July 24th, 2022

New Construction in NYC Up 69% in First Quarter of 2022

New Construction in NYC Up 69% in First Quarter of 2022

On the eve of the expiration of a popular multifamily housing property tax program, construction activity soared across much of New York City. According to the latest construction pipeline report by the Real Estate Board of New York, 689 new building job application filings were filed between January 1 and the end of March. Although this represents the highest volume of filings in a single quarter since 2014, the expiration of the Affordable New York plan – otherwise known as 421-a – may have prompted the spike.

With nearly 700 filings for new construction jobs in NYC, construction activity for the city rose by 69.3% in Q1 2022 versus Q1 2021. The figure also represents a 3.6% increase in filings over Q4 2021. Activity in other key metrics, including the total square footage of new development and the total number of residential units included in those projects, increased during that period too.

Filings for new construction in NYC during the first quarter of 2022 accounted for roughly 23.3 million square feet of space, representing a 300% increase over the same period in 2021. Activity during the first quarter included the addition of nearly 20,000 new residential units – a 300% increase over Q1 2021. Still, the planned number of new residential units dropped by more than 25% from the previous quarter, which could be a sign of things to come. Likewise, the number of planned residential units dropped by more than 4,000 from Q4 2021, when they hit a record, to Q1 2022.

Although the uptick in new construction in the first quarter seems promising, the total includes very few large filings – defined as projects of 300,000 square feet or more. Of the nearly 700 filings made in Q1, only 16 fell into this category. The previous quarter saw 26 filings for large projects, so it looks like plans for significant developments – especially large rental buildings – may be waning in anticipation of the lapsing of the 421-a tax incentive program.

The 16 filings for large projects in NYC in Q1 2022 accounted for more than 25% of the quarterly total, representing more than 6.4 million square feet of new development, suggesting that the vast majority of filings were for much smaller projects.

The report, which analyzes the total number of new building job application filings submitted to the New York City Department of Buildings, also provides a breakdown of construction activity by borough. Most boroughs saw a positive year-over-year change in new construction activity. Manhattan was the outlier with only 20 filings, representing a 9% drop over the same period in 2021.

Here’s how the other boroughs stacked up in terms of new building job application filings for the first quarter of 2022:

The report also highlights the most significant construction projects filed with the city during the first quarter of 2022, broken down by borough. The largest filing of Q1 2022 was for a 23-story, 500-unit multi-use development at 94-15 Sutphin Boulevard in Queens. That project represents nearly 481,568 square feet of new development.

The largest projects in each of the other four boroughs are as follows:

In the third year of the pandemic, as the city’s housing and rental markets boom back to life, a spike in construction activity during the first quarter suggests that ongoing price increases could level off in the near future. However, the dramatic increase in new filings for that quarter could have a lot to do with the expiration of the 421-a property tax incentive.

Known as Affordable New York, 421-a expired on June 15. Available in one form or another since the early 1970s, the incentive is designed to promote new housing construction in NYC – one of the most expensive markets for new construction in the US. In New York, sky-high construction costs and exorbitant operation costs make it difficult for developers to come up with profitable plans; the 421-a incentive allows property owners to keep paying taxes on the assessed value of the land before it was developed into residential housing. The incentive extends over a predetermined number of years – typically 40 – and helps to bring costs in line with the rest of the country.

Between 2010 and 2020, developers in NYC used private capital and the 421-a incentive to develop most of the city’s new multifamily apartment buildings, adding more than 117,000 new residential units. Proponents of the incentive believe that new construction activity across NYC will plummet if it expires as developers scramble to find ways to profit from such projects.

As noted previously, New York has some of the highest construction costs in the country, ranking second after San Francisco. On average, construction costs in NYC are around 30% higher than in major European cities like Paris and more than double those of other North American cities like Toronto.

