NYC’s Housing Crisis: Next Steps After “New York Housing Compact” Fails

Can NYC Accomplish Housing Reform Without the State’s Help?

With New York governor Kathy Hochul’s proposed “New York Housing Compact” apparently dead[1] in the state legislature for 2023—the budget has been approved without it, and no further action is expected in the short period before the current session ends—it’s time for a postmortem. Hochul’s proposals, although not well thought-out in some respects,[2] were substantially in keeping with pro-housing land-use regulatory reforms that have successfully been enacted in other states. In the spring of 2023 alone, major reforms have been approved by state legislatures in Washington State[3] and Montana.[4] But New York’s adverse experience is not unique; in the same period, pro-housing zoning reform proposals were defeated in Colorado[5] and Arizona.[6]

New York and these latter states could not get to consensus on state-level housing reforms for perhaps similar reasons: local land-use control is popular with incumbent residents who benefit from it, and aspiring residents who lose out are not local, so they do not vote in local elections. The benefits of land-use regulatory reform are long-term, while the consequences of moving against voters’ wishes may be felt in the next election. This brief will review in detail the specific conditions that make passing pro-housing legislation so difficult in New York’s legislature.

In addition, the brief will discuss what New York City can do to solve its own housing crisis in the face of a recalcitrant state legislature. In fact, the city has many opportunities to progress within the bounds imposed by its own delegated powers and existing state laws. However, it will need to overcome ideological rigidity and antigrowth politics at the neighborhood level, much like the politics that created deadlock in the state legislature.

One important issue in a postmortem of the Housing Compact’s reception in the legislature is why New York, unlike some other states, can’t do housing reform at all, despite the ongoing supply crisis. There are NIMBY (Not-In-My-Backyard) housing opponents everywhere, and yet other states have managed to put pro-housing coalitions together.

This brief offers two explanations for New York’s recalcitrance. One is structural: the state’s constitutional structure, interacting with voting patterns, makes the state unusually vulnerable to deadlock over this specific issue. The second is practical: the state has evolved a fiscal structure that feeds off geographically concentrated, high-income enclaves in the New York City metro region.[7] If the richest New Yorkers were discontented and leaving in droves, the legislature would have a fiscal problem to solve. However, policies that induce an ongoing exodus of New Yorkers with more moderate incomes do not have the same implications.

Structural Issues: Political Competition Returns to New York, but Mainly in the Suburbs

New York State has legislative elections every two (even-numbered) years. That means that members of the state senate and assembly are constantly running for reelection. Throughout most of the state, incumbents are safe from competition in the general election; most of NYC is safely Democratic, as are the larger upstate cities (Buffalo, Rochester, Syracuse, and Albany). The remainder of upstate is mostly safely Republican.

The “swing” areas of the state are concentrated in the NYC suburbs. In the 2022 election, New York Republicans gained four U.S. House of Representatives seats: two in Nassau County and two in the Hudson Valley.[8] In the state senate, Republicans gained five seats: three in Nassau County and two in the Hudson Valley.[9] In the state assembly, Republicans gained a seat in Nassau County, another in Suffolk County, and four additional seats in Brooklyn, Queens, and Staten Island.[10] Assembly district lines will be redrawn for the 2024 election but are not expected to change significantly.[11] 

Democrats control both houses in the state legislature, with two-thirds supermajorities, and they want to keep them. Suburban Republicans are firm NIMBYs and opposed Hochul’s Housing Compact.[12] Democrats are not going to risk further losses in the suburbs in the absence of a plausible base of support. Hochul did not mobilize such support, and it’s hard to see how it would emerge, given the extreme levels of socioeconomic segregation that have been engineered by decades of public policy.

Other states have created coalitions of rural Republican libertarians and urban-reform Democrats to overcome suburban opposition. In the New York case, upstate Republicans would need to undercut their party’s best shot at increasing representation. That’s not likely to happen.

Democrats will need to solve this problem within their own caucus. However, as it turns out, many New York City Democratic legislators are also opponents of pro-housing legislation.[13] NYC Democrats will use left-signaling language, denouncing the construction of “luxury housing” in one of the nation’s wealthiest enclaves, but won’t suggest or support any compromise that has the potential to result in the construction of mixed-income housing, even where feasible.

