Lack of New Apartment Construction Could Make NYC’s Housing Crisis Worse
As asking rents soar across the NYC region, an ongoing slowdown in new apartment construction could make things get worse before they get better. According to a recent pipeline construction report for New York City, construction of new units remains far off the usual pace – and it’s unclear when things will improve.
According to the report, tens of thousands of new housing units are currently underway or planned across NYC over the next three years. Even so, the pace lags far behind the historical one. Around 33,000 new units are poised for delivery by the end of 2024; historically, at least 35,000 new units should be coming to market during that period. With around 2,000 fewer new units being produced than usual, it’s easy to see why vacancy rates remain near record lows.
To highlight the issue, one only needs to consider another recent report by the Real Estate Board of New York. Per the report, New York needs to develop at least 560,000 new housing units by 2030 to keep up with the rate of job and population growth predicted over the next several years. To date, construction has started on only around 21,000 new units, demonstrating just how much new construction continues to lag around the area.
Unfortunately, the lag in new housing construction is putting additional significant strain on people seeking regular-priced housing inventory. Part of the reason is that the vast majority of new apartments being developed around the region are luxury units commanding top-dollar asking rents. Only around 30% of new units in the pipeline will be up for sale; the rest are expected to be rentals – and most of them will be market-rate units.
If demand for new housing is so strong, why aren’t developers doing more? Several factors are converging to stunt the pace of new construction. Rent reform legislation passed in 2019 plays a part, for example, putting restrictions on when and how landlords can raise the rent – and how much they can raise it. However, the legislation is just one piece of a very complex puzzle.
More than anything, skyrocketing development costs are to blame for the ongoing slowdown in new construction across the country and the world. As inflation continues to soar, prices for everything from land to construction materials have skyrocketed at record rates. Needless to say, developers need to keep costs in check to turn a profit. As long as construction costs are on the rise, new construction will keep stagnating.
New housing development has lagged behind population growth for some time in NYC, and the roots of the problem stretch back many years. Restrictive zoning ordinances, for example, often make it challenging to develop new types of multifamily housing in many parts of the city.
Another factor contributing to the issue is the escalating number of vacant yet unavailable apartments in the area. Primarily second homes, investment properties and vacation rentals, these properties sit empty much of the time, chipping further away at the amount of housing available for renters and buyers alike. Many new luxury condos and apartments in the city serve as second homes or rental properties for New Yorkers, including many who fled the city during the pandemic.
Yet another issue dampening new construction activity is the city’s archaic property tax system, which places a higher tax burden on rental buildings, scaring away many developers from building new apartment and condo properties. Additionally, regulations require developers to set aside at least 25% of units in new buildings for affordable housing, cutting into landlords’ profits.
Even though non-stop construction activity is the norm in hotspots like the Brooklyn waterfront and Long Island City, and the total number of apartments across the area continues to rise, inventory has been scant for a while. In Manhattan in May 2022, for example, there were 13,933 rentals available on the market; in May 2019, 21,881 units were available.
Meanwhile, asking rents across NYC have been hitting record highs. For the first time this past May, the median asking rent in Manhattan hit $5,000 per month. The citywide median asking rent for that period hit $3,349, another record.
Home values are equally daunting across NYC. For instance, in the second quarter of 2022, the average price for a Manhattan co-op or condo stood at $2.1 million, and the median price stood at $1.2 million. However, the Fed raised interest rates for the first time earlier this year, and rates are expected to increase more through the rest of the year. Higher mortgage interest rates reduce consumers’ buying power, forcing many to keep renting. With more renters choking the market, bidding wars have been breaking out for rentals, even in not-so-popular areas.
As noted previously, most of the little new construction being built is luxury housing with sky-high price tags. Between 2017 and 2021, the NYC area lost 96,000 apartments renting below $1,500 per month. During that same period, the city gained 107,000 new apartments renting at $2,300 and higher.
Meanwhile, the vacancy rate for units priced below $1,500 per month is now below 1% while the rate for apartments renting for $2,300 or more per month stands at just below 13%.
Adding insult to injury, new construction has been especially stagnant in suburban areas. Over the last decade, the vast majority of new housing in the area has occurred in the five NYC boroughs and North New Jersey. In other places, including Long Island, Westchester County and Southwest Connecticut, hardly any new units have been delivered in recent years.
One silver lining for the ongoing housing shortage is that prices should start equalizing once construction picks up again. However, it could take many years for the industry to build the number of units needed to keep housing accessible and reasonably affordable for many New Yorkers. In the meantime, bidding wars for homes and apartments across the city will likely continue, and prices could keep rising for the foreseeable future. For now, finding a place to live in NYC will likely continue to be an uphill battle for many.