In addition to facing much higher construction and development costs, operating costs for commercial buildings in NYC tend to be much higher than in most other parts of the country. It costs around 50% more to keep a commercial building up and running in NYC versus the US average. Fully taxed buildings – those not protected by the 421-a incentive – spend 60% to 65% of gross rental income on expenses versus only 38% across the US. As a percentage of rental income, NYC property taxes are also much higher than the US average. In New York, property taxes eat up 30% of rental income; the US average is only 13%.

Since New York City has such astronomical construction and operating costs, the 421-a tax incentive was designed to make new construction more affordable and profitable. It was also put into place to encourage the development of more affordable housing. With the median rent in Manhattan now exceeding $5,000 per month, it’s safe to say that the city needs affordable housing more than ever. However, now that the 421-a incentive has lapsed, those prices could keep getting worse before they start leveling off.

In general, the 421-a incentive reduces operating expenses for an NYC commercial building from 60% to 65% of gross rental income to 30% of gross rental income, making it easier for property owners to keep buildings up and running while still enjoying decent profits. Governor Hochul proposed a successor program to 421-a, 485-w, but the New York legislature did not approve it. As of July 2022, it is unclear whether a new incentive program will be unveiled or if the city’s archaic property tax system will be completely overhauled.

Although an overhaul of the city’s property tax laws is in order, it would involve significant amounts of effort and maneuvering. Therefore, it could not be accomplished in time to make a difference in the midst of one of the worst housing crises the city has ever seen.

Why was the 421-a incentive allowed to lapse? Although the incentive is popular with developers, opponents argue that it does little to bring more affordable housing to the city. Because of the incentive, the city lost more than $1.8 billion in tax revenue – funds that could be used to help develop more effective affordable housing initiatives.

In New York, the city has an immediate need for 227,000 new residential units to keep up with job and population growth between 2010 and 2020. By 2030, NYC needs at least 560,000 new residential units to stay on track. In the first quarter of 2022, only 20,000 new residential units were in the pipeline – and that was an increase of more than 500% over the same period the previous year. Therefore, although the first quarter showed a promising jump in new construction, the pace at which new residential units are being developed around NYC falls woefully short of keeping up with demand.

If you walk around nearly any part of NYC, you’re apt to see cranes and other signs of new construction. In places like Long Island City and the Brooklyn waterfront, new residential towers are going up seemingly every day. Although it feels like plenty of new units must be coming to the city, the truth is that various factors are keeping the pace slower than it needs to be.

The main problem with the ongoing lag in new construction is that it makes housing even scarcer. Vacancy rates for everything from market-rate to high-end luxury units are at record lows, and bidding wars are becoming par for the course, even for rentals in quieter areas. Meanwhile, the pandemic is in retreat, prompting thousands who left the city to flood back in.

As schools and offices reopen across NYC, demand for housing is sure to increase even more in the years to come. Many high-paying jobs keep opening up across the area, attracting high-net-worth individuals who can afford record-high rents. As the summer of 2022 continues, foreign investors also appear to be returning to the fray – and they could complicate matters more, gobbling up the few available properties.

Unless the 421-a incentive is reinstated or a similar program is developed, the private development of residential housing in NYC will probably remain stunted for the foreseeable future. Investors and developers are especially unlikely to develop affordable housing, which is even less profitable for them in the short- and long-term.

One thing is for sure: There’s no lack of demand for housing of all affordability levels across New York City. The consequences of the expiration of the 421-a incentive remain to be seen. Still, they are likely to become more apparent once data from the second and third quarters of 2022 becomes available. Even though the numbers for Q1 look promising, they may represent an artificial increase because of concerns about the incentive’s looming expiration. Many developers scrambled to get their plans filed before the 421-a incentive expired. Figures for the second quarter should reveal how much the expiration affects the situation.

Although the New York legislature rejected Governor Hochul’s successor program, the state government continues to work with NYC officials to develop new programs to help curb the ongoing housing affordability crisis. If rent prices keep skyrocketing – they rose more than 40% in Manhattan over the course of one year – additional steps may need to be taken to incentivize developers to produce more affordable housing. However, the precise manner in which they will do so remains to be seen.

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