A Fresh Take on CRE

The Case for Rent Deregulation

Since this is a commercial real estate blog, I have avoided the topic of rent regulation, but the fact is, that rent regulation has a huge impact on real estate owners that we represent, and this is a topic that I'm passionate about, so here it goes.

First, let me explain what rent regulation is in NYC. There are 2 major forms of rent regulation - Rent Control, and Rent Stabilization - there's also public housing, Mitchell Lama, etc. - but I'm not getting into that today.

Rent control only applies to 2% of NYC apartments, and will soon cease to exist as it is limited to existing tenants and inheriting a rent controlled apartment is quite difficult. If you want to know more about rent control and MBR (Maximum Base Rent), visit: http://www.housingnyc.com/html/resources/dhcr/dhcr1.html.

Rent Stabilization applies to a whopping 48% of NYC apartments and a much higher percentage of Manhattan apartments. Rent Stabilization basically stipulates, that as long as a tenant lives in an apartment with rent under $2,000, that tenant's rent cannot be increased more than the set percentage set by the Rent Guidelines Board (RGB). That set percentage generally is somewhere between 2.5-4.5% per year. The only way an apartment can be destabilized, is if the rent on the apartment hits $2,000 AND the tenant makes $175,000 or more, or if the apt is vacated and reaches $2,000 a month. The apt can reach $2,000 a month on vacancy in a couple of ways. First, the RGB sets a higher % that an apartment's rent can be increased on vacancy. Right now that number is 17%. Second, When an apt. is vacated, a landlord can make improvements to the apartment and allocate 1/40th of the value of the improvements to the monthly rent. Therefore, if an $850 apartment is vacated, the Landlord can first raise the rent to $995 dollars. Then, the landlord can make $41,000 in improvements to the apartment. After allocating 1/40th of the improvements to the apartment, the rent is now $2,020 and Voila, the apartment is destabilized.

It seems relatively simple for a landlord to destabilize an apartment, and it is, but ONLY, if the tenant vacates, and that's the big catch. The fact of the matter is, once people get rent stabilized apartments, they don't leave . . . it's too good of a deal. This creates a system that inflates rents for everyone else. It is anti-capitalistic, prevents new residents from moving to New York City, and discriminates against the "new middle class." Don't believe me? Think of this: ONLY 1/3 OF NEW YORK CITY RENTALS ARE AT MARKET RATES. Of those, only 3% are available at any given time. To make matters worse, less than 1/3 of Manhattan rentals are at market rates, and the vacancy rate is only 2.24%.

Anyone who's taken Econ 101, or has a little bit of common sense understands the concept of supply and demand. If supply is low, the demand for what limit supply exists is inflated, and price increases. That is what happens with NYC rentals, and particularly Manhattan rentals. Imagine how much lower prices would be, if there were no more rent stabilization.

Now, it's only fair that I address the comments of advocates of rent stabilization. They claim, that if you get rid of stabilization, you will displace millions of middle class people and New York will become a city of the very rich and the very poor. Interesting theory, and to some extent it has merit, but is a cheap apartment in Manhattan an entitlement? I have many friends who would love to live in Manhattan, but cannot or choose not to because the rents are too high. Are the recent college graduate middle class less important than the middle aged entitled middle class?

Besides which, rent stabilization does nothing to protect the middle class, it just protects the status quo. If you make a million dollars a year and your stabilized apartment is $500 a month, do you get a larger increase in rent? There answer is no! Your apartment will go up 4.5% this year, the same number as everyone else. Hell, Governor Patterson, has 1 rent stabilized apartment and Representative Charlie Rangel has 3. Is that fair? Is it fair that in the same building, 1 resident has a 3 bedroom apartment for $568, and another a 1 bedroom for $2,200?

To make matters worse, the assembly just passed bills which will raise the rent at which apartments get deregulated to $5,000, and raise the income limit to $240,000.

Let's think about what would happen right now if rent stabilization were abolished.

First, stabilized tenants will be in a bind - no question.
  • Some would pay a higher rent and stay where they are - given the tough economy, they'd be in a much better position to negotiate with their landlords then they would have been in a year ago.
  • Some will move to cheaper neighborhoods or boroughs.
  • Some will move out of the city entirely. They will rent in the suburbs, or use the money they saved by being rent stabilized to purchase a house.
Second, increased supply in this economy will significantly decrease rents across the board.
  • Many people who otherwise would not think they could afford to live in NY will move here. This will bolster the NY economy and compensate for people moving out.
  • People at risk of losing their apartments along with their jobs will be able to stick it out a little longer and until things start to recover.
Third, landlords will raise rents in formerly stabilized apartments.
  • To get higher rents, landlords will need to invest significantly in their buildings and apartments. While before they had no incentive to fix up their buildings, now the incentive is clear. The blight of rundown buildings will be gone from the city.
  • Apartment buildings will start to sell again, and for a lot more money. Transfer taxes, capital gains and the like will be a windfall for the city of New York.
  • Owners that recently purchased buildings and are at risk of default will no longer default on their loans.
Fourth, higher rents will mean higher assessed values for buildings.
  • Higher assessments means more tax revenue for the city. This means more money to invest in jobs, infrastructure, etc.
So, you decide. Is rent stabilization a fair system? Does it really protect the middle class? Is it good for the economy? Is it good for society? Is a 3 bedroom apartment in Manhattan for $600 a month an entitlement? Is an apartment in Manhattan an entitlement?

For more on this topic read: