Building the Skyline

The Birth & Growth of Manhattan's Skyscrapers

by Jason Barr 3 Comments

Mitchell Bites Lama: The Unintended Consequences of a Housing Program

Cristina Scofield, Mary Beth Combs, and Jason M. Barr                   October 26, 2022

The post-World War II period was a time of massive government intervention for cities. Public housing was meant to replace the “slums” with affordable and clean shelter for the poor. While land deeds, federally-backed home loan programs, and highway building allowed members of the white middle class to buy free-standing homes in the suburbs.

But the lure of cheap land and the ability of Americans to fully embrace a car-based lifestyle worked too well. Central city areas, like Manhattan and the Bronx in New York, saw the flight of the middle class. Manhattan became a borough of the ultra-rich and ultra-poor, while the Bronx was for the poor and minorities who were boxed out of the suburbs through zoning and racial discrimination.

To counter the unintended consequence of “White Flight,” the New York State government enacted the so-called Mitchell-Lama (ML) housing program to encourage developers to build middle-class housing in central cities. Little did they know that they were setting themselves up again to generate a new set of unintended consequences that would reverberate long into the future.

The Mitchell-Lama Program

In 1955, the New York State legislature passed the Limited Profit Housing Law, which included a provision for the Mitchell-Lama (ML) program. ML has funded the majority of affordable units out of all the supply-side programs in New York City.

Under the provisions of ML, developers get financial incentives (such as low-interest mortgages and/or real estate tax benefits) in exchange for the construction of affordable rental and cooperative housing units aimed at middle- and moderate-income tenants. Current statutes reflect a minimum 20-year “affordability period” in which profits are limited, income caps are placed on tenants, and properties are subject to regulation and oversight by government agencies.

But the affordability period has varied over the years. The original period at the time of adoption as 35 years, after which owners could engage in a “buyout,” but which also carried many financial stipulations and costs. In 1959, during Governor Nelson Rockefeller’s administration, the buyout clause was changed dramatically, reducing the minimum affordability period to only 15 years and eliminating the stipulations on buyouts to encourage the construction of affordable housing.

Mitchell-Lama Apartment Buildings in New York City

Updates

In 1961, all laws regarding government-aided middle-income housing (including Mitchell-Lama) were consolidated into Article 2, Section 35 of the Limited Profit Housing Companies Law of the State of New York. This section, which is in effect today, allows for voluntary dissolutions (colloquially, “buyouts”) after 20 years. To exit the program, owners must have paid off all principal and interest of the original mortgage. Once out of the program, the landlord loses the tax benefits but is no longer under government supervision and can charge market rents.

In the case of Mitchell-Lama cooperative apartments (co-ops), a different dissolution process is required to convert the coop to market rate. Originally, two-thirds of co-op residents had to vote for privatization for a coop to leave the ML program (and thus waive Mitchell-Lama tax benefits). A 2021 New York State bill signed by Gov. Kathy Hochul, however, raised the co-op dissolution requirement to 80% of residents as part of an effort to retain the affordability and availability of these properties. Upon a successful vote, privatization follows. Residents remain owners of their units but must begin to pay market-rate real estate taxes. Many co-op owners, however, sell their units, often for a significant profit. For example, Southbridge Towers, located in Lower Manhattan, was one such Mitchell-Lama co-op that voted to privatize; residents who sold their apartments saw profits in the hundreds of thousands of dollars.

Overall, the program in Gotham has generated about 140,000 housing units (New York has nearly 3.7 million units). Since the turn of the millennium, buying out has been alluring as the prices of market-rate units have skyrocketed. In 2004, there were 125,000 units (53% in co-ops). There are fewer than 96,000 ML units today, and about 70% are co-ops. So, rental buildings have been more likely to exit.

The Location of Mitchell-Lama Buildings in New York City Color Coded by the Number of Class C Violations from 2017-2021. Source: here.

Incentives

It’s easy to see the incentives for favoring a buyout.  Once landlords get through the regulatory red tape, they are free to raise rents and operate outside the auspices of government oversight, opening the door to higher profits. These landlords can also sell their buildings for big gains. Or, in the case of co-ops, unit owners can sell out and receive huge windfalls.

But this leads us to wonder if the buyout opportunity might not lead to some perverse incentives in terms of building maintenance. Are landlords purposely neglecting buildings as they near the buyout date, either to displace rent-regulated tenants to make room for market-rent-paying tenants or with the intention of selling an empty building for a big profit?

There’s certainly some anecdotal evidence. In 2010, the New York Times reported on 1520 Sedgwick Avenue in the Bronx. It was bought by private investors after it exited from Mitchell-Lama. The article reported that “[s]ince the new owners took over… in the fall of 2008, the number of violations has jumped to 598 from 82, an increase of more than 600 percent, according to the Department of Housing Preservation and Development.” Life for tenants became miserable, as the new landlord sought to replace them with those who would pay higher rents.

But is this a larger, more systematic problem? To answer this question, we turned to the data.

Buyouts and Building Maintenance: The Evidence

As a stipulation of government oversight, all Mitchell-Lama buildings are subject to inspections by the NYC Department of Housing Preservation and Development (HPD). HPD publishes the results of these inspections online at NYC OpenData. HPD inspectors enforce the Housing Safety Code, issuing violations of different classes in varying severity. In particular, Class C violations are “immediately hazardous” and refer to issues with lead-based paint, window guards, pests, mold, and heat/hot water violations.

We looked at the incidence of housing safety code violations in Mitchell-Lama properties over the years to see if there was any correlation between the arrival of the expiration of affordability and the incidence of building neglect.  To this end, we performed a statistical (regression) analysis, looking at the drivers of Class C violations for ML properties. (Sources and results here.)

In the first set of analyses, we compared ML buildings to large non-ML rental buildings, controlling for building characteristics, locations, and the number of inspections citywide. We found that overall, Mitchell-Lama properties have, on average, 1.69 more yearly violations than comparable regular market-rate rental properties (regardless of rental or cooperative status).

The Buyout Window

In another analysis, we looked at the number of violations of the ML buildings within a 10-year window around the benefits expiration year, controlling for building location and characteristics,  and the number of total inspections citywide. The data show average increases of 3.5 violations in the year immediately preceding expiration, 2.5 violations in the year of expiration, and 6.35 violations in the year immediately following expiration.

