CHIP NYC – Fighting the Good fight for New York’s Housing Providers

Most readers of this Newsletter know about the good work Neighborhood Building Owner’s Alliance (NBOA) does for the mostly small and medium-sized housing providers across Chicago and their representative associations who comprise its members. Community Housing Improvement Program (CHIP) provides many of these same services to housing providers in New York City.

New York, like Chicago and many other urban areas around the country, is dealing with the rise of “affordability” as a driving concern in the housing industry. You don’t have to look far to find articles about the rapid increase in home values or escalating rents driven by record high demand. These problems have only been compounded by the pandemic which disrupted supply chains and temporarily curtailed the production of new housing units. While production is increasing again, it is still not keeping pace with demand as housing prices and rents continue to escalate at record levels all across the country.

Like NBOA, CHIP represents the interests of housing providers in a city where renters have long held the upper hand and make up the large majority of households. In both cities, the dominance of renter households has translated into political power. Tenant groups have advocated for, and received, many rights and privileges at the expense of property owners. While these benefits are always portrayed as pro-tenant, their real world impact is often harmful to both tenants and owners of rental properties.

CHIP describes itself as “an association of about 4,000 responsible owners and managers of over 400,000 rent-stabilized rental property across all five boroughs in New York City. CHIP empowers housing providers to provide quality, affordable housing and to build thriving communities.”

2019 Democratic Sweep in New York State Hurts Housing Providers

The CHIP mission got a lot harder to deliver after statewide elections in 2019 brought a Democratic sweep of both Houses of the New York Legislature and the Governor’s Office, an important turning point for the New York State Senate which had been mostly under Republican control since 1939.

With complete control of the Legislative and Executive Branches of state government, tenant advocate groups were able to get the Housing Stability and Tenant Protection Act of 2019 enacted into law. Among its other provisions, this act dramatically reduced the amount of rent a housing provider can charge for a vacant unit to a new tenant.

New York, like Chicago and many other urban areas around the country, is dealing with the rise of “affordability” as a driving concern in the housing industry.

While the intent of this law was to take away any incentive housing providers might have to push out long-term tenants in order to obtain higher rents, the practical impact is that owners of newly vacant units often have a greater financial incentive to leave these units vacant than they do to renovate them and re-rent them at depressed rents.

Under the new law, housing providers essentially have two losing options from which to choose:

Option One – spend an average of $75,000 dollars to make legally mandated repairs to apartment units in exchange for a minimal allowable rent increase that would need 75 years to fully recoup this investment, but which would automatically revert to the pre-renovation rent after a 30-year period, or;

New York State Capitol Building in Albany

Option Two – leave the unit vacant and hope this punitive law is eventually repealed or replaced.

For obvious reasons, a growing number of New York housing providers are choosing Option Two and simply foregoing any rental revenue altogether. The economic choice is to lose less money with a vacant unit; or more money with a fully renovated unit at a permanently suppressed rent.

The perverse impact of this law has been a growing inventory of units that sit vacant, now estimated at well over 40,000 in New York City alone. This is particularly shocking, given that New York never seems to have enough apartments to satisfy demand. This is a clear example of government policy making things worse, not better, and distorting markets to the benefit of a few at the expense of many.

Compounding the Problem – Eight Years of Mayor de Blasio

Compounding the impact of this new legislation at the state level, former New York City Mayor Bill de Blasio, a self-described Progressive, made sure that rent increases for Rent Stabilized apartments went up as little as possible during each of the eight years of his mayoral term.

Former NYC Mayor Bill de Blasio

Rent regulation in New York is a through-the-looking-glass world that we do not (yet) have to contend with here in Chicago. Without getting too bogged down in all the details of Rent Stabilization versus Rent Control, suffice it to say that Rent Stabilization governs about one million New York City rental units constructed prior to 1974 in buildings with six or more units. Annual rent increases for Rent Stabilized units are strictly controlled. These increase are set by the Rent Guidelines Board (RGB), comprised of nine members, all of whom are appointed by the Mayor – two from tenants’ organizations; two from property owners’ organizations; and five at large. While the RGB is nominally independent, the Mayor can replace Board Members whose actions he does not like. As such, he exerts considerable influence over the RGB and what they do.

Throughout de Blasio’s tenure, the RGB limited rent increases to close to zero, citing low inflation and, more recently, the impacts of the pandemic as their primary justifications. At the same time, operating costs continued to increase in New York, including real estate taxes and utility increases, both of which are determined, at least in part, by governmental decree. In many instances, the approved rent increases on Rent Stabilized units did not even cover the increased cost of operations.

