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Bold Ideas, Fresh Solutions Desperately Needed To Spur Affordable Housing Development

Want to get a jump start on upcoming deals? Meet the major New York City players at one of our upcoming events!

Affordable housing — and how to build it — is one of the most vexing issues facing communities across the United States.

Developers have long blamed the high cost of labor and construction prices as an impediment to supply, and now they point to uncertainty around tariffs and new rent reforms as an extra strain standing in their way. All the while, the waiting lists for new affordable units stretch into the thousands, housing prices have continued to climb and some cities' rates of homelessness are escalating.

Bold Ideas, Fresh Solutions Desperately Needed To Spur Affordable Housing Development
A rendering of 1164 River Ave.

The problem is particularly acute in New York City, where housing affordability is at a crisis point and the average cost of multifamily building is said to be at an average of $375 per SF, one of the highest rates in the world.

“A private acquisition [for a supportive housing development] used to be $20 per SF … The city understood that it would cost that much," Hudson Cos. principal Aaron Koffman said. "That number is now at up to $70 per SF."

Hudson is co-developing La Central in the Bronx, which will eventually be a five-building complex with 992 units of affordable housing.

“I don't see how it's sustainable," he said. "Because ultimately [affordable housing developers] end up coming back to a government agency and asking for more subsidy. That's not sustainable.”

Finding creative solutions to cut building costs, forming strategic partnerships and seeking out institutional capital for deals are more important than ever. Getting affordable projects financed, handling costs and navigating the affordable housing landscape with the state’s strengthened rent regulations will all be discussed at Bisnow’s NYC Affordable Housing Summit next month. 

“I’d like to see more bold proposals for real zoning bonuses for affordable housing,” said Koffman, who will be speaking at the event. "We are going to have to build up in certain areas if we're going to start really, really chipping at the issue that we face right now, and we're going to have to come up with a strategic regional plan."

Bold Ideas, Fresh Solutions Desperately Needed To Spur Affordable Housing Development
A rendering of La Central

While tariffs have not yet cut into the bottom line on Hudson’s affordable projects, he noted the lack of clarity of what may happen next, and how it may impact steel and solar panels, is something his firm is monitoring closely.

In New York City, more than 40% of households are rent-burdened, meaning they are spending at least 30% of their income on housing. Increasing the amount of affordable housing in the city — where hundreds of thousands of jobs have been added in the last decade — has been a key platform of Mayor Bill de Blasio's administration, now in the heart of its second term. The administration has said it is on pace to produce more than 300,000 income-restricted units by 2026.

Proponents of the state’s new heightened rent regulations consider them a win for affordability in the city, arguing the laws preserve units by halting deregulation — the Rent Guidelines Board estimates around 150,000 units in the city have been destabilized through vacancy decontrol in the last 25 years. But many in real estate say elected officials should have spent time looking for solutions to add to the city's dwindling supply.

“I actually think rent regulation policy will help there because it will decrease the overheating of the value of real estate in New York City,” said state Sen. Liz Krueger, who represents the 28th Senate District in New York and who will be speaking at the event.

“We need to address the zoning issues in communities surrounding New York City that still refuse to allow any kind of affordable housing to be built," she said. "What subsidies exist and are they being best targeted? I do not think they are.”

Many developers say there are fundamental cost challenges they must prepare for now.

“We are seeing the cost of natural materials rise higher than we have in previous years. Wood is at an all-time high,” Caroline Vary, managing director of asset management for affordable housing developer Jonathan Rose Cos., said at a Bisnow event in April.

She pointed out the U.S.-China trade talks had made it even harder to access the right sort of materials in the right quantities.

“We are trying to be very strategic, knowing where materials are coming from and brokering deals,” Vary said. “[We need to] plan ahead for the shortages that we are going to see in the labor force.”

Eli Weiss, a principal at Joy Construction, which is building around 1,000 affordable housing units in the city, including a major development at 1150 and 1184 River Ave. in the Bronx, said finding ways to be more efficient on construction sites is now crucial.

"When I started in this business [in 2003] … the hard costs for projects, give or take, were about $170 per SF, and they are literally double that today. Literally double,” he said in an interview.

While tariffs on steel have had an impact, the main price jumps are caused by increasing wages, he said, as 60% of construction site costs are spent on labor. Weiss said Joy has begun to look at solutions like modular housing, but it is still to early to embrace that kind of technology on a broad scale. The time spent in pre-construction, he said, is what makes a difference.

“Ten years ago, we would get onto a site to get our arms around it a few weeks before we started construction. Today that process starts 10 to 12 months before," he said. "We've been trying to do more and more to beef up our pre-construction side of the business ... on a $75M construction project, every single month of general conditions is a significant amount of money, every single month of construction is interest on your debt … you could be talking about a few million dollars.”

Time Equities CEO Francis Greenburger agrees purchasing materials and fixing labor agreements early in the process is a key component to dealing with unexpected cost increases — though some things are impossible to predict.

“Unfortunately, it is hard to know where and how much tariffs and counter tariffs will affect which materials,” he wrote in an email. “Generally sticking to domestically sourced materials can limit this exposure and meet sustainable construction standards.”

Time Equities is not pursuing any new developments in the city until “the political environment changes," Greenburger said, a direct reference to the city’s new rent regulations, which have enraged large numbers of the real estate industry.

Bold Ideas, Fresh Solutions Desperately Needed To Spur Affordable Housing Development
Victor Sozio marketed three rent-regulated buildings in Glendale, Queens

The new laws, passed last month, curtail how property owners can pass on the cost of upgrades to buildings onto the tenants, among other significant changes. Along with criticisms that they fail to address supply, some in real estate are anxious they will scare off capital from affordable deals.

“The institutions have to re-evaluate,” Taconic Investment Partners Vice President Tyrone Barnes said. His firm is joining with the city, BFC Partners and L+M Development Partners to develop 1,000 units on Surf Avenue in Coney Island.

"The fact that there would be such a significant change to laws with no real lead-up time or thinking about the unintended consequences is concerning," he said. "You have cities like Atlanta, Houston and D.C., those towns are very business friendly [and in New York] we are making development more difficult.”

Ariel Property Advisors broker Victor Sozio said while the rent reforms are causing challenges, there could be a silver lining.

“There could be an increased amount of interest from market-rate owners who are considering pursuing certain tax incentives, which include extended affordability,” he said, referring to existing multifamily assets.

For new development, he said, some owners are joining with experienced developers who have the knowledge to build an affordable housing capital stack in order to create more affordable units.

“When it comes to an existing building, if you have a 200-unit property that has a high percentage of rent-regulated [units], some owners may find it makes sense to engage with HPD to enter into a long-term affordability program.”

Learn more Aug. 8 at Bisnow's NYC Affordable Housing Summit at the New York City Bar Association in Midtown Manhattan.