While these numbers may seem small when taken separately, it is important to remember that this means a three-year period would see an average of 12-13 new Class C violations. Within the span of one year until expiration to four years after expiration, there is an average increase of 21.4 new violations. The incidence of up to 12-13 violations within the three-year period and 21-22 violations within five years around expiration is troubling. One Class C violation might mean an entire family is without heat in the middle of winter. Twelve of these violations within a concentrated period make a building virtually uninhabitable.

In short, the data strongly suggest that the buyout opportunity is driving owners to neglect their proprieties to replace low-income tenants with higher-paying ones.

Coefficient Estimates for Additional Number of Class C Violations, on Average, versus Years Till Mitchell-Lama Expiration. Source: here.

The Policy Implications

Given the evidence, new housing code compliance incentives must be implemented, particularly for ML properties.

Inspections

In addition to traditional code enforcement inspections, both annually by HPD and those requested by tenants, New York City could gravitate to a model where inspections are based on predictive algorithms that use data from tax assessors’ offices, utilities, public works, and other sources to identify housing-related health risks and to prioritize properties for inspection and coordinated service provision. And in this case, being close to expiration for an ML property is a risk for tenants.

A recent study of a neighborhood in Boston found that risk-based inspection using a machine learning model resulted in an 1.8-fold increase in the number of inspections that identified code violations.  Beyond these inspection measures, New York also could increase the number of inspections of buildings owned by repeat offenders, such as setting the timing for a building’s next inspection based on how many violations were discovered at its last inspection.

Capital Reserve Funds

Similar to the rules already in place for New York City co-op boards, non-co-op ML building owners could be required to create a capital reserve fund to cover future significant repair and replacement costs.  In addition to regular maintenance of roofs, elevators, fire escapes, and fire doors, building owners should be required to hire a professional architect or engineer every five years to determine a capital budget that looks ahead as far as five years.

Fine structures

HPD violations may result in civil penalties imposed by the Housing Court if an owner fails to comply with the violation and certify the correction or if the owner certifies the correction falsely.  The degree to which these fines are levied and enforced has been questioned by others researching housing code violations.

New York Times reporter Kim Barker shows that the fines are too small to create an incentive for building owners to comply, particularly if they are planning to sell the building after they force the current owners (either through neglect or harassment) to move.  Often the millions of dollars in profit earned by converting and selling at market rates far exceeds the relatively small fines levied against building owners who do not correct code violations.

Stories of landlords who try to drive tenants out of regulated apartments are legend: “In the 1980s, one moved in drug dealers and prostitutes to harass tenants. One landlord legendarily roamed the halls with snarling pit bulls. Several earned tabloid nicknames, such as Dracula Landlord and Reptile Landlord.”

If building owners who want to marketize a building are more likely to neglect the building and/or harass tenants , then fine structures should be reconfigured to incentivize compliance better.  A fine system could be tied to a percentage of the sale price of the building and is based on the number of violations per year in, say, the five years immediately before the sale of the building.

The Future of Middle-Class Housing in New York?

More broadly, Mitchell-Lama housing is becoming a “dying breed.” The real problem is the discrepancy between market prices and the benefits generated by being in the ML program, even with generous subsidies.

While the ML has provided housing for hundreds of thousands of New Yorkers, it raises bigger questions about its overall sustainability. The spike in building class violations that we found around the expiration dates provides evidence of the program’s structural problems.

Going forward, New York needs to devise or revise its methods for encouraging middle-class housing. Back in 1955, when they were writing the law, they did not think of or care about one simple fact: incentives matter.

by Jason Barr 6 Comments

Gotham Needs a Master Plan for the 21st Century

Jason M. Barr       September 13, 2022

New York is a resilient city. In 1975, it was left for dead when President Gerald Ford failed to help stave off its Fiscal Crisis. But, the rise of high-tech and high-skilled industries has reinvigorated its economy, while the drop in crime has brought back consumers and tourists alike. Then, when the Covid-19 Pandemic hit, the commentariat was, once again, predicting the death of Gotham. Yet, the city endures.

New York’s problems today are, in some sense, crises of success rather than failure and abandonment, like in the 20th century. Housing is more unaffordable than ever. Too many people are chasing too few units, and prices have soared. On its streets, too many drivers are overwhelming roads never designed to handle such capacity. Decades of economic growth enabled by fossil fuels have put us on the brink of climate change catastrophes.

And what is New York City doing about these things? It’s playing Pin the Tail on the Donkey.

That is, Gotham is groping its way forward with half-baked policies that hardly address the problems at hand. The decentralized nature of its governance also means that agencies and authorities operate with little consideration that housing, transportation, and climate change are inextricably linked.

Thanks to its wealth and determination, New York may well muddle its way to the future. But this is wasteful, unnecessary, and will cause undo suffering.

Time for a New Master Planning Philosophy

It is time for a new master plan based on 21st-century thinking, not like the master plans of old that tried to tame the city or to micromanage what happens on every block. Rather, a city is a dynamic system of interrelated parts that feed back on each other and evolve based on changing forces both from within and outside the region. These forces create a type of order–a kind of controlled chaos, that should be embraced rather than squashed. A new master plan is needed that “listens” and adjust policies and investments as the times change in order to encourage improvements, adaptation, mobility, and growth without adding unintended harms.[1]

Housing Woes

Since New York’s renaissance began in the 1990s, there has been a pervasive sense that rising housing prices are the norm, and nothing can be done to change the tide. There is a deep mistrust of developers and the free market for housing since the thinking goes that if left unchecked, the market will exacerbate gentrification and cause prices to rise even higher.

As a result, the government has cobbled together a suite of policies that ignores the necessary solutions and worsen the problem. First has been the doubling down on rent stabilization. This policy only makes sense if you believe access to New York’s housing is a zero-sum game. Rent stabilization remains in effect if the citywide vacancy rate remains below 5%. But it remains below 5% in large part because of stabilization!

The other programs rely on subsidies to incentivize the development of affordable housing units. Sure, they have helped the lucky few who get access, but they have not addressed the fundamental problem–a demand-supply imbalance.

Over the decades, New York has erected many barriers to prevent the housing market from doing its job. Rent stabilization is only one problem; overly restrictive zoning is another. In Gotham, more than two out of every three residential properties are either above or very close to their allowable floor area caps. That is, it’s illegal or impractical to add more housing on these lots.

By law, the City prevents new housing and then blames developers for not providing it. When prices go up, it “punishes” “greedy” landlords by enacting price controls.

