A city in desperate need of housing must unlock its unoccupied, uneconomic rent-stabilized apartments.
A draft report from the Mamdani administration made headlines with the conclusion that New York City needs about 700,000 new homes in the next 10 years to meet existing demand and accommodate projected growth. 70,000 new homes a year would be more than four times the average number of new housing units permitted in recent years.
To say that quadrupling the number of new homes developed next year and then repeating that feat in each of the following nine years is logistically, financially and politically difficult would be a serious understatement. Merely coordinating where this significant increase in the city’s housing stock should go given current zoning, landmarking, regulatory and local community board constraints would be a massive undertaking.
Fortunately, there is a major source of housing that already exists, needs no approvals and is distributed throughout the city: the more than 57,000 rent-stabilized apartments that New York State’s Division of Homes and Community Renewal has reported are sitting empty. At an average household size of 2.48 people for the city, these vacant units could house approximately 140,000 people — the entire population of Syracuse, New Haven or Stamford, Connecticut.
Think about that: In the midst of a supposed housing emergency, New York City is sitting on tens of thousands of affordable units — residences that remain empty because the economics are utterly broken. This is a profound flaw in the rent regulations that control the market and other ill-considered laws piled atop them.
If landlords are supposed to be as greedy as many people say, why have they chosen to collect no rent at all for approximately one out of 40 privately owned apartments? The answer I have heard from very rational-sounding landlords is that they would lose money if they rented these apartments.
How is that possible, and what does that say about our system?
The explanation begins with the fact that below-market-rate apartments in one of the most expensive cities in the world are rare finds and tenants are reluctant to give them up. People fortunate enough to get these units, either through luck, a personal contact or a bribe, generally stay almost three times as long as tenants in market-rate apartments. When tenants finally do leave, there is considerable work needed to make them ready for a new tenant. Many of these units are in older buildings and the deferred maintenance on them can be considerable. Kitchens and bathroom fixtures may well be obsolete, the wiring may be outdated and the apartments are often in bad shape after decades of neglect.
Prior to the Housing Stability and Tenant Protection Act of 2019, landlords were able to increase the rent by 20% when a rent-stabilized apartment became vacant. This “vacancy decontrol” increase, along with the ability to increase the rent by up to 6% per year to pay for capital improvements, provided the funds to address these issues and get the apartments back into circulation. The 2019 law ended the 20% increase in rent entirely and limited the increase in rent to pay for capital improvements to 2%. It also imposed several limits on the ability of landlords to collect even this smaller amount, such as denying any increase in buildings where 35% or fewer of the total units are rent-regulated. In other words, the law almost stopped funds for renovating units.
This is not a story about market forces run amok; it’s about market forces distorted so profoundly they can no longer work the way they’re supposed to.
Since every unit and every renovation is different, there is no simple number for the cost of renovating an apartment and making it habitable for a new tenant. That said, most estimates for renovation costs in the city start in the low six digits. Landlords of rent stabilized apartments, however, have estimated that they can usually update a vacated unit and make it habitable for approximately $30,000. They do note that these renovations could in many cases cost considerably more than $30,000. Additionally, I note that this estimate came from large landlords who have their own staff who can do work at a much lower cost than the private contractors that smaller landlords have to hire.
Let’s do some back-of-the-envelope math. First, landlords will have to recoup at least $30,000 just to break even. If we assume they borrow the $30,000 at an interest rate of 8% and repay it over eight years, the tenancy of a typical rent-stabilized tenant, a landlord would incur a monthly cost of $424.
Many landlords I spoke to who are keeping units vacant claim that any rent below about $1,000 per month makes a unit uneconomic to rent. Although the main expense is the cost of renovating the unit, there are clearly other expenses which fall into two categories.
The first is the increase in costs caused by having a new tenant. The largest of these is the increase in property taxes due to the landlord’s new rental income. Although the specific effect on taxes from this new income depends on many variables and is particularly difficult to estimate, a rule of thumb is that net rental income (rents minus expenses) is taxed anywhere from 40% to 50%. Using the midpoint of 45% and taking into account the deduction for the renovation expenses, $1,000 of new rental income would increase a landlord’s property taxes by $259 per month. Clearly, there are other increased costs associated with renting the unit, such as additional expenses for water, gas, wear and tear, insurance and administration. These costs are harder to estimate, but probably somewhat less than the $259 tax expense.
Another category of expenses is potentially very significant but even harder to quantify: the costs associated with a non-paying tenant. The clear majority of tenants pay their rent, especially those with the good fortune to snag a below-market-rate apartment. But for those who do not — an estimated 22% of rent-stabilized tenants are behind on their rent according to the Community Service Society — the costs associated with evicting them as well as the months of unpaid rent can be quite substantial. New York City has some of the most tenant-protective laws in the United States, and the City’s Housing Court process has multiple safeguards for tenants which cause the typical eviction process to take from four to 18 months (with some going significantly longer). Again, this does not occur frequently, but the potential for these substantial costs is definitely on the minds of landlords when calculating the potential profit from or loss associated with renting out an apartment.
Given that just the additional taxes and expenses of renovation would consume more than two-thirds of a $1,000 rent before any other expenses are taken into account, it is not hard to see how a landlord dealing with sharply rising costs for almost everything, particularly energy, could conclude that units renting for less than that are not worth renting. This is particularly true given that there are at least two pending court cases that could invalidate some of the City’s rent laws and enable landlords to charge more for these apartments — something landlords could not do if they have already rented them at lower rents.
In a time of polarized politics, I think everyone should agree that turning these 57,000 or so empty apartments scattered about the city into homes would be a giant win for the city and the tens of thousands of people who would call them home. This could be easily accomplished simply by allowing landlords to pass through the cost of necessary renovations to new tenants. In many cases, prohibiting this does not stick the landlord with the cost, it just results in no renovation, no costs and no tenant.
When Mayor Mamdani was running for office, he promised to make housing more affordable. Earlier this year, the city’s Rent Guidelines Board fulfilled one of his promises by prohibiting any rent increase whatsoever for renewed rent-stabilized apartment leases, a freeze Mamdani wants to continue for a full four years. This may save some New Yorkers money, but it does not make housing more affordable. It merely shifts costs from tenants to landlords. There are at least 57,000 reasons why this policy harms the city and limits its ability to meet its housing goals.