For example, after much criticism, former mayor Bill de Blasio pushed through the Soho/Noho rezoning in 2021,[14] one of the few land-use changes during his mayoralty that had the potential to produce mixed-income housing in a high-opportunity neighborhood. Unfortunately, the demise of the Section 421a tax-exemption program (which provided an incentive for developers to build income-restricted housing under de Blasio’s signature Mandatory Inclusionary Housing program,[15] described more below) ensures that no new housing will be constructed in the Soho/ Noho neighborhoods in the foreseeable future. For some Manhattan legislators, that’s a positive, not a negative, outcome of the present impasse.

The antidevelopment posture of Manhattan legislators reflects another characteristic of New York politics: low-turnout primaries closed to non–party members. Closed primaries give exaggerated power to well-financed special-interest groups—in Manhattan’s case, “preservationist” nonprofits that oppose all land-use change. The affluent Manhattanites who fund these groups and respond to their mobilization efforts enjoy the benefits of concentrated density but want to lock the doors to newcomers. Thwarting pro-housing initiatives at both the state and local levels is consistent with the agenda of these groups and shields legislators from their criticism.

In sum, the continuous election cycle, political competition focused specifically on some of the most antigrowth parts of the state, lack of a strong libertarian tradition among Republicans, and reactionary attitudes on land use among both Republicans and Democrats are structural and political obstacles to pro-housing reform. Pro-housing YIMBY (Yes-In-My-Backyard) advocates need strategies to overcome these impediments. Perhaps age succession will help, as NIMBYism essentially pits the well-off older residents against young adults and other newcomers seeking opportunity in prosperous communities. However, an insidious consequence of current policies is to drive all but the highest-paid young adults out of state, where they can’t vote for change in New York.

The pro-housing YIMBY group Open New York, in its 2023 policy agenda,[16] advocated for putative leftist priorities as a possible trade-off for pro-housing legislation. The most important of these is “good-cause eviction,” in contrast to the current unlimited prerogative of landlords in unregulated buildings to evict renters upon lease expiration. In its strongest form, good-cause eviction effectively amounts to statewide rent regulation, which would exacerbate housing shortages and offset the benefits of any truly pro-housing legislation. This attempted bargain was unsuccessful. Good-cause eviction was strongly opposed by the real-estate industry, which is already burdened by draconian rent controls on a substantial portion of the state’s rental housing stock. In addition, the advocates overestimated the extent to which Democratic legislators were driven by ideological anti-profit considerations, in contrast to wanting to give affluent constituents what they desired, which was that their communities would experience no physical change at all.

“New York Exceptionalism”: The Practical Advantages of Economic Exclusion

The absence of a mass exodus of the affluent and of the businesses that employ them prevents another contingency that might shake the state legislature’s complacency: a financial crisis requiring fundamental restructuring of New York’s antiquated system of land-use regulation, along with much else.

There exists an extensive literature on “American exceptionalism,” the idea that the U.S. is unique or exemplary among nations for historical or other reason.[17] Sometimes the concept is used as a straw man to be debunked, with critics pointing out America’s flaws.[18]

Is there a New York equivalent of American exceptionalism? An Internet search turns up a Medium essay by Warren Hoffman, written in the dark pandemic month of May 2020, asserting such a phenomenon:

When New Yorkers talk about New York as being “the best,” they grammatically signal that some sort of comparison has ostensibly taken place. It implies that they’ve experienced the other contenders for “best city” out there and after judging all of them, can now say that New York is indeed superior  New York exceptionalism is the lie that New Yorkers tell themselves that enables them to look past all that is wrong with the city: the broken transit system, the heaps of trash, the homelessness, the outrageous rents, the rats, the rampant inequality.[19]

Hoffman is onto something. The idea of New York exceptionalism, however debatable, is appealing to enough people and businesses to keep the city (and its suburbs) prosperous and the tax revenues flowing (and thus keeps the state—highly dependent on the New York City region—prosperous and solvent, as well). New York’s political culture thereby coasts along on widely held assumptions about the city’s—and, by extension, the state’s—greatness. So great a place can get by as it is, and it hardly needs to change.