Stuck in Traffic

New York’s transportation situation is just as bad as its housing market. Regarding automobiles, no new roads have been constructed since the 1960s when Robert Moses was in power. But the system was never designed to handle the traffic of a metropolitan region with 19 million people and their truck-based freight. Too many cars are “chasing” too few roads, resulting in massive congestion, frustration, waste, and harm. Meanwhile, the MTA is struggling to get its straphangers back.

More broadly, the larger transportation network is run by a hodgepodge of agencies. The Port Authority oversees bridges and tunnels from New Jersey, and the Department of Transportation oversees bridges, tunnels, and roads within Gotham. Then there’s the MTA, which oversees subways, buses, and commuter rail. There is practically no coordination between them, even though they all provide the same product—mobility.

Climate Change Catastrophes

On September 1, 2022, Crain’s New York Business ran the headline, “One year after Ida, New York leans into nature-based climate strategies.” The article discusses how the City is increasing the number of “bluebelts”—natural wetlands that can absorb water from surges or torrential downpours.

This is certainly a promising program, but when you think about it, it’s just another example of how New York is groping its way to climate change resiliency. Bluebelts  can only be one minor fix in very specific neighborhoods. The broader resiliency strategy thus far has been piecemeal and ad hoc: add to the bluebelt here, beef up a shoreline there, build a seawall here, etc. There is no larger framework, nor any consideration of how its actions will affect the cost and access to housing.

Yes, learning by experience and tweaking policies on the ground are important parts of the equation. But when you look at what’s being done, it’s clear that New York is taking the path of least political resistance—it “sneaks in” its resiliency projects where residents are not likely to complain. Hardly a rational plan.

Constrained New York. This graph shows that two out of three residential properties are at or above their allowable floor area ratio limits. Source: NYC PLUTO.

The VEAM Principle

It’s high time that the City updates its thinking about how cities work, how policies should be enacted, and how governance should be structured. It’s high time that Gotham creates a new master plan for the 21st century.  The plan should be based on economic realities and not on visions of utopia or catering to narrow special interests. Such a plan should adhere to what I call the VEAM Principle.

V: The Value of Land

First is the value of the land. Land values represent the value of geography. Central places are more valuable than suburban ones. Blocks near train lines or parks are more valuable than those further away. And where land values are highest, more housing should be allowed and encouraged.

Because the zoning framers feared density, they set up a city where most of its land is forced to remain low density. As a result, there is hardly any flexibility for high-amenity neighborhoods to increase the amount of housing. In many places, the zoning codes are the same whether a property is one block or one mile from a rail line or large park. It makes no economic sense.

E: Externalities

However, the main problem of dense development is that it creates a host of negative externalities or harms that affect residents and visitors. Tall buildings can create shadows, and density can create congestion on the streets. City planning needs to minimize the damage without hurting residents.

Historically, in the name of limiting shadows and congestion, the City has resorted to building bulk limits. But this is a very blunt instrument because it creates housing scarcity and simultaneously curbs the negative and positive externalities.

If shadows from new construction are a problem, tax shadows or tax bulk or height above some “reasonable” level that gives back resources to the community to improve the quality of life.

A: Affordability

In New York City, rent stabilization remains in effect if the citywide rental vacancy is less than 5%. But rather than saying, “vacancy is too low, we need to implement price controls,” how about we imagine a world where citywide vacancy is always say 10% naturally—a world where there is so much housing and so many choices that rents are inherently affordable without unnecessary restrictions. The government needs to have more faith in the invisible hand. That’s not to say it can’t use a velvet glove to help adjust things from time to time.

M: Mobility

The goal of transportation policies should be to move the most amount of people with the least amount of congestion. This means rail, subways, roads, and the prices of using each should be coordinated to give people several choices and limit congestion. The more options people have, the more naturally they will eschew their cars. The key: all elements of the transportation system are linked—cars, buses, subways, commuter rail, walking, cycling, and scootering are all different forms of mobility and should be treated as such within a larger mobility framework.

Just as importantly, transportation goes hand in hand with housing—rail lines and subway stops should have more housing because not only is the land more valuable, but it also makes life easier for thousands of people. The City can’t just build a route to connect Queens and Brooklyn and say that it solved a problem. The new line will drive up the cost of housing and land. Without upzoning along the corridor and beyond, the affordability problem will worsen.

Pandemic Effects. Since the pandemic started in early 2020, mass transit ridership has been down, while driving has surpassed its pre-pandemic levels. Source: Newmark Research.

Elements of A Master Plan

A master plan, of course, is a detailed document. But here, I offer some key elements that adhere to the VEAM Principle.[2]

Rethink Zoning

The current zoning system, enacted in 1961, was based on the belief that density was bad. Today, cities embrace density for all its benefits. Thus, Gotham needs a zoning plan that reflects this. This could be done in, say, one of two ways. The first would be to upzone all neighborhoods initially and then provide local “bump ups” in the allowable floor area ratio (FAR) based on land values. Let demand dictate density.

The second possible strategy is to eliminate floor area ratios altogether and have developers pay impact fees or externalities charges that are a function of land values and current density. In suburban neighborhoods, the fees would rise dramatically, say after the fourth floor, whereas in Manhattan, fees would rise after, say. 30 stories. This way, the externalities are paid for without stifling needed housing construction.

Zoning regulations have also prevented the City from enacting transit-oriented design (TOD) policies. In many neighborhoods along the subway lines, it’s impossible to densify. A genuinely forward-thinking plan would encourage densification along the subway and commuter rail (which would also naturally increase ridership).

Congestion Pricing Everywhere

New York is on the brink of establishing “congestion pricing” for cars and trucks entering lower Manhattan (though parochialism may kill it yet). However, it’s not really a congestion charge since the fee will not move up or down based on how many cars want to enter (that’s a toll). Again, this plan illustrates the lack of systematic thinking. It charges only one price and is very localized, applying only to those entering Manhattan south of 59th Street (and does not consider that parking or traffic just outside the zone will likely become that much worse).

I have written on this subject before, so I will only say that a proper congestion pricing system goes citywide. It charges tolls on all the highways, bridges, and tunnels based on actual usage during the day. And fees for highways are linked to mass transit—if roads become crowded, the costs of using buses or subways fall simultaneously. Integrate the entire system.

Climate Change Impact Maps

New York should produce climate change impact maps that show the likely damages from surges, flooding, and other shocks.[3] The maps will give property owners the information they require, and will also suggest needed government investments for resiliency.  The maps would work alongside the zoning maps and transportation plans so that a master resiliency plan does not backfire by harming other aspects of city living and affordability.

