when these loans mature, the increased debt service costs associated with refinancing may prove untenable.

Two graphs that represent lending trends for free market units and rent regulated units

The 2021-2022 transaction surge, prior to the market plunge in 2023, was largely driven by unregulated multifamily units. Rent regulated multifamily lending has seen the most precipitous drop to a level below even the most challenging period of GFC.

The Burden of Taxes

Past-due taxes are an important indicator of distress in the multifamily market. While inflation and increasing debt service costs may be the primary expense pain points, tax obligations remain challenging for many property owners. Class A multifamily exhibits low rates of past-due taxes–each with about 1.5% delinquency. On the other hand, rent regulated multifamily properties had three times as many past-due taxes, at 4.5%.

Graph representing NYC total property tax liability

Since 2019, total free market multifamily tax liability has increased and remains higher than rent regulated multifamily. However, free market multifamily exhibits low rates of past-due taxes–with an approximate 1.5% delinquency rate. Three times as many rent regulated multifamily properties (4.5%) have past-due taxes compared to free market properties.

Construction Overview

Various factors, from economic cycles to policy decisions, have shaped the trajectory of housing construction, affordability, and the overall multifamily landscape. Although the city’s current housing stock of approximately 3.6 million units is the largest it has ever been, recent additions have not been sufficient to accommodate growing demand. In fact, the New York City Housing & Vacancy Survey (HVS) for 2023 detailed the tightest housing market in the city in over 50 years. The vacancy rate has fallen to a multi-decade low of 1.4%, down dramatically from the pandemic high of 4.5% in 2021 and 3.6% pre-pandemic in 2017.

Graph showing the Number of Multifamily Permit Filings per Month in 2023 Past Trends & Current Realities of Rent Control

In the mid-2000s, NYC experienced a housing boom characterized by robust construction activity and soaring property values. Between 2005 and 2008, the Department of Buildings issued permits for more than 30,000 units annually, signaling a period of unprecedented growth. After the Great Recession, however, from 2010-2022, employment grew by 23%, while housing stock increased by just 9%. The Great Recession led to declines in housing construction, limiting the supply of new housing.

Graph representing the net annual increase in housing units by submarket

Employment and population continued to grow significantly faster than the housing supply in 2023. The expiration of 421A may have exacerbated this trend.

The 421A Tax Exemption Program

The 421A Tax Abatement program was started in 1971 to incentivize the development of underutilized or vacant properties, allowing developers to forego property taxes on new construction projects for a decade or longer, provided they offered rental units at affordable rates for low- to middle-income families. However, in January 2016, the program expired, only to be succeeded by a revamped version named Affordable New York, introduced by Governor Cuomo in January 2017, with an expiration date set for 2022.

Prior to the first expiration in 2015, New York City experienced an unprecedented surge in construction activity as developers raced to qualify for the tax incentives. Within the first six months of that year, developers secured permits for 42,088 new residential units in the city, according to the U.S. Census Bureau. This surpassed the total for any full year since 1963, when nearly 50,000 permits were issued. The surge in permits was largely attributed to developers rushing to commerce foundation work by June 15, 2015, in time to qualify for the tax abatement program. To note, developers had until 2019 to complete construction to qualify for the abatement.

The average estimated hard construction cost per unit jumped to $124,300 in 2015 from $99,500 in 2014.

Brooklyn emerged as a hotspot for development in 2015, accounting for 46% of residential permits.

Leading up to the expiration of the most recent version of the program, developers embraced the program as a way to ease the cost of doing business in New York. Consequently, building permits surged in the months preceding the program’s expiration as developers broke ground in time to qualify for the tax break. However, following these expirations, new building permits plummeted, and the city has seen fewer new rental developments come to market. Some developers have pivoted their projects to condos; others have decided to build all-affordable developments with some help from the Department of Housing Preservation and Development.

Over the past decade, approximately 3,000 properties in the city, totaling around 117,000 units, utilized the 421A program.

Graph showing the permit filings for new construction in NYC

Transaction Velocity & Market Fundamentals

Overall vacancy rates have remained within a narrow range from 2010-2019. They increased dramatically in 2020 as people moved away from the city, and then declined significantly over the past two years. HVS reported that vacancies fell to a multi-decade low of 1.4% in 2023. This is down from 4.5% in 2021 and 3.6% in 2017.

Rental Vacancy Rate

An August 2023 report by the city’s Independent Budget Office finds that almost a third of vacant rent stabilized units in 2022 were also vacant in the prior year, for a total of nearly 13,400 units. Moreover, the IBO found that this number has more than doubled since 2017 when there were estimated to be roughly 6,500 such long-vacant units. Some property owners have argued that the increase reflects changes in the rent regulation laws in the 2019 Housing Stability and Tenant Protection Act (HSTPA). The changes made it more difficult to increase the rents on vacant units, decreasing owners’ incentives to repair or make required improvements.

Graph showing the rental vacancy rate in NYCGraph of NYC rental housing inventory and median rents by apartment size

Transaction Volume

New York City’s housing is primarily controlled by generational private owners, with transaction volumes reflecting a nuanced landscape. While approximately $6.4 billion exchanged hands in 2023, notably lower than the previous year’s $14.5 billion, the demand for apartment buildings falls within two categories. (1) Those constructed in the past decade or (2) situated in sought-after renter neighborhoods like Brooklyn and Manhattan. Investors increasingly prioritize owning high-quality assets to manage risk where unexpected capital expenses are less likely to occur, and fear of absorption totals cratering is minimal.

Overall sales volume has drastically slowed, with Q4 2023 figures falling below $1 billion, a rarity since 2010. 2023 was the second-lowest volume year of the past decade.

Investors note that factors such as rising borrowing costs, moderating rent growth levels, and the potential of a near-term recession may contribute to a continued slowdown in transaction volume in 2024. Unless buyers are zeroing in on specific buildings or locations with
massive rent growth potential, advertised cap rate projects on multifamily properties will likely need upward readjustment.

Graph of transaction volume for NYC metro

As New York City grapples with housing affordability and supply constraints, policymakers, developers, and community stakeholders face complex challenges. While recent years have seen efforts to boost construction and preserve affordable housing, more comprehensive strategies are needed. Moving forward, policymakers need to explore innovative approaches to incentivize affordable housing development, enhance rent regulation mechanisms, and promote equitable urban planning. Additionally, addressing cost pressures and fostering growth will ensure that New York City remains vibrant and accessible to residents, developable for developers, and maintainable for landlords.

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