The 2019 legislative changes in the New York Legislature knocked values on rent-regulated properties down by approximately 40% from pre-2019 levels.

The new Mayor, Eric Adams, has not been in office long enough to have established a track record with Rent Stabilization; however, he does not claim to represent the Progressive wing of the Democratic party as de Blasio did and may prove to be more sympathetic to the needs of housing providers in the city. This may be good news, or it may just be a case of “too little too late.”

CHIP estimates that, over the eight years of the de Blasio administration, the combined effect of low rent increases and rising expenses has caused NOI on Rent Stabilized properties in New York City to fall by an average of 7%. CHIP further estimates that the 2019 legislative changes in the New York Legislature knocked values on rent-regulated properties down by approximately 40% from pre-2019 levels, due in no small part to the financially ruinous restrictions now in effect on vacant units!

Smaller Owners Begin Exiting the Market

The practical impact of these changes is that many buildings, formerly owned by small and medium-sized owners, are now being sold at discounted prices to large, institutional owners like Blackrock and other Hedge Fund investors. For many small owners, thin or negative profit margins, increasingly onerous regulations and an environment of falling values has lead them to conclude that the time has come to get out of the rental housing business in New York. These are all concerns than many small investors in Chicago understand only too well.

The big losers in this story are the small and medium-sized owners.

For big-money investors, however, the current distress in the housing market looks more like an opportunity than a reason to flee. These deep-pocketed investors are taking the not unreasonable view that there is only one New York City, and that it will continue to remain central to the US and global economies. They further believe that the stress now being wreaked on housing providers is an opportunity for them to pick up apartment buildings at low prices – prices that will almost certainly rise again at some future point, even if they show little to slightly negative profitability in the near to medium term.

This was the same strategy that many of these investors used following the Great Recession (2007-2008) when they acquired vast numbers of foreclosed homes which they then rented out as they patiently waited for values to rebound. They won that bet in a big way, and believe they will win this one as well.

The big losers in this story are the small and medium-sized owners. They have neither the deep pockets nor the political influence of the corporate and hedge fund investors that are replacing them. And they are losing their will to continue battling the political winds that seem bent on destroying their businesses in the name of more and more “protections” for tenants.

What the tenant advocates do not seem to recognize (or simply choose to ignore) is that there must be some profit in ownership if rental properties are to be maintained and improved, or for more rental housing to be constructed.

CHIP has already filed a legal challenge to the constitutionality of the 2019 law which, they argue, represents a taking of private property without compensation. This challenge could go all the way to the Supreme Court.

The 2019 legislation, in combination with the zero to negligable rent increases approved by the RGB under Bill de Blasio, effectively wiped out profitability in New York residential real estate investment, at least for a good percentage of those rental units subject to Rent Stabilization. It also provides yet another disincentive to building more rental housing since investors fear that these units will ultimately fall under similar ruinous regulation.

The unintended consequences of this action are twofold: first, small owners are gradually being replaced by big-money investors; second, there are greater disincentives to build new units as demand continues to increase, driving rental prices on unregulated units ever higher.

This may turn out to be a “careful what you wish for” moment for tenants’ rights organizations who may come to regret the fact that they have successfully driven small housing providers out of the market. They may find that the new, corporate owners who replace them are a more formidable foe. Hedge fund investors have money and influence that small owners can never match. Having placed their bets on New York City apartments, it is a certainty that these investors will advocate strongly for more favorable treatment of their newly acquired apartment portfolios.

If ever there was a cautionary tale for housing providers in Chicago and Illinois, the New York experience is it.

Meanwhile, CHIP is not waiting for the last small owner to sell their apartment properties before taking action. The organization has already filed a legal challenge to the constitutionality of the 2019 law which, they argue, represents a taking of private property without compensation. This challenge could go all the way to the Supreme Court and is currently working its way through the lower courts.

Cautionary Tale

So, it we think we have it bad in Chicago, we just need to look east to New York City to see what the future could hold if our tenants’ advocacy organizations can obtain the same results here as their New York counterparts. And don’t kid yourselves. This is exactly what they are trying to do.

This is an eventuality that our NBOA members should understand – and fear. Ultimately, it will hurt owners, renters and the entire housing market as it has already done, and continues to do, in New York. If ever there was a cautionary tale for housing providers in Chicago and Illinois, the New York experience is it.