Tie Services Upgrades to Density

Upzoning and TOD mean higher-density neighborhoods. The master plan needs to outline the process by which local services, such as schools and parks, automatically get upgraded as the local population increases. This way, the government agencies are prepared ahead of time, and residents can rest assured that population increases will not reduce their quality of life.

Transition Requires Compensation

Rethinking and reorienting policies means change. However, people naturally resist it because they fear the new outcome will be worse than the status quo.[4] Thus, Nimbyism is a tremendous barrier to moving New York to a better place.

As I have argued elsewhere, a new master plan needs to spell out how transitions will proceed in a manner that makes people better off. One way to do this is to compensate those who will be harmed, such as offering land value insurance for homeowners and subsidies to renters who need to move when their building is redeveloped.

Housing Vacancy. This graph shows NYC rental housing vacancy rates since 1960. It has never risen above the 5% threshold needed to end rent stabilization. Source: NYC Rent Guidelines Board.

The Steps to a Better New York

What are the steps needed to create and enact such a master plan? The first thing is leadership—perhaps the scarcest commodity of all.  The process would begin with the mayor and with a paradigmatic shift in thinking—that the metropolis is a complex system that, if guided properly, can generate order without design.

Reforming Governance

The mayor needs to assemble all the relevant agencies, authorities, and local, state, and federal leaders and have them map out the elements of governmental coordination. New York needs to build the capacity for systematic thinking and action.

A Blue Ribbon Panel of 100

The next step would be for the mayor to convene a Blue Ribbon Panel of 100 respected leaders and accomplished community members to create the master plan. A diverse panel, chaired by a seasoned but impartial public servant, would give its output legitimacy, as the plan must be fair and not favor one group or industry over another.

Having the panel issue the plan makes an essential statement that change is a community effort. It says, “Let’s collectively imagine a world where housing is more affordable, where traffic and transportation woes are not a constant part of daily living, and where we don’t need to live in constant fear of flooding.” Imagine that!

Its members could come together to engage in systematic thinking. Parks representatives will hash things out with housing advocates. Climate change experts will hash things out with transportation representatives, real estate developers will hash things out with social service providers, and so on.

Selling it to the Public

With a plan in hand comes the hardest part of all: selling it to the public. The pervasiveness of Nimbyism and the widespread cynicism about government effectiveness make any significant policy change nearly impossible. The Blue Ribbon Panel and city and state leaders must demonstrate how the plan will improve New Yorkers’ lives—that housing will be more affordable, transportation will be faster, and climate change damage will be minimized. The Panel can sell the plan without succumbing to parochialism.

The Future Today

We have, unfortunately, created a crisis of creative thinking—a kind of a prisoner’s dilemma world where protecting our self-interest seems preferable to working towards the common good.

As as the nation grew wealthier, its citizens asked its leaders to help preserve their gains. Governments thus have erected barriers to slow down or prevent dramatic urban changes. This, however, has cemented the notion that the expensive and congested status quo is preferable to any and all possible changes, even those that have the potential to create great good.

Despite what we tend to think, the status quo is not inevitable. But moving to a better world involves leadership and a deeper understanding of how cities function and succeed. I believe it can be done.

 

Read my Skynomics Blog posts about New York City housing here.

 

—

[1] I’m grateful for Alain Bertaud’s masterful book, Order Without Design: How Markets Shape Cities, which has inspired the ideas in this post. I do not, however, profess to speak for him or am I attempting to directly represent his views.

[2] For the sake of brevity, in this post, I avoid the discussion of real estate taxation, but any new master plan should consider a land value tax program.

[3] This is a tall order, given that the city government can’t even update its FEMA insurance flood maps since Hurricane Sandy hit in 2012.

[4] It’s not clear to me how eliminating bumper-to-bumper traffic, for example, is worse than the status quo.

by Jason Barr 1 Comment

Frictions and the City: Housing Affordability and Redevelopment in New York (Part II)

Jason M. Barr    August 31, 2022

New York City suffers from a housing affordability crisis.

The fundamental problem is that there are too few homes to keep up with the demand, particularly in the middle- and lower-income areas. The rich get the units they want because their money incentivizes developers to provide them. Besides, the places where global jetting setters have apartments are where zoning regulations are the most generous, mainly because of Manhattan’s long history of welcoming density.

A Century of New Housing

A review of new housing over the last century shows that new construction across Gotham in the 21st century has been underwhelming compared to past decades. The last era of big supply increases ended circa 1965. The Roaring Twenties was the best period, where the city was averaged close to 100,000 new units per year. 85% of Gotham’s housing was built before 1975.

Since 2010, just 11% of the roughly 2,100 census tracts in New York City have provided 80% of its new housing units; most of these tracts are close to the city center. In other words, only a few census tracts are doing most of the “heavy lifting.” Hardly a way to end an affordability crisis.

Let’s say that each census tract “pledged” to add its fair share of housing by increasing the number of units by 10% over the next five years—through new construction, conversions, accessory dwelling units (ADUs), etc.—that would add 365,000 units, more than what has been added to the city in the last 15 years (see the figure below). This kind of fairness would be a huge boost to affordability.

In this blog series, I aim to uncover the nature of the frictions to new housing in places where high-rollers are not interested in putting their money—the places where housing is desperately needed but is not being supplied.

Norwood, The Bronx

In a previous post, I looked at the Norwood section of the Bronx. By many measures, it is a successful dense working-class neighborhood with excellent parks, easy access to public transportation, and a strong retail corridor. Yet, a review of the housing stock shows that the neighborhood is frozen in time, with 95% of its residential structures built before 1965! This is a waste, given that Norwood has all the attributes for more transit-oriented housing.

So, what are the main frictions? First is the costs of new construction relative to the residents’ income. Because it is a working-class neighborhood (far off the gentrification path), the income that households can pay for housing is quite limited. The median household income of Norwood is $40,000. Using 30% of gross household income as a benchmark would suggest that the typical household should pay less about $1,000 monthly for rent (the actual median rent is $1,600).

But because of its current density, land values are relatively high, coming in at around $430 per square foot of land. This, combined with the fact that average construction costs for a new apartment building run around $300 per square foot, means that the return on investment on new construction would not generate a sufficient return to attract redevelopment. From an investment perspective, buying an existing apartment building is more profitable than building a new one.

