The apartment sector has produced some fat gains over the past several years, putting a smile on investors’ faces. For many tenants, however, turn that smile upside down.
In many metros across the United States, rents have shot up dramatically during the past five years, according to a recent report by the National Association of Realtors. And while this has made investors and property owners happy, renters have felt the squeeze from rising rental costs, especially considering that increases in household incomes have lagged considerably. In fact, NAR reports that during the past five years rents have increased faster than incomes in all but four of the 70 metro areas included in the study.
Metros where renters have seen the highest increases since 2009 are New York City (50.1 percent), Seattle (32.4 percent), San Jose (25.6 percent), Denver (24.1 percent) and St. Louis (22.3 percent). The growing gap between rent and income was most severe in the New York metro, where tenants realized only an 8 percent increase in income to offset the 50 percent increase in rents.
The rising rent trend and expanding rent-to-income gap is exacerbating an already dire need for additional affordable housing options in many communities. Low-income working families have seen their incomes stagnate while the available supply of affordable rental housing shrinks. Local policymakers will face some stiff challenges in the coming years as they seek to protect and expand the affordable housing stock.
According to most reports, no metro in the world has a larger affordability gap than New York City, where skyrocketing rents have produced a deepening affordability gap. Last year, Mayor Bill de Blasio announced an ambitious housing plan that promised 200,000 affordable housing units — some 120,000 will be preserved and some 80,000 will be newly constructed — during the next decade. The mayor described the plan as “literally the largest and most ambitious affordable-housing program initiated by any city in this country in the history of the United States.”
As part of the plan, the city will count on private funding sources to augment the public investment by forging a link between market-rate development and affordable housing. In expensive markets such as New York, however, that’s not an easy proposition to sell, and, as developer Jonathan Rose accurately noted, “The cost of new construction is higher than the cost of providing affordable and middle-income housing.”
An insightful and informative article on Mayor de Blasio’s plan and the New York City housing dilemma written by Henry Grabar for nonprofit organization Next City, noted:
Since its inception, rent regulation has been the enemy of property owners, real estate developers and economists who argue that their subsidy for longtime residents stunts the city’s continuing evolution, strains landlords and distorts the city’s housing market. Indeed, the programs do little for new arrivals. By keeping units off the open market, they likely drive up newcomers’ housing costs. But the state’s two rent regulation programs, with a median tenant income of $36,000, remain the most powerful single guardian of New York City’s economic diversity.
In forging a strong link between market-rate development and affordable housing, the administration walks a tightrope. Stunting the returns on residential investment may deter new projects. Not enough pressure, and affordable housing targets will be forgotten in a rush of new, expensive buildings. Who will leave New York first: real estate investors in search of higher profits, or the poor in search of lower rents?
This is New York City’s dilemma, one shared by many large cities across the United States.
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Larry Gray is editorial director of Institutional Real Estate, Inc.