In 2022, New York State’s per-capita personal income was $78,089, trailing only three other states (Connecticut, Massachusetts, and New Jersey) and the District of Columbia.[20] Per-capita personal income by county is available only for 2021, as of the writing of this brief. In that year, per-capita personal income for New York County (Manhattan) was $195,543; for Westchester County, $119,705; and for Nassau County, $99,597. Suffolk County was next, at $81,309.[21]

New York has the highest local tax burden of any state, according to the Tax Foundation. In 2022, New Yorkers paid 15.9% of net product in the state collected in state and local taxes, compared with a national average of 11.2%.[22]

New York State’s largest tax source by far is income tax. In fiscal year 2020, which began April 1, 2019 (the latest year available), the state collected $53.7 billion in personal income taxes, out of a total tax take of $80.8 billion.[23] The state publishes data on collections by income percentile for full-year residents, accounting in calendar year 2020 (the latest year available) for $44.9 billion in revenue. Of this total, 45.6% was from taxpayers in the 99th percentile of taxable income ($656,000 and above), and an additional 17.2% was from taxpayers in the 95th–99th percentiles (taxable income between $224,000 and $656,000). Thus, the state has a high dependency on a small base of affluent taxpayers.

Hochul’s housing proposals were fundamentally a challenge to the richest parts of the state, where most of those taxpayers live, to foster socioeconomic diversity, generating less revenue (at least on a per-capita basis) and more demand for services from a less affluent population. It’s possible that this transition could have been managed to everyone’s benefit, with the growth in revenues from new state residents below the 95th percentile of taxable income more than offsetting the cost of providing them with state services, and new residents not affecting the willingness of more affluent households to live in the state. However, no information or analysis existed to demonstrate that.

From an extremely narrow fiscal perspective, the present system works well. The state extracts enormous revenues, by national standards, by sustaining privileged enclaves where affluent households enjoy a unique and sophisticated quality of life. Perhaps against logic, they are willing to pay New York taxes for the opportunity to access the experience of New York living.

These arrangements may begin to harm the state’s finances someday, as labor shortages constrain economic growth. However, the example of the San Francisco Bay Area indicates that affluence can coexist with housing supply restrictions for a very long time. Lower-paid essential workers will use overcrowding, illegal subdivisions of existing homes, or long-distance commutes as strategies to stay in the labor market. An increasingly visible homeless population can be ignored and avoided. Provided that high-income residents perceive benefits to living in the New York metropolitan area that outweigh the social costs, state finances, at least, will remain robust.

Mayor Eric Adams, his housing and city planning officials, and the city council should not, and probably do not, want the combination of glittering urban wealth and dystopia that is described in the preceding paragraph. However, for the city to solve its own housing problems without any help from the state legislature, many policies need to change.

Mandatory Inclusionary Housing (MIH)

The Adams administration carried over from its predecessor a policy, in connection with zoning changes that allowed more housing, that requires a substantial percentage of units in new buildings to be set aside permanently for low-income tenants at below-market rents. The Mandatory Inclusionary Housing policy was designed to work in conjunction with the Section 421a tax-abatement program, which provided generous offsetting long-term tax exemptions on both the market-rate and the below-market units. The combination of affordability mandates and offsetting tax exemptions worked economically only in the city’s highest-rent neighborhoods, leaving most of the city dependent on public subsidies. The offsetting tax exemption applied only to new construction and effectively only to mixed-income rental housing. Therefore, other options theoretically permitted in designated MIH areas, such as condominiums, conversions of nonresidential buildings, payments in lieu of providing affordable housing, and providing the required low-income units on a different site nearby, were effectively precluded.[24]

With the demise of Section 421a in June 2022, there will not be any new mixed-income MIH rental buildings constructed once the current crop of “grandfathered” buildings is completed.[25] (The city also requires developers of 100% affordable, heavily subsidized buildings to make MIH affordability commitments, but these are dependent on continued public funding.)

That leaves a great many property owners in MIH areas with few development options other than competing for a limited pool of subsidy dollars. Since most are unable to win that competition, the city needs to create private investment alternatives, however politically unpalatable. In a report published earlier this year, I recommended that the city create a ministerial process to waive MIH requirements for residential developments that do not qualify for tax exemptions.[26] That change is even more imperative in light of the politics of the 2023 legislative session. While there is no indication that a 421a-like tax exemption in some workable form is going to be reenacted in the foreseeable future, the New York legislature is capable of sharp turns in direction. If mixed-income MIH developments become eligible again for tax exemptions, the ministerial waiver would no longer be applicable.