More Frictions

But say the construction costs were lowered, for example, through generous subsidies or reductions in the costs of labor, materials, or building methods, this would not solve the problem. In Norwood, there is a “land shortage.” Most apartment buildings have rent-stabilized tenants. As a result, it’s nearly impossible to empty an old building to tear down. Given the construction economics, a developer would likely need to combine two or more lots and have the tenants in both buildings leave voluntarily, a near impossible task.

A large part of the reason they don’t want to leave is that vacancy in the neighborhood is so low, thanks in large part to rent stabilization and the lack of new construction. Where would they go if they left? Rent stabilization creates a Catch-22—tenants can’t leave because there is nowhere to go, but there is nowhere to go because tenants don’t leave. The rental vacancy rate in the Bronx is now 0.78%!

But let’s say the government came up with a plan to facilitate the movement of people to other buildings nearby, you still would not have solved the problem, because of the zoning regulations. In Norwood, nearly all the residential properties today are required—by law—to be five stories or less. There is no way a developer could buy a low-rise building and construct, say, a 10- or 12-story one in its place (with twice as many units). The rules forbid it.

With all these frictions, is it any wonder that no new housing has been provided in decades?

Rosedale, Queens. This suburban community has expensive housing and is close to the train, parks, and shopping, but restrictive zoning prevents densification to satisfy the demand.

Rosedale, Queens

But Norwood is just one type of neighborhood. New York is nothing if not a city of neighborhoods. To explore the kinds of friction in a suburban community, comprised mostly of one- and two-family homes, we can look at the Rosedale section in Queens. This is a very different place than Norwood. Rosedale is literally at the edge of the city, sharing a border with Nassau County, one of the world’s largest bedroom communities. The median household income, about $93,000, is over twice as high as Norwood.

The neighborhood has about 25,000 residents covering 2.1 square miles (5.4 km2), with a density of 19 people per acre (compared to 120 people per acre for Norwood). About 80% of its residents are Black or African American, with 9% Hispanic and 5% White.

Amenities

The neighborhood has a suite of local amenities. The 90-acre (36 ha) Brookville Park is on the western border. The Long Island Railroad (LIRR) stops at the northern edge. Because it is a small neighborhood, most residents can walk to the station. The rail line runs parallel to Sunrise Highway, a six-lane “highway” with traffic lights. The Greenacres Mall is just on the Nassau side of the border, and JFK Airport is also a stone’s throw away.[1] The southern part of the neighborhood is bordered by a deep channel, onto which backyards abut. Several houses have docks for personal boats.

There’s plenty to offer, but, by my estimate, it has barely grown its housing stock. In 2002, there were about 6,210 units, and in 2021, that figure was close to 6,850—a 10% growth in two decades, an annual rate of about 0.05%. Nearly 90% of properties are one- and two-family homes (and about 5% are apartment buildings). Nearly half of the homes are for two or three families, suggesting a relatively high demand for rental units.

The median price of a one-family home is $610,000. This puts the house price-to-income ratio at about six—considered double the “affordable threshold” of three. In this sense, the typical middle-class household in Rosedale also suffers from an affordability problem.

The Economics of Redevelopment

Since Rosedale is a middle-class neighborhood of free-standing homes, the problem of redevelopment is not rent stabilization. So, what are the frictions?

To see, we need to investigate if it’s economically feasible for property owners to densify. What is the “optimal” density given the income and costs of construction and land? If the optimal density is greater than the current density, it suggests, in this case, that the key friction is either zoning or land assembly.

To this end, I “costed out” various types of redevelopments on the assumption that a developer would buy two typical adjacent lots of 4,000 square feet and combine them to make one relatively large lot (in Manhattan, nearly all the residential lots of this size have 5- or 6-story apartment buildings). I looked at both rental buildings and condominiums (the data, assumptions, and analysis can be found here).

The results suggest that from an economic point of view, the neighborhood has too few housing units. Rosedale has the demand to support garden apartments and low-rise multifamily buildings. That is to say, the revenues from new construction would more than pay for the costs. My analysis also shows that condos would be more profitable than rentals.

Greetings from Rosedale, New York City

The Zoning

Seeing how the neighborhood “wants” more housing, why can’t it get it? A look at the zoning regulations gives some clues. All the residential buildings fall into an “R3” district, with 60% as “R3X.”

R3X

With the R3X regulations, no structure is legally allowed to have a floor area ratio (FAR) greater than 0.5. This means for a typical 4,000 square foot lot (372 m2), there can be no more than 2,000 square feet (186 m2) of space. In addition, there is a height limit of 35 feet (11 m). The house must be set back at least 10 feet (3 m) from the street, and the rear of the home must be at least 30 feet (9 m) from the property line.

In addition, R3X has “contextual zoning” rules which require pitched roofs after 21 feet (6.4 m), further restricting the flexibility of construction.[2] At least one spot of off-street parking is required per dwelling unit.

While the other R3 districts—in this case, R3-1, R3-2, and R3A—have slightly different rules, the broad parameters are the same. No residential structure in Rosedale can have a FAR greater than 0.5, nor can it rise more than 35 feet (11 m), and it must provide off-street parking.

All these regulations mean that it’s illegal to have anything more than a one- or two-family house. In short, nearly 90% of the neighborhood property owners must keep their homes exactly the way they are. More than half of the structures are over the allowable floor area ratio, and nearly all the rest are so close as to make it economically unfeasible to tear them down and replace them with anything except a ballooned-up, more modern version of what’s there now.

The neighborhood is mandated by law to be frozen in time.

Zoning as Blunt Instrument

What’s even more perverse is that amenities surround the neighborhood. The LIRR station is within walking distance (or is a short bike or bus ride away). The western part is bordered by a park, and the eastern part is next to a mall.

The zoning codes makes no distinctions regarding land values and access to these amenities. Lots near amenities will have higher land values, reflecting the benefit to residents. And higher land values suggest a higher demand for that location. Being close to a rail line, for example, is valuable, which means that densifying is the rational thing to do.

However, in Rosedale, it’s illegal for land values to dictate density because the entire neighborhood has the same set of FAR regulations—all of which “force” one- or two-family homes on residents, regardless of whether this is economically rational or not.

A Century of Housing Construction in New York City. During the 1920s, the city regularly built over 80,000 units per year. Today, that figure is closer to 20,000. Sources: here.

What’s To be Done?

Upzone Rosedale

As I have discussed elsewhere, the first thing to do is to permit the allowable FAR to tick upwards based on the demand and land values. The minimum rezoning throughout the neighborhood should be increased from 0.5 to 1.0, with a corresponding loosening of height limits, plot coverages, and off-street parking requirements.

