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Hochul's Real Estate Plan Gets Mixed Reviews From CRE Pros

New York Gov. Kathy Hochul unveiled an ambitious real estate agenda in her State of the State speech Wednesday, but many commercial real estate professionals are taking a wait-and-see approach. 

Kathy Hochul, then-lieutenant governor of New York, in Coney Island on April 9, 2021.

If enacted, Hochul’s policy proposals could have a dramatic impact on New York’s real estate industry. The governor will push to replace the expiring, and controversial, 421-a tax abatement with a similar program mandating deeper and longer-term affordability, environmental targets and other modifications. Hochul also plans to propose legislation scrapping the state’s limits on residential density and changing zoning to promote conversions of office and hotel assets into housing, along with an array of other initiatives ranging from free lawyers for renters to environmental benchmarks. 

While the governor’s policy agenda included little in the way of specifics, industry insiders who spoke with Bisnow say they are generally receptive to the administration's goals. Despite general skepticism regarding the political viability of much of her agenda, there was widespread relief that the administration seems committed to continuing a tax incentive program in the same vein as 421-a. 

New York City needs far more rental apartments, particularly at lower rents — and it’s clear the private sector must continue to play a key role in producing it,” New York Real Estate Board President James Whelan said in a statement. “We support Governor Hochul’s sensible proposals for addressing the city’s housing crisis by eliminating density limits so the city can rezone areas with good mass transit, pursuing commercial-to-residential conversions, and creating a new program that incentivizes the development of rental apartments and produces more affordable housing for New Yorkers.”

For months, real estate players have been fretting over the fate of 421-a, reformed and rebranded as Affordable New York in 2017, the tax abatement program used to develop a large chunk of the city’s new market-rate and affordable housing stock. 

The current program, set to expire June 15 of this year, allows developers a tax exemption for 35 years if they set aside 25% to 30% of the units for low- and moderate-income tenants when they build a rental building with more than 300 units.

Real estate players argue it is a make-or-break program for New York City multifamily development and a central tool in solving the city’s enduring housing crisis. But housing activists and a number of elected officials at both the city and state levels have expressed hostility toward the program, which they portray as a handout to developers. 

With a shifting political landscape and new leadership in New York City and Albany, the industry has been bracing for broad adaptations to the policy and even its abolition. The uncertainty surrounding the future of Affordable New York has all but ground market-rate development to a halt.

“Come Jan. 1, no one's going to take on a new project because they don't know what's going to happen,” Silverstein Director of Development Brian Collins said at a Bisnow event last fall. 

Now, there is greater certainty.

Lower Manhattan

The Hochul administration aims to replace Affordable New York with a similar program that would have deeper affordability requirements, require longer-term affordability to provide stability for low-income households, and restructure the tax abatement to ensure maximum efficacy of taxpayer dollars. The new program would also add an affordable homeownership option, better align with city and state climate goals, and enable flexibility to create financially viable smaller buildings, her administration wrote in a State of the State policy book.

The administration’s outline provided few details as to what such a restructured program would look like. And while experts who talked to Bisnow expressed relief that some form of tax abatement would continue, they stressed that the devil will be in the details when it comes to determining whether a future program will actually incentivize development. 

James Nelson, head of Tri-State Investment Sales at Avison Young, said the hard work lies ahead.

‘We all agree that there’s a housing crisis in New York. There’s no question that we need deeper affordability — but the challenge is that you start getting into deeper affordability and you can get to a point where the construction cost no longer justifies building that housing,” Nelson said. “We need to be thoughtful about this, and it’s going to require a real discussion with the private sector to figure out what makes sense, what works here, and what is going to help you build and deliver this housing.”

Hochul also aims to drive housing creation through legislation abolishing the state’s limit on residential density, currently capped at a floor area ratio of 12. While the change would have wide-ranging effects on multifamily development in the city, the governor’s policy outline frames the change largely as a tool to promote the conversion of office assets to residential.

Indeed, the proposed legislation would mandate that office-to-residential conversion of buildings constructed before 1980 or located south of 60th Street in Manhattan would be allowed until December 2027. Additionally, hotels near residential areas would face an easier path to a change of use to residential. 

In a Manhattan office market with record vacancies, particularly in Class-B and Class-C properties, this approach to housing creation may seem intuitive.

But Nelson said he is skeptical. He says New Yorkers shouldn’t be expecting a wave of offices and hotels becoming apartments any time soon.

“This is something that’s talked about a lot, and on the surface it sounds like a great idea, but a lot of the older office buildings are not conducive to residential,” Nelson said. “You start looking at these old, antiquated office buildings, and maybe now you’ll have the zoning to do that, but then you’re going to have to chop off the back 10% or 20% of the building. What does that cost? Does that even make sense?”

Other experts who spoke with Bisnow cast doubt on the effectiveness of such state-level legislation without city action and an accompanying tax abatement program. Its political viability is also in question. Similar initiatives were launched by the Cuomo administration but failed to gain traction. 

With the fate of Hochul’s agenda, and the fate of 421a, on the docket in Albany this spring, the coming months will bring greater clarity as to which direction the state’s shifting political sands will pull commercial real estate.