Big Real Estate’s Continuing Stranglehold Over New York City
Recently, the Nobel laureate economist Paul Krugman wrote in the New York Times about the causes of unaffordable housing in New York City. He blamed the crisis on a few things, including a powerful financial “monoculture” in the city, NIMBYs, and the city itself blocking new construction. That last element, however—that the city blocks new construction—is an increasingly popular myth that needs examination.
When we look at construction in New York, we see that the city is not an economic monoculture. Property taxes are the largest revenue source for the city, and both New York City and New York State work to increase property taxes by subsidizing new development with zoning changes, planning policies, new interpretations of zoning and building regulations, economic development plans for rebuilding, the use of eminent domain, tax abatements and credits, public-private capital projects, and sweetheart real estate deals for major political donors—and this is only a partial list.
It all adds up to billions of dollars in direct and indirect subsidies for billionaire developers like Stephen Ross, Steve Roth, and Gary Barnett. So much for the idea that New York “blocks” construction. Please note: the first three rules of real estate are traditionally “location, location, location.” The following discussion about affordable and unaffordable housing is specific to New York City in our time.
Big Real Estate
No group is more powerful in New York City and New York State than the richest developers, represented by the Real Estate Board of New York. Its members were among the biggest donors to Governor Andrew Cuomo; they gave Governor Kathy Hochul even more money, and in a shorter period of time. In the city, former Mayor Bill de Blasio suffered a series of scandals related to donations from developers.
Lobbyists for Big Real Estate write legislation in Albany. Big Real Estate is always well represented on the City Planning Commission and in state and city economic development offices. Much like lobbyists in Washington, D.C., individuals from Big Real Estate cycle in and out of public and private jobs, alternating work in state and city agencies with high-paying positions in real estate development. The result is a political culture in Albany and around New York’s City Hall that believes that what’s good for Big Real Estate is good for New York.
Sam Stein documents the history of the rise of Big Real Estate in his book Capital City, Gentrification and the Real Estate State. He points out that New York used to have financial capital, real estate capital, and industrial capital. But Big Real Estate conspired to drive industry out of town, because real estate developers and investors have different goals than industrial companies. Industry wants cheap land for factories and affordable housing for workers. Developers and real estate investors want ever-increasing land prices and housing profits.
Two trends contributed to real estate’s triumph over manufacturing in the 1970s: (1) companies moved to southern states in search of cheaper land and less expensive labor; (2) following white flight from the city, New York City went bankrupt. Big Real Estate convinced the metropolis to hitch its fortunes to increased property taxes in the years that followed.
When New York State built the World Trade Center and Battery Park City, the two largest developments in Manhattan at the time, they used public agencies authorized to issue bonds for financing the projects. Battery Park City was profitable and contributed significant amounts of money to the public coffers. The World Trade Center office buildings were less profitable, until the Port Authority sold them for a good price in 2001 (shortly before 9/11).
Despite the success of those projects, in the 21st century, the city and the state have preferred the post-Reagan model of public-private partnerships for large developments. Two of these, Atlantic Yards, in Brooklyn, and Hudson Yards, in Manhattan, were built above open railyards. By any measure, Atlantic Yards has not done well in its almost two decades of existence. The “affordable housing” there is uncompetitive with market-rate housing. The developer could not meet its obligation to finish the project by 2016. And there is no schedule for starting construction of the deck above the railyard where most of the rent-regulated housing is supposed to go.
At Hudson Yards, the city spent billions of dollars subsidizing Ross’ Related Companies development, which has done poorly since the pandemic started. Frequently referred to as “Houston on the Hudson,” it’s very unpopular with New Yorkers.
Many of the city-subsidized luxury apartments there are unsold (like half of the luxury condos built south of Central Park since 2013). The glitzy towers at Hudson Yards followed the financial model of Billionaires’ Row. Their dramatic height and shiny, “iconic” architecture created a new “asset investment class” for the global rich; the large pied-à-terre condos became known as “safe-deposit vaults in the sky.” In the beginning, they were the most profitable building type in the history of New York—but developers built too many.
Hudson Yards also has city-subsidized supertall office towers. Even before the pandemic, Hudson Yards took more than three-quarters of its office tenants from buildings in midtown Manhattan, because there was a glut of space in large office towers. Since Covid arrived, there is more empty office space than ever, and no one knows the future of the office building. Nevertheless, New York State proposes subsidizing the construction of nine more supertall towers around Penn Station, next door to Hudson Yards.
The state’s Pennsylvania Station Area Civic and Land Use Improvement Project will use upzoning and the power of eminent domain for the benefit of Roth’s Vornado Realty Trust. In return, Vornado will pay to bring more entrances and daylight into the dank and ugly below-ground station, where visitors to the city now scuttle in like rats.
“Sounds good, right?” ask State Senators Liz Krueger and Brad Hoylman in the Daily News (“Slam the brakes on the State’s Penn Station project”). “Yes, except we don’t know how much the train station costs, how much money the developer is paying, how much money the developer is making, or how big the development is going to be.”