The zoning regulations should also consider the location of amenities and provide higher FARs on these blocks. Upzoning the corridor along the LIRR and Sunrise Highway seems a no-brainer. If city regulations truly had transit-oriented design (TOD) in mind, this area could be rebuilt as a mixed-use walking neighborhood centered around the train stop.

Likely, the MTA/LIRR owns a significant amount of land along the train lines. A master plan should allow the MTA to lease lots to developers now used only for parking ; this way, the MTR can profit from the density and plow the money into improving service. For that matter, the greater the density along the corridor, the more riders and the greater the revenue.

A Streetcar Named Sunrise Highway

More ambitiously, how about a streetcar line that runs along Sunrise Highway from the city to deep into Long Island, and parallel to the LIRR? Again, the blocks along the highway could be converted into apartments for thousands of people in what could be one of the world’s longest TOD corridors (to build along Sunrise Highway would hardly impact Nassau County’s homeowners, though the Nimbyists would immediately cry foul.)

Legalize ADUs

Another no-brainer is to allow homeowners to create Accessory Dwelling Units (ADUs). An ADU is a small additional unit, say a converted garage, basement, or porch, that has separate living space and entrances and is suitable for one- or two-person households. ADUs provide additional income to the property owner and housing options for the very old, young adults, or the single. There are nearly 2,000 single-family homes in Rosedale—imagine each one had an ADU!

Land Value Insurance

One of the biggest obstacles to change is the fear of change—the fear that homeowners will find their house values plummeting as the neighborhood redevelops. Ironically, a densifying community will see increased land values which would help existing property owners. For example, residential land values in Norwood are around $430 per square foot as opposed to $150 for Rosedale, even though Norwood’s median income is less than half of Rosedale’s.

One possible policy is to offer land value insurance to residents. As I have discussed elsewhere, homeowners could take out an insurance policy that would pay out at the time of selling if their land values declined because of rezoning.[3]

The point is that some form of insurance can mitigate fears that partly drive Nimbyism and opposition to rezonings.

Can We Get to Affordable Housing? Think VEAM

The road to affordability, however, begins with systematic thinking. Right now, Nimbyists dictate what happens because they are trying to protect what they have. Parochialism is the order of the day. Residents see changes as a zero-sum game–one neighborhood benefits at the expense of another.

Incentivizing massive redevelopment begins with the idea that all neighborhoods must be ready to chip in their fair share of housing. It also means that people who fear change must see some compensation if they are harmed–to reduce their reluctance of change.

But a big problem is that different government agencies frequently act independently, without any sense that a city is system of inter-connected parts. For example, the Department of City Planning oversees zoning, while the MTA, Department of Transportation, and the Port Authority oversee transportation (each separately from each other). Planning, zoning, and transportation are barely connected, despite the fact that housing and mobility are two sides of the same coin.

While I will have more to say about this in future posts, the road to a better, more affordable city begins with recognizing what I call the VEAM Principle. First is the Value of Land–higher land value places should have more allowable density since land values represent the value of geography. Second is Externalities. Planning polices should reduce shadows and congestion, for example, without imposing undue burdens on what can be built. Third is Affordability. If a neighborhood has low vacancy, it must be upzoned and encouraged to build more units (even above its “fair” share). Affordability cannot come from ad hoc policies and expanding the rent stabilization program. Lastly is Mobility. More housing requires more mobility, which means investments in rail, pedestrian and bike lanes, and driving congestion fees.

If the city truly considers these four elements at the same time, Gotham will get that much closer to solving its affordability crisis.

 

Continue reading Skynomics Blog posts on New York City real estate here.

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[1] Rosedale, however, is on the landing path of airplanes. Giant steel birds descend over the houses. It’s a bit unnerving to see it for the first time.

[2] Why the government dictates architectural practice is beyond me. Sure, things like building scale matter, but if a city is going to add a restriction, it should allow a dispensation somewhere else (such as higher lot coverage). Dictating style alone only serves to make housing markets more expensive. IMHO, when the government forces architects to recreate older styles, it makes the neighborhood look more inauthentic.

[3] The program could not insure against the value of both house and land, since house value insurance would incentivize owners to under-maintain their homes.

by Jason Barr 5 Comments

Frictions and the City: Housing Affordability and Redevelopment in New York (Part I)

Jason M. Barr       June 13, 2022

New York’s resurgence in the 21st century has led to a housing affordability crisis. More than half of the city’s renters pay above 30% of their income for housing. Of this group, one-third are severely rent-burdened, spending more than half of their income on rent. And, of those earning less than $25,000 per year, 85% are severely rent-burdened.  Furthermore, between 2009 and 2019, there was a 59% increase in people living in the city’s shelters.

Now that the pandemic is abating, housing access and costs are worsening. All these problems exist despite a ten-year housing affordability plan implemented by Mayor De Blasio in 2014.

Why the Crisis?

If you ask people why housing is so expensive, you will get different answers. To many, the affordability problem is a result of gentrification and the rise of skyscrapers along Billionaire’s Row. If you were to poll economists, they’d likely point to overly restrictive zoning, which often prohibits densification. To others, the problem lies with the city government, which does not do enough to encourage or build low-income housing. And yet, to others, the fault lies with “greedy” landlords who allegedly gouge their poor tenants.

While all of these might be true to some extent, the bottom line is that the demand for housing across the income spectrum is greater than the market’s ability to supply it. New York has nearly 3.6 million housing units, so one can’t pin the problem on a single cause.

In a fluid housing market, however, rising prices should lead to a rise in housing supply which would moderate price increases. To the degree that there are “frictions” or barriers to creating new housing, housing is under-supplied, particularly in lower-income markets, where the returns to new development are smaller.

Aim for the Middle

The best way to make housing affordable for lower-income residents is to add an abundance of units in the middle range. Middle-class households, who move into the new buildings, will generate higher vacancies in the older ones, reducing their rents and making them more affordable for those of more modest means.

What barriers to new housing prevent supply from keeping up with demand, especially in the middle range? This post—the first in a series on this topic—will explore the economics (or lack thereof) of urban densification with a particular focus on one neighborhood in the Bronx, Norwood.

The Norwood Section of the Bronx. The neighborhood is surrounded by parks and has easy access to mass transit (black lines are subways). The neighborhood appears a likely candidate for transit-oriented design.