Alternatives to Section 421a Tax-Exemption Program

New York City has relied heavily on the Section 421a provision for construction of new, mixed-income rental housing in recent decades. The law is, in part, compensation for the unfavorable tax treatment of rental housing (in comparison with owner housing) and, in part, compensation for providing a percentage of the building’s units at below-market rents.

A report published in the last days of the de Blasio administration illustrates the sharp disparities in the city’s property-tax system (Figure 1).[27]

The effective tax rate is the property tax paid per $100 of a property’s sales-based market value. Large rental residential buildings (11 or more units) have an effective tax rate about double that of 1–3-unit buildings, co-ops, condos, and small rental buildings (4–10 units). That’s the impetus for enacting the 421a exemption.

Without a successor law, few large rental buildings will be built, other than publicly subsidized, 100% affordable housing that qualifies for tax exemptions under other provisions of law that do not expire. Most new multifamily housing construction of 11 or more units will be condominiums, due to the favorable tax treatment. (While NYC has many legacy cooperative buildings, new-construction co-ops are uncommon.)

However, the market for new condominiums is relatively limited, since purchasers must produce a down payment and qualify for a mortgage. Upon purchase, condo owners assume market risk (the possibility that their equity will be wiped out by a market downturn, leaving them owing more on their mortgage than they can obtain in a sale).

Many New Yorkers either cannot afford, or do not want, to be home buyers. Some in this group have the income to support the rents necessary for new rental housing construction, if property taxes on new buildings are not prohibitive. It is important that new housing construction exists to serve that segment, in order to reduce upward rent pressures on existing unregulated housing units and the proliferation of under-the-table payments, such as brokers’ fees, to secure access to rent-regulated apartments.

In the absence of a 421a successor or a reform of the city’s unbalanced property-tax system, which is even less likely, the city still has options to encourage production of unsubsidized, market-rate rental housing. However, that housing would need to be in small buildings of 10 or fewer units.

Unfortunately, the city’s recent housing production is tilted toward large buildings, not small ones. In the 2010–20 decade, new housing was concentrated in a small number of neighborhoods zoned for high densities, and little new construction took place in areas zoned at low densities, where large numbers of small rental buildings might be found.[28] This development pattern, in turn, reflects decades of restrictive zoning changes intended to prevent the demolition of small homes in low-density areas. In a previous report, I noted[29] the city’s important legacy of “infill zoning,” a once-effective zoning tool for encouraging the construction of small multifamily buildings. There are many additional models to draw upon from zoning reform efforts nationwide. The recently enacted Washington State legislation,[30] for example, requires cities with a population exceeding 75,000 to permit at least four units on any residentially zoned lot and six units within a quarter-mile walking distance of a major transit stop. New York City, with the nation’s most extensive transit system, does not meet this standard in its zoning, but doing so would be an effective means of addressing its housing supply shortfall with new rental housing, under current state laws.

Another option for the city is to make full use of city-owned property for housing, including school sites, libraries, mapped but unbuilt streets, and public housing sites (including the often-unnecessary street widenings created on the perimeter of housing superblocks). City-owned property can be offered for mixed-income housing development under long-term leases that make such development economically feasible, in a way that is similar to the effect of Section 421a. The city has taken advantage of these types of housing opportunities from time to time, but not systematically, so there are still underutilized city-owned sites with residential development potential left unused. Now, it needs to do so.

In some cases, where the underlying land is extremely valuable, the city may be economically justified in permanently or temporarily relocating city facilities or public housing residents to get the full economic benefit of the land asset. For example, a public school, P.S. 452, built in 1957, sits on a 52,724-square-foot lot on the west side of Amsterdam Avenue between West 60th and West 61st Streets in Manhattan (Figure 2). According to the city’s records, it has a built floor area ratio (FAR) of about 1.5.[31] Built on the gritty West Side of the West Side Story Broadway musical, the school today is surrounded by high-rise towers in one of the city’s most affluent neighborhoods. Most of the surrounding land is zoned for 12 FAR, the highest residential density permitted by current state law. The city needs to find a way to take full advantage of the real-estate value of such properties.

