Vertically obsolete: Part 1, Several families in Sunnyside?

August 4, 2014 | Affordability, Apartments, de Blasio, Density, Development, Economics, FAR, Housing, Inclusionary zoning, Land use, New York City, Rent stabilization, Rental, Verticality, Zoning

By:David A. Smith

Despite its author, Josh Barro, writing a good article about the complications of inclusionary zoning, the New York Times (June 7, 2014) chose a headline that sends the reader on a long misdirection:

Affordable Housing That’s Very Costly

As we’ll see, that’s misoriented in two ways: (1) the cause isn’t the housing but something else, and (2) when assessing whether it’s ‘costly,’ as the late great Henny Youngman replied when asked, “How’s your wife?”, compared to what?

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If you ask how costly my wife is, you can’t afford her

Abington House, at 500 West 30th Street near the High Line in West Chelsea, is a new luxury residential building and, like a lot of new luxury developments in Manhattan, it’s extremely expensive. The cheapest two-bedroom apartment now listed there rents for $5,850 a month. That gets you only one bathroom; a two-bed, two-bath can run as high as $8,695.

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At Abington House, a luxury apartment building in Manhattan, 20% of the rents are much lower than the rest because of a city program. Credit Bryan Thomas for The New York Times

Location, density

But 78 apartments in the building, or 20% of the total, are set aside as affordable housing under New York City’s “inclusionary zoning” program. That means 19 two-bedroom apartments are priced from $687 to $873 — about a 90% discount to market rents.

The rent reductions are enormous … but even more enormous is the implied loss of capitalized value from them, which we can calculate as:

($5,850 – $687) = $5,163 per month x 12 months = $61,956 annually / 5.0% cap rate = $1,239,120

Thus, the rent buydown inherent in that apartment cost the developers the equivalent of $1,240,000; using the higher market rents, the effective discount is ($8,693 – $873) * 12 / 5.0% = $1,877,000.

Those apartments were granted to 19 households that make from $25,612 to $42,950 a year and won a housing lottery the city held last year.

These figures work out fairly close to 30% of income for rent, so in fact it is genuine affordability – and it’s been created with zero cash outlay by City of New York.  Have we found the perpetual motion machine?

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It’s a mockup, it must work!

There are two appealing facts about inclusionary zoning:

[1] Developers pay for it, so it has no direct fiscal cost at a time when direct subsidy dollars for affordable housing are scarce.

Though inclusionary-zoning affordable apartments aren’t ‘free’, as Mr. Barro fully realizes, they are ‘politically free’ in that they are off budget, so the mayor who successfully implements an inclusionary-zoning policy can do so without the normal budgetary thrash and criticism. 

[2] It produces economic integration, with high- and low-income households living on the same hallways.

Indeed it does, as we can see by the implied incomes of the market renters.  At 30% of income for rent, someone paying $5,850 a month should be earning $234,000, and if the $8,693 rent is affordable, the required minimum income is $347,500 – and these folks are living down the hall from people making $25,612 to $42,950 a year, so the rich are making roughly 8x what the poor are making. 

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Choose a hand

But more important than economic integration as a principal or outcome of social-justice policies is the value of embedding lower-paying jobs in close proximity to their workplace.  If that isn’t don’t as a matter of conscious policy, then those jobs will be pushed, by inexorable land-use economics, to the city’s periphery, with resulting traffic jams, pollution, and spatial segregation that leads to urban unrest. 

This is no small thing in Manhattan, where high housing costs — rents rose 19% from 2005 to 2012 [Fake scare stat – that’s a piddling 2½ % annually – Ed.] — are turning it into an island of exclusivity.

Lower Manhattan has been an ‘island of exclusivity’ for fifty years; recently, as the city grows, the economic exclusivity has consistently moved north, and is now reclaiming Harlem.

On the other hand, the affordable housing units created by inclusionary zoning are extremely expensive. The subsidy to each family getting an affordable two-bedroom unit at Abington House will be worth nearly $90,000 a year.

$93,490 to be exact ( [$8,693 – $873] * 12), assuming zero vacancy.

That money could cover rent for several families in a middle-income neighborhood in boroughs outside Manhattan, like Sunnyside, Queens.

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Is forty minutes each way worth 4x the family housing?

Instead of ‘in kind, in situ,’ (IKIS) as in the Abington, where the value generated in a place, and from the development of a particular location, is plowed back in to precisely that location, the City of New York could instead convert the obligation into cash, in the form of linkage payments.  The developer would be indifferent between an in-kind delivery or a payment for linkage – indeed, from personal experience I can tell you that most developers would rather pay the money and not have to address the complications of integrating 20% different residents into the same development – so the City could have chosen to receive anywhere from $1,250,000 to $1,875,000 apiece. 

Nathan Newman, the housing activist behind the group More NYC, offers another suggestion: straight up cash. In a recent report, he argued that the city should drop inclusionary zoning and instead offer developers additional density in exchange for cash payments that the city could use to finance affordable housing programs.

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Well, it’s progressive, isn’t it?

Would that have been a good trade?

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The proposed trade puts front and center the funding dilemma:

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Do we use the proceeds from upzoning a high-value area in that area, or do we redeploy them elsewhere in the city, relatively far away from the epicenter of appreciation?

It’s much more complicated than it looks.

1. Linkage adds more affordable supply than IKIS.  As Mr. Barro quite correctly notes, for the price of a 40-minute commute each way, out in Sunnyside the City could get three or four affordable apartments, at exactly the same rents, for every IKIS apartment added to the chi-chi submarket of the suddenly hot post-Garment-District.  We can even push that argument logically further: in highest-value locations, every IKIS renders (say) one family homeless who would not otherwise be.

While Mr. Newman’s report overstates the amount of affordable housing a cash fund could create, its core insight remains: Inclusionary zoning generates fewer affordable housing units than a cash equivalent because luxury apartments make for an expensive form of affordable housing.

Again, I think Mr. Barro is writing imprecisely and therefore confusingly; it’s not that the apartments are luxury, but rather the location is too valuable, and it should go vertical faster.

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Not physically obsolete, but vertically obsolescent

2. Linkage helps correct vertical obsolescence, IKIS doesn’t.  For cities to grow and thrive in an age of technology and information, they need to go up, using the elevator as the vertical utility.

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Manhattan, 1922: the earliest aerial photograph

Though Lower Manhattan’s grid of streets and subways remained much the same, as the years pass into decades, the city goes up and up.

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Manhattan, 1931

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Manhattan, 1939: The first New York World’s Fair

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Introducing the Trilon and Perisphere

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Manhattan, 1961: Three years before the second New York World’s Fair

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The 1964 Unisphere

The buildings kept going up because the economics made it feasible.  And each time the buildings went higher in the sky, what was there before had to be demolished. 

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Manhattan, 1973

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Manhattan, 2007: A city that has recovered and then some

If 20% of each of these towers had to be set aside for affordable housing, they would have been built later, or smaller, or not at all.

[Continued tomorrow in Part 2.]