Norwood

This neighborhood remains far off the gentrification path that, in theory, could house a larger population because of its easy access to parks, mass transit, jobs, and retail. A stroll through the area reveals a building stock virtually frozen in time, with 85% of its residential structures built before 1940.

Norwood is a middle- to low-income neighborhood in the north central Bronx. It consists of mostly low-rise buildings built out between the arrival of the subway after 1904 and the Great Depression. About 70% of its residential structures are four stories or less. And another 25% are five- or six-story apartment buildings.

It is surrounded by parks:  Van Cortlandt Park to the north, Mosholu Parkway to the west, the Bronx River to the east, and the New York Botanical Garden to the south. In the center is the Williamsbridge Oval with recreational facilities.

The Montefiore Medical Center complex along Gun Hill Road is the neighborhood’s largest institution and employer. There are two retail corridors, one along Gun Hill Road and the other along Jerome Avenue. There is easy access to two subway lines—the D train and the elevated 4 train—and there’s a Metro North commuter rail stop on the eastern border.

The neighborhood has about 40,000 residents with a gross density of about 110 people per acre (similar to Greenwich Village). In terms of ethnic and racial composition, it is diverse. About 63% of residents are Hispanic, 20% are Black, 10% are White, and 10% are Asian. Immigrant groups include those from Albania, the Arabic-speaking world, and the West Indies. The median household income is $36,800, less than the median for the Bronx, which is $41,900. 96% of households are renters.

TOD?

While, like all urban neighborhoods, Norwood has its share of problems, it strikes me as a vibrant place that should have more housing for low- and middle-income residents. This extra housing would ease the rental burden by lowering rents from increased supply and benefit those who can take advantage of its local amenities.

Given its excellent parkland and easy access to mass transit, it seems a prime candidate for transit-oriented design (TOD), where denser housing is built adjacent to parks and rail lines. Since the neighborhood is far from Manhattan, it is precisely the kind of neighborhood that could, and should, remain affordable for those in the lower-income brackets.

And yet, virtually no new housing has been built in decades. Why not?

I reached out to Lev Mavashev, the Founder and Managing Principal of Alpha Realty, a real estate brokerage firm specializing in mid-market multifamily properties, to get his take on Norwood’s lack of redevelopment. His response, “It’s a supply-constrained market.  There just isn’t much to develop on. Most properties in Norwood are your typical rent-stabilized multifamily buildings.  And the sites that are available for development are constrained by zoning.”

Well, let’s see what the numbers say.

Mosholu Parkway, The Bronx. This strip of parkland is a abutted by blocks of 5- and 6-story apartment buildings constructed in the 1920s.

The Economics of Redevelopment: A Case Study

As a case study, let’s take the blocks of apartment buildings that face Mosholu Parkway, a large strip of green land with a parkway in the middle. The buildings are all five- and six-story apartments, and there is no reason why they couldn’t be redeveloped to house 10-story or even 15-story structures (say with setbacks).

In this case, what would the economics be of tearing down an older low-rise apartment building and replacing it with a medium- or high-rise that could accommodate more people. What would the return on investment (ROI) look like, and what are the major barriers preventing redevelopment?

Return on Investment

Let’s look at a hypothetical development’s return on investment (ROI). Here we define the ROI as the net operating income (NOI) divided by the total cost of constructing a new building, ignoring financing costs to keep things simpler. The NOI is the total income from rent minus the expense of operating the building, including real estate taxes.

The idea is to look at the four major pieces of the puzzle: (1) the costs of buying the land and creating the new building, (2) the expected income from rent, (3) the net operating income (the profit), and (4) the return or profit rate.

The Cap Rate

We need a benchmark to see if a project is worth going forward. In this case, we can use the so-called capitalization (cap) rate, which is the building’s current net operating income divided by its market value. In other words, if an investor buys a rental property, the market price will be adjusted relative to the operating income to give a satisfactory return.

For the average multifamily property in the Bronx, the current cap rate is about 6%. That is, on average, investors expect at least a 6% return (though this varies above or below 6% based on the neighborhood). If new a development produces an ROI greater than the cap rate, it makes sense to redevelop the property, and if not, it’s more profitable to retain the older building.

To make matters as simple as possible, as a hypothetical exercise, we will pick an existing structure, tear it down, and redevelop the lot. We’ll look at three scenarios: (1) replacing what’s there now with the same number of units, (2) creating a building with twice as many units, and (3) a more detailed scenario that looks at the return from building heights that range from six to 26 stories. (The information on the data sources, assumptions, and analyses can be found here). For now, we ignore the zoning regulations.

The Land

To redevelop a property requires buying an old building, having the tenants vacate, and then tearing it down. We can use recent sales prices of these buildings to get a sense of what the land would cost. In fact, one apartment building that recently sold along Mosholu Parkway has all the right elements for a hypothetical teardown/redevelopment.

This 6-story apartment building, completed in 1928, is on a lot of 15,000 square feet and has a total building area of 70,650 square feet (with a Floor Area Ratio of 4.71). In October of 2021, it sold for $12 million. It has 72 residential units (with no retail). It is a relatively large lot and could certainly accommodate a much taller building (in fact, in Manhattan, recent construction on 15,000 square-foot lots frequently rises 20 stories or more.)[i]

Land Cost: $12 million

The Construction Costs

With the property in hand (for now, we magically assume we can empty it. I’ll return to this issue below), we must tear it down and rebuild it. To give redevelopment a “fair shot,” I will assume a relatively low but typical range for construction costs (both hard and soft) of between $300-350 per square foot. Costs are determined by wages and materials, the quality of the finishings and appliances, and the amenities. For this project to work, we must consider one that is relatively modest in scope.

Construction Costs: $300-350 per square foot

The Income

Based on my discussions with real estate professionals, new construction in the Norwood section of the Bronx would likely have average monthly rents of $2,200-$2,400. Rents in the older buildings (most of which likely fall under rent stabilization) are between $1,500-$1,800 per month. The premium for new construction reflects tenants’ preferences for newer buildings.

Average Monthly Rents per Unit: $2,200-$2,400

Net Operating Income

Older buildings typically have expenses that run 35-45% of gross rental income because of aging equipment and less efficient designs. And they often pay full real estate taxes. Newer buildings with new plant and equipment, and more efficient heating and electric systems, will typically have operating expenses at about 25% of gross income (this includes tax abatements as well). Again, to give redevelopment the “best chance,” we assume zero vacancy.

