Unlock the inventory: Warehousing of rental units is one contributor to high rents
We all think we have a grasp of the basic economic principles of supply and demand, but New York’s rental market seems to run counter. Home prices are dropping, yet rental prices in this renters’ city keep going up. The city is supposedly losing population, yet would-be tenants are having bidding wars. We know that the city needs to build many more affordable apartments badly, but beyond that, what’s going on?
Some of the answer we can surmise. Interest rates are driving up mortgages, somewhat negating the effect of lower purchase prices and sending some potential buyers back to rentals. There’s also the reality that, while there’s higher availability in the expensive segments of the market, at the more affordable end of things, the vacancy rate can be near zero even as more New Yorkers are pushed towards this shrinking stock.
According to the 2021 Housing and Vacancy Survey, vacancy rates were 12.64% for units with asking rents above $2,300; 4.09% for units between $1,500 and $2,300, and less than 1% for all units under $1,500. We need much more construction of those low-cost units, driven in part by tax incentives and the easing of burdensome zoning and regulatory processes.
But even if we could somehow flip a switch and set tens of thousands of such units in motion, it wouldn’t bear fruit for years.
One near-term culprit is the warehousing of existing units. Many newly vacated units require significant investments to get back up to optimal condition to re-rent, and for regulated units in particular, this cost might be too much for landlords to justify, leading them to keep the units empty.
A carrot-and-stick approach of providing credits for these fixes and penalizing the long-term holding of vacant apartments could yield dividends, as could reexamining the stringent caps on the ability to raise regulated rents that the state imposed in 2019. We should also look to greater enforcement of one of warehousing’s biggest offenders, the illegal hotel economy. Rental properties should be for New Yorkers.
