The 421-a Tax Break Looks Dead. Experts Say The Housing Crisis Is Set To Worsen As A Result
The New York Legislature has ended its annual session without passing good cause eviction laws or renewing the Affordable New York tax break, commonly known as 421-a. But rents are still rising at breakneck speeds, leading both landlord and tenant groups to lament the lack of action on their top legislative housing agenda items.
Several key figures in NYC politics, including the city comptroller, have been keen to see the death of 421-a, which gives developers a tax abatement for including some income-restricted units in their projects. Now, developers have until June 15 to break ground on developments to qualify for the tax break.
This dynamic will suppress housing construction both in the long and short term, real estate insiders say, unless the program is replaced with some other incentive.
“There’s going to be a window of six, nine, 12 months or longer of a huge lack of new rental inventory that will come to the city,” JLL Senior Managing Director for New York Rob Hinckley told Bisnow Monday. “That's going to increase rents, especially for market-rate, but you’re also going to decrease the new supply of affordable housing units.”
Rents plummeted in NYC during the early days of the pandemic but have been steadily climbing back up over the past year. Prospective tenants in the city saw a 33% increase to prices between January 2021 and 2022, according to one survey reported by The New York Times. In many neighborhoods, rents are now higher than they were before the start of the pandemic.
Without 421-a or a similar incentive, developers and investors alike will likely choose to pursue different types of properties in NYC. While Hinckley said he sees opportunities in condominiums, outer-borough construction and some luxury developments, Slate Property Group principal David Schwartz said the lack of information makes it hard for developers to make decisions about what to pursue.
“I think one of the things that people don't necessarily appreciate is that all housing affects all housing. If you don't build enough market-rate housing, it puts further pressure on affordable housing,” Schwartz said. “We wouldn't consider a market-rate development project until we know what's coming. So we're not looking at any market-rate development projects. We’re focusing on either buying existing assets or 100% affordable jobs.”
More developers may follow Schwartz's lead and in the coming month turn toward 100% affordable constructions, which are eligible for other government subsidies, notably the Low-Income Housing Tax Credit program.
“There are other ways to finance affordable housing units,” Local Initiatives Support Corp. NYC Senior Executive Director Valerie White said. “But with the loss of this program, it is reducing the amount at this moment right now to put additional units in the foregoing pipeline.”
While there are many market-rate developments in progress and due to deliver over the coming years, there isn't enough to meet the need — which stands today at 227,000 housing units to meet present demand, according to a report commissioned by the Real Estate Board of New York. The known development pipeline covers just 14% of projected need by 2030, according to the report.
“The pipeline that’s coming is not even close and traditionally hasn’t been close,” Hinckley said. “That's why we have the highest rents in the entire country — because supply has never kept up with demand.”
The tax break was crucial to funding affordable developments in NYC between 2010 and 2020, according to the NYU Furman Center’s annual State of New York City’s Housing and Neighborhoods report, which was released Monday.
Almost 20% of the nearly 52,000 income-restricted housing units built during that decade used the 421-a tax exemption without any additional government subsidies, according to the report, and 68% of all developments in that period used 421-a in some way.
“Unless there's a big shift in the way the city subsidizes new housing, we'll lose the kind of markets where affordable housing is developed,” NYU Furman Center Executive Director Matthew Murphy told Bisnow.
“Unless we see a big correction in the market, we won't see the same level of market-rate rental housing get developed, because 421-a is critical to doing that," Murphy said. "I think that marketwide, we're going to lose affordability for typical market-rate renters in the long run.”
421-a’s disappearance will also affect which neighborhoods get new developments, Murphy said. The tax break was crucial to funding affordable developments in the city’s more affluent neighborhoods, and without it, affordable housing will be built farther and farther away from the city center.
And although rents are rising, the New York Assembly also didn't pass good cause eviction legislation this session, a package of laws that would prohibit drastic rent increases and almost guarantee tenants a right to renewal. But landlords haven't relaxed, Rosenberg & Estis member attorney Daniel Bernstein told Bisnow.
“Until it actually passes and people know exactly what a good cause eviction law would mean for their properties, it's very hard for owners to plan — other than just to say, 'Hey, this doesn't seem like a good idea for our properties,'” he said. “Good cause eviction is still being proposed for a future legislative session. I'm sure this is not the last time it gets raised.”