Expenses Ratio: 25% (i.e., NOI is 75% of gross rental income)

 

Scenario I: A New Building the Same Size as the Old One

In this scenario, we tear down the old building and replace it with one that has the same size, height, and number of units (72). The advantages are a higher rental roll and a higher NOI from a more efficient building (and tax breaks). But the downside is the high construction cost. Here we assume the lower construction figure of $300 per square foot and the lower monthly rent of $2200.

Does the ROI hit the 6% threshold?

The answer is no. The best case for this project is an ROI of 4.3%

Total Cost (Land and Construction): $33.20 million
Total Expected Annual Rental Income: $1.90 million
Total Expected Net Operating Income: $1.43 million
Expected ROI: 4.3%

 

Scenario II: Replace with Double the number of units

But the low return for replacing the building may partly be due to the high land values. Therefore, we need to cost out a taller building. In this scenario, we assume there will be 144 units, and the building will be 12-14 stories high (ignoring the zoning, which currently prohibits this kind of structure).

Let’s assume that the average per square foot construction costs will be the higher $350, given the extra costs associated with a larger building. However, a taller building might increase the average rent if people on the higher floors pay more for better views. Again, to give this building a “fair chance,” we’ll assume average monthly rents on the higher end of $2,400.

Does it hit the 6% ROI threshold? The answer is no.

The taller building generates a high return, but it still does not pay to construct market-rate housing in this neighborhood.

Total Cost (Land and Construction): $54.4 million
Total Expected Annual Rental Income: $4.1 million
Total Expected Net Operating Income: $3.1 million
Expected ROI: 5.1%

 

Scenario III: The Search for the Profit Maximizing Building Height

The above two cases show that new construction does not pay. However, it’s only two examples. Maybe we are missing the sweet spot? To this end, I crunched the numbers to estimate the ROI for buildings that range from 6 stories to 26 stories. The idea is to find the building height that generates the highest return.

In this case, I needed to make additional assumptions about rents and construction costs. If you are interested, the details are here. So, what are the conclusions from this exercise?

First, no building would ever hit the 6% ROI benchmark. Second, the profit-maximizing building height is 15 or 16 stories.

Return on Investment vs. Building Height. This graph gives the estimated hypothetical returns for buildings of different heights along Mosholu Parkway in the Norwood section of the Bronx. Source: here.

The Frictions Takeaway

The takeaway from this analysis is that under a reasonable scenario where we have a large lot with a good location, the economics of densification do not pay in this lower-middle-income neighborhood in the Bronx. But if the city eliminated some of the main frictions to densification, much more housing could be supplied. It’s clear that the threshold to unleash new housing is not—from an economic point of view—that far away. If the city eliminates the current zoning restrictions,  you would still not likely see much development because construction costs are too high relative to the potential income, even if tax abatements are available.

What’s to Be Done?

The policy strategy, in this case, would be a two-fold plan. First, subsidize construction costs directly so that the developer of a lower- or middle-income high-rise building pays, for example, only a fraction of the hard construction costs per square foot. The lower the income of the residents in the neighborhood, the greater the subsidy. In this way, unlike tax abatements, the program can directly target the residents that need help the most.[ii]

The second element is upzoning. Right now, along Mosholu Parkway, for example, the allowable floor area for new construction is less than the actual floor area of the buildings. If a developer tore down an old building, by law, the new one would have to be smaller! Once new construction is subsidized, then the planning rules must increase the allowable units. In other words, subsidizing without upzoning is like someone stepping on a car’s gas pedal while the clutch is in park.

Rent Stabilization: The Catch-22

Another issue ignored above is that of rent stabilization. The rent stabilization rules limit the rent increases landlords can charge tenants and prohibit tenant evictions for those in good standing—great benefits to residents.

However, this limits a neighborhood’s ability to provide more housing. Specifically, it’s nearly impossible to evict tenants. And, even if the economics favored neighborhood densification, the time and resources needed to empty the building are so large they reduce the return, eliminating what slim incentives for redevelopment that might be present.

But tenants are rightly reluctant to move because they have few alternatives. Since there is limited new construction and low vacancy, where will they go? And if they did move, they’d have to pay more for rent.

Rent stabilization thus creates a Catch-22: Residents don’t move because there is no new construction, but there is no new construction because residents are not moving.

Jump-starting the Process

The government needs to act to pop a neighborhood out of its stasis. I think the best strategy for this is for the government is establish a new program where an agency or authority buys up large lots or assembles them from smaller ones, clears the land, and then auctions off long-term ground leases to developers who will construct more lower- and middle-income housing.

To the extent possible, the program can focus on areas of underdeveloped or industrial lots. The ground leases would state what must be built and what the rents will be. This way, the government buys the land and then resells the development rights, and if there is a resultant loss in land values (which there would not likely be), they can be directly absorbed by the government.

The government has the power over eminent domain and has planning rights to centralize, coordinate, and jump-start the growth in the housing stock outside of the center. It can begin this process through the selling of ground leases from land it purchases. Once the neighborhood starts to see a rise in vacancies from this new construction, the market itself, along with construction cost subsidies and upzoning, would do the rest.

Can We Get to Affordable Housing?

The only way to get out of the affordability problem is to create more units, especially in the outer boroughs, where gentrification is less an issue. Ironically, the best way to help poorer households is to boost supply for the lower-middle income range. Since new units tend to rent for a premium, higher vacancies in the older units will then reduce their cost and increase affordability.

New York City has vast areas primed for transit oriented design if the government takes the next steps of promoting development along the subway lines and parks. The Norwood neighborhood in the Bronx is one such place given its vast parkland and access to mass transit.

At the end of day, we must recognize that the free market for housing made New York City the world’s greatest metropolis and it will be the market that continues to provide housing for Gotham in the 21st century. As  real estate broker Lev Mavashev put it, “Developers need the government to be their partner. The government needs to incentivize construction and new development, not restrict it via red tape and regulations.”

The data support this notion.

 

Continue reading Skynomics Blog posts on New York City real estate here.

 

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[i] Land values are not exogenous in the sense that if allowable FAR was increased or tax abatements were removed, the value of land would adjust accordingly. Generally speaking, for multifamily residential, land costs are expected to be between 25-33% of the total per square foot costs.
[ii] I will leave for future work which type of subsidisies will affect the city budget less. At any rate, it seems that the real estate tax abatement program in New York, known as the 421a, is on its way out. It’s longer run impact on housing construction is unclear, especially if removal of the abatements reduces the price of land.

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