ThreeBest, 6/16/19.
Sometimes the news cycle just keeps coming back around.
Theme of the week: NYC rental housing (again) - both legislative changes and economic impacts.
For first-timers: what is ThreeBest / who is the author?
As always, I would love your thoughts - just reply to this email.
- Jeremy Healey
1. One business thing.
This past week, New York State approved major changes to the complex of rent regulation laws, in a decision touted as a populist move.
From coverage in The New York Times (link):
Newly empowered Democratic leaders in Albany announced a landmark agreement on Tuesday to strengthen New York’s rent laws and tenant protections, seeking to address concern about housing costs that is helping drive the debate over inequality across the nation.
The changes would abolish rules that let building owners deregulate apartments, close a series of loopholes that permit them to raise rents and allow some tenant protections to expand statewide.
The deal was a significant blow to the real estate industry, which contended that the measures would lead to the deterioration of the condition of New York City’s housing. The industry had long been one of the most powerful lobbies in Albany, but it suffered a loss of influence after its Republican allies surrendered control of the State Senate in the November elections.
“These reforms give New Yorkers the strongest tenant protections in history,” the Senate majority leader, Andrea Stewart-Cousins, and the Assembly speaker, Carl E. Heastie, said in a joint statement. “For too long, power has been tilted in favor of landlords and these measures finally restore equity and extend protections to tenants across the state.”
As discussed previously (link), this comes on the back of enormous pressure - likely only the Bay Area has had more breathless coverage of its housing issues than New York.
That said, two issues are worth highlighting from the business side (with a third highlighted under #2, below).
The Economics
Despite the political benefits, the economic impacts of rent control are essentially undisputed.
Libertarian economist Tyler Cowen, who normally teaches economics at George Mason, recently led a master class in internet trolling. Rather than rehashing the obvious case (see, for example, Megan McArdle’s effort [link] in The Washington Post), Cowen simply concluded his daily links on Friday by citing liberal economist Paul Krugman’s own post from 2000 (link).
To quote Krugman:
The analysis of rent control is among the best-understood issues in all of economics, and -- among economists, anyway -- one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ''a ceiling on rents reduces the quality and quantity of housing.'' Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand. Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go -- and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended? Predictable. Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out -- what yesterday's article oddly described as ''free-market horror stories'' -- and constantly proliferating regulations designed to block those strategies? Predictable.
… None of this says that ending rent control is an easy decision. Still, surely it is worth knowing that the pathologies of San Francisco's housing market are right out of the textbook, that they are exactly what supply-and-demand analysis predicts.
The Market Impact
Unlike many issues that move markets, major changes in legislation are telegraphed well in advance.
The Times began covering the issue in mid-April, as an example (link).
But the Journal beat them to the real story, which illustrates what happens when risk rises in an illiquid, long-only market (link):
Sales of New York City rental apartment buildings plummeted in the first quarter, signaling the uncertainty around rent regulation after the current law expires in a few weeks.
… Uncertainty surrounding the rent stabilization law, which expires after June 15, is partly to blame, the report said. Some proposed measures would further restrict landlords’ ability to raise rents on regulated apartments. That could put a big dent in building income and property values, real-estate executives and analysts said.
Changes to rent regulation laws could decrease the t operating income of rent-stabilized housing across New York City by 20% to 30%, according to an analysis from the Real Estate Board of New York, the real-estate industry’s lobbying organization.
The prospect has some investors waiting on the sidelines until there is a resolution.
The smart money waited. We’ll see what they do next.
2. One news thing.
Although the Times has been heavily involved in reporting news around this issue, they come across as a bit naive, focusing only on the most obvious participants.
They have been eager to highlight the role of activists, which fits well in the current political environment, such as in the piece piece headlined “Rent Laws: Dozens Arrested at State Capitol as Debate Escalates” (link).
For months, activists have cast a looming rewrite of New York’s rent laws as a once-in-a-generation battle.
The state law that regulates almost one million rent-stabilized apartments expires on June 15. With Democrats in control of the Legislature for only the third time in more than half a century, progressive lawmakers are pushing for tenant-friendly provisions.
This is contrasted with the landlord community, whose tactics are characterized by subterfuge in a piece entitled “Inside the Stealth Campaign for ‘Responsible Rent Reform’” (link):
Confronted with a Democratic takeover of the State Legislature and emboldened progressive activists, the city’s landlords and developers — long accustomed to ruling New York through political donations and expensive lobbyists — are adopting the tactics of their activist foes.