Rethinking “Zoning for Housing Opportunity”

The Adams administration’s ambitious proposal for amending the city’s zoning resolution to facilitate new housing construction, called “Zoning for Housing Opportunity,”[32] counts on state legislation that won’t be forthcoming in 2023 and may not be in the foreseeable future. The city’s package needs to be recalibrated to focus on actions that can result in increased housing production, even if the state never comes through.

For example, Hochul proposed, and the city endorsed, amending special provisions in state law facilitating conversion of nonresidential buildings to housing. Currently, the state’s Multiple Dwelling Law (MDL) applies to buildings with three or more units and specifies standards for residential occupancy in buildings that were in nonresidential use on January 1, 1977. These standards reduce, for instance, requirements for the dimensions of yards, courts, and distances from living-room and bedroom windows to lot lines. Hochul’s amendment would have moved the eligibility date to 1990, greatly expanding the number of buildings that could be converted into residences.

Adams’s Zoning for Housing Opportunity amendment permitting conversion of additional nonresidential buildings to housing should simply cross-reference the special conversion rules in MDL,[33] rather than specify a date by which an eligible building needed to have been completed, as current zoning does. Such a change would make all buildings that were not designed as housing but located in areas where housing is permitted and completed before January 1, 1977, eligible for residential conversion. Currently, in many areas where conversions are permitted, a 1961 completion date applies, limiting the number of eligible buildings unnecessarily. If MDL is amended in the future to encompass buildings completed by a later date, those buildings would automatically become eligible under city zoning.

The proposal to enact a citywide floor area bonus—a zoning provision that allows buildings to be larger than normally permitted if they provide some public benefit—for buildings including a specified percentage of any type of affordable housing (and not exclusively senior housing, as is currently the case) is highly dependent on the existence of the 421a program, or a similar tax incentive. Without it, mixed-income housing can’t be built, and the applicability of the proposed floor area incentive would be limited to 100% affordable buildings eligible for tax exemptions under other provisions of law. The city needs to evaluate whether the benefits of effectively concentrating new construction of affordable housing on fewer sites make this amendment worthwhile.

Another proposal, to encourage construction of apartments over stores along the city’s commercial corridors, might be workable if the new housing can be marketed successfully as condominiums. Because the market for condominiums is more limited than that for rentals, however, a targeted series of zoning map amendments in high-opportunity neighborhoods may be more effective than a citywide zoning text amendment. For example, along Northern Boulevard in Flushing, Queens, a neighborhood with a strong condo market, zoned densities drop off sharply east of 150th Place. To the west, the street is lined with apartment buildings, many recently constructed; to the east lies a landscape of low-rise commercial buildings and parking lots. A lonely six-story apartment building that well predates the 1961 zoning sits at the corner of 153rd Street (Figure 3). Rezoning the boulevard to allow some companion apartment buildings would be a quick win for the city’s housing supply.

Hochul has promised to keep fighting for pro-housing legislation, and she should. The YIMBY group Open New York, in the meantime, plans to “partner with other influential groups like unions, environmental groups and advocates for older people—a strategy seen as effective in places like Oregon and California.”[34] That may be more successful than attempting to partner with left-wing development opponents, more interested in quashing all hope of landlord profit than in solving the state’s housing crisis. New York State has a long tradition of using tax and financial incentives to lower the cost of new housing, in exchange for reasonable affordability conditions, while ensuring sufficient returns to induce developer participation. These models can help pave the way to zoning liberalization.

State-level zoning reform, however, may be a long-term process. In the interim, housing dystopia looms in New York City, as opportunities to live in the city are foreclosed for all but the top slice of the income spectrum. The city is not bereft of options. However, lawmakers need to move fast, be creative, and disabuse themselves of the false promise that they can strongarm private housing developers and mandate affordability at their expense. The city may not be able to achieve Adams’s full goal of 500,000 new units in 10 years without a revived Section 421a tax incentive. However, it can greatly improve housing supply, compared with the baseline production if nothing is changed. That, in itself, is very much worth doing.

Please see Endnotes in PDF

Photo by: Lindsey Nicholson/UCG/Universal Images Group via Getty Images