The state will declare the buildings across 31st Street from Penn Station blighted. They include a beautiful power station designed by McKim, Mead & White when they built the old Penn Station (where “one entered the city like a god”). The U.S Department of Transportation can then seize them with the power of eminent domain. The plan is to demolish the buildings, put new tracks below grade, and sell the land above for new towers.
In addition to the problems described by Krueger and Hoylman, are the problems in the incomplete list below. As at Hudson Yards, property taxes will be diverted to pay for the station, but if Vornado never builds the new towers, they won’t make payments towards rehabbing the station. The ESDC will sell the land to a developer or developers: their history at Atlantic Yards suggests they will sell it to Vornado for less than other developers would offer. There is a more efficient and less expensive plan to avoid having to build new tracks. Demolishing the buildings above the tracks and on the upzoned lots will displace more than 3,500 apartment dwellers and cause over 1,000 businesses to move or close. All of that will be done outside the normal public process.
Vornado calls the neighborhood surrounding the station their “Penn Campus.” Some locals fearfully call it “Vornadoville.” The ESDC will give them a big increase in value in return for an unknown payment that may never happen. Why is that a good decision for one of the richest cities in the history of the world?
Supply and Demand
New York’s problem is that it promotes the wrong kind of development, not that the city and state block development. The luxury buildings make the city, in the words of then-Mayor Bloomberg—a luxury item you have to pay for. The supertall towers at Hudson Yards and on Billionaires’ Row drive up land prices all over Manhattan, making it impossible to build middle-class or low-cost housing. And the tall towers cost much more to build per square foot than an 8-story or a 20-story building: between the land costs and the construction costs, only a very expensive apartment is profitable.
New York City and Big Real Estate argue speciously for the supply-and-demand theory of affordable housing that says building apartments of any kind will somehow trickle down to more affordable apartments for all—as though a large supply of Mercedes S-Class limousines would lower the demand for a $16,000 Kia Rio. But after 20 years of “the market” and city subsidies building primarily luxury and super-luxury apartments, we can see that in New York’s modern global market, that’s as untrue as Reaganomics’ Laffer Curve was.
New York’s great urban theorist Jane Jacobs emphasized that cities are complex organisms that resist simplistic concepts like supply and demand. Choosing a neighborhood, a building, and an apartment to call home is not like buying a widget or a washing machine. The downtown group Village Preservation documented the failure of the theory in a brilliant analysis of the luxury upzoning for SoHo and NoHo that passed in the final days of the de Blasio administration. If you still believe that Big Real Estate will voluntarily build so much housing that land prices and development profits will fall, they have a bridge in Brooklyn they would like to sell you.
Another great urban theorist, Joan Clos, frequently talks about the problem of letting developers’ interests determine planning and development. A former mayor of Barcelona, Clos is currently the director of the United Nations program for housing and urban development known as HABITAT. “[N]ot many people understand that urbanization generates wealth,” he says. “Just by the fact that you design an urban plan, you are creating money—because the value of this land, once the design is approved, increases 10-fold.” With the city’s help, the rich get richer, while the poor get evicted. The NIMBYs Krugman complained about in his piece are another story, but it’s easy to understand that nonplaces like Hudson Yards and Billionaires’ Row make New Yorkers sad about the city they love.
History shows that the only way to get affordable housing for all is to build affordable housing for all who need it. America came closest to having enough affordable housing in the decades of prosperity following World War II, when the federal government simultaneously brought income inequality to the lowest level in the history of the country and built federally subsidized affordable housing. In retrospect, we can see that other federal actions, such as the financing of the interstate highway system, caused a great exodus from cities. That, in turn, drove down the cost of urban land.
New York and other global cities regrouped, bringing land prices back to historic highs that block the kind of development most residents can afford. In other parts of the western world, the most successful models for overcoming that problem are cities like Amsterdam and Vienna, which combine public and private methods of financing to create rental apartments the majority of the population can afford.
New York’s Empire State Development Corporation (ESDC) recently held a hearing about its plans for Vornadoville. One of the coordinators of the opposition, Lynn Ellsworth, pointed out in her testimony that the enabling legislation for the ESDC tells the agency “to develop rental housing that is affordable to persons of low income” and to seek out urban places where there is an “unavailability of private capital” and a lack of public transportation.
Vornado’s annual report says the area the ESDC calls “blighted” is “teeming with activity” day and night. “Our assets sit literally on top of Penn Station, the region’s major transportation hub, adjacent to Macy’s and Madison Square Garden.”
The ESDC is wasting state capital and power. It should be working with the bankrupt New York City Housing Authority (NYCHA), New York City’s largest landowner and landlord. More than 380,000 tenants live tenuously in their apartments at the bottom of the pyramid. Fifty-thousand New Yorkers are homeless, and post-Covid evictions are just beginning. They all desperately need our help.
In 2022, we have a climate crisis, a health crisis, a jobs crisis, a housing crisis, an inequality crisis, what many think is a political crisis, and what may be a growing crime problem—and none of these will be fixed by building more luxury apartments and supertall office towers. There is a supply and demand problem: there is an overwhelming demand for housing that the average New Yorker can afford, and the public-private partnership will never supply the solution. We need to return to development practices that use the power of the state for the benefit of all.
Featured image via Business Insider.