They have sent buses of electricians and boiler repair workers to Albany to protest the proposed changes. They have organized rallies outside public hearings. They have paid for mailers urging constituents to call their representatives, and informally referred to organizing “Worker Wednesdays” in the Capitol to counter activists’ tradition of “Tenant Tuesdays.”
They have formed groups with generic names — Responsible Rent Reform, Alliance for Rental Excellence — to run social media advertisements featuring minority construction workers and maintenance staff, who worry that they would lose work if the current laws, which expire on June 15, are overhauled.
The goal is to deliver the industry’s message — that too-strict rent regulations would affect not only wealthy landlords, but also the working class — in a way that does not seem like it is coming from the industry.
In contrast, the Journal gets full marks for a more recent piece, which picked up on research that suggested why reform may have passed, through assessing who would benefit (link):
The biggest beneficiaries of rent regulation in New York aren’t low-income tenants across New York City, but more affluent, white residents of Manhattan, an analysis by The Wall Street Journal found.
These Manhattan renters get a steep discount from market rents in the same neighborhood: about $1,000 a month per apartment, up to nearly $2,000 a month in Manhattan’s Upper West Side. In many less affluent working-class neighborhoods, regulated rents are no different than, or only slightly below, market rate rents in the same locale, providing little direct benefits to tenants, an analysis of U.S. Census Bureau data shows.
The analysis suggests a policy conundrum that may surface as Gov. Andrew Cuomo and state legislative leaders agreed on legislation to strengthen rent laws to protect tenants: Changing some provisions could disproportionately help wealthy renters.
This makes sense: in a time of immense political pressure, there is a clear political motive to do something.
It should surprise no one that, if forced to adversely impact their favorite interest group (real estate owners), politicians will find ways to benefit their second favorite interest groups (wealthy voters), rather than the poor.
As the Journal points out, these issues had been raised earlier by the wonky Citizens Budget Commission (link):
The Governor’s budget message includes a proposal to extend rent regulation, contingent on reforms intended to strengthen protections against increasing rents and the loss of units. Legislators and some stakeholders have proposed additional reforms that would expand the scope of rent regulation and address other provisions that affect rent increases. However, these proposals would exacerbate many of rent regulation’s flaws and will not make a meaningful impact on the affordability of rental housing in New York City. Instead, they will further benefit upper-income renters without providing relief to the low-income households most likely to be rent burdened. Moreover, the reforms will do little to address concerns about the relatively poor physical condition and maintenance of rent-stabilized buildings and may aggravate these problems.
Any reforms included with the renewal of rent regulation should focus on better targeting its protections to the most rent burdened.
Shockingly, their concerns remained unaddressed.
3. One culture thing.
Culture may be a bit of a stretch.
But in a masterstroke of timing, New York Magazine just published a piece illustrating those who benefit from rent regulation, in an article on the remaining tenants of the Bossert Hotel (link), a a high-end hotel redevelopment in Brooklyn Heights.
The winners? A small group of tenants notable for their long-tenure in a well-off neighborhood.
Follow the sounds and you’ll reach the apartment of 88-year-old Daisy Diamontopulos and her daughter, Elana, two of just five rent-stabilized tenants living in the otherwise empty, freshly renovated boutique hotel.
When I visited earlier this year, the pair turned out to be genial hosts, despite being in the middle of both dinner and the evening news. Daisy, a retired health-insurance worker, originally moved to the Bossert in 1967 with her husband. She pays about $700 a month for the two-bedroom apartment she shares with Elana, a high-school science teacher, and Adam, their electric-green talking Amazon parrot. (Adam has lived at the hotel since the ’70s, when Elana was just 4, making him almost 50.) The walls of their apartment are heavy with framed family photos; icons of Jesus, Mary & Co.; and ceramic Acropolis souvenir plates. Adam’s cage is by a window that has breathtaking views of New Jersey, Ellis Island, the Statue of Liberty, and lower Manhattan.
… In 2012, as part of their larger retreat from Brooklyn real estate, the [Jehovah’s Witnesses] sold the Bossert to David Bistricer and Joseph Chetrit for $81 million. The new owners immediately announced plans to turn the building into a 280-room boutique hotel. According to Elana, the new owners offered them $30,000 to give up their apartment, but despite the looming renovations, they refused to budge. “We would have left, but where do you go? What can you afford?” says Elana. “Sometimes I panicked — me displaced, okay, fine, I can live in a box, but what am I going to do with my mom?”
I am tempted to think that the Citizens Budget Commission planted the piece themselves.