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This podcast has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only as defined by local laws and regulations. Please read other important information which can be found on the link at the end of the podcast episode.
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Good afternoon everybody. It's Michael sembelist with the February 2026 I in the Market podcast. Over the last two, three months, almost every client I see in the Tri State area and even beyond asks me the same question, which is, what do you think of the new mayor? I try not to evaluate politicians before they've done a few things. I think it's kind of unfair. But in this case, I think it's important for us to think about how a democratic socialist mayor will address New York's chronic housing shortage, particularly given some of the policies that he's put forth in terms of saying that he's going to try and solve it. So I want to start with this movie that I rented recently. It was called Drop Dead City and it was a documentary on the city fiscal crisis during the 1970s. It was pretty entertaining, but I remember thinking that it left Mayor John Lindsay off the hook almost entirely. There was a movie poster with 18 different caricatures of the people in the movie and Lindsay wasn't even one of them. The documentary focused instead on Mayor Abe Beam, who inherited most of the mess and a bunch of other protagonists. But it was Lindsay who was New York's young, articulate, handsome and charismatic mayor from 1966-73 that was the architect of many of the policies that eventually led to the crisis. A debt finance spending spree, a quadrupling of municipal pension costs, and growth in the city's payrolls to the point where Lindsey's New York City government employed more people than the garment industry, the banking industry and longshoring combined. Now you have to remember this was the 70s when all of those three things were pretty big businesses. So, so interesting that they kind of left Lindsey off the hook there. And that was the hook, so to speak, for me to start thinking about the new mayor and his policies. So where are we? We have one of the tightest housing markets in New York City since 1960. And so the mayor, the new mayor campaigned on some pretty high profile policies to address it. $70 billion in new city funded capital investment in affordable housing, public housing, accelerated land use approvals for these kinds of projects, a rent freeze for rent, stabilized apartment, and increased taxes on companies and wealthy residents living in the city. So in the eye in the market this month we look at the housing shortage and some of its demographic and economic costs and at some policies enacted by the Adams administration to try to jumpstart housing development. And then we focus on Mandani's policies and the challenges they face. And then we conclude with a little bit of research on, on rent freezes and what they do. The short answer, in case you have to go someplace, is that if Mamdani's $70 billion housing plan doesn't take flight for whatever reason, New York City is going to have to keep hammering away at restrictive zoning policies that impede development and forge more public private partnerships like other cities to improve housing abundance and affordability. And also New York City is going to have to at some point design solutions to the, to the worsening problem of, of rent stabilized units that aren't getting renovated because of the cost recovery rules that are when put in place in 2019. So let's dive in and hope you guys are interested in this topic because I sure am. So of New York City is a renter City. Around 70% of the units are rented rather than owned. And of these rental units, around 40% are rent stabilized, 7% are public housing, 3% are still rent controlled, and the rest are unregulated. It sounds like a lot of them are unregulated, you know, around half, but 15 to 20% of those now have protection under something called the good cause eviction law, which protects tenants, even in unregulated apartments, from eviction or lease termination without some kind of good cause. What's really interesting and amazing when you, when you look at the charts that we have in the piece on this, the New York City apartment rental stock is most, in other words, the number of units is, is almost unchanged since 1965. I mean that's kind of amazing. Most of the growth in, almost all the growth in the housing stock has taken place in the owner occupied units. So kind of that, that kind of tells you New York City housing stock being unchanged since I was, you know, born in the early 60s is an amazing stat and tells you everything you need to know about why we have a housing shortage. Over, over since 1980, when I graduated high school, the housing into employment ratio has fallen from about 90% to about 80%. In other words, the ratio of housing units to employment have been falling. And then here's the really telling stat. Vacancy rates in the city are only 1.4%. Now to put that in context, most academic research, you know, civic planning research, says that vacancy rates need to be around 5%, maybe a little higher, so that there's enough inventory for people to move into the city or move within the city. And the vacancy rates in New York are now just 1.4%. And if we strip out the $2,400 plus rental category, the rental rates are below 1%. So that is a housing shortage. New York did add more units to 2024 than 2023. But to really resolve the housing shortage, housing production would have to double and stay there to levels that were last seen in the 50s and 60s, which was a very different environment in terms of construction and employment. And another way to think about what's going on is the number of permits that were issued for new housing units. Last year was at its lowest level in the 21st century, aside from the years following the financial crisis. Slow permitting is not just a New York City issue, it's a New York State issue. North Carolina issues twice as many permits as New York State with half the population. So this is not a great state for permits. So let's talk about this 2019 act. It was called the New York Housing Stability and Tenant Protection Act. And I understand why they did it because for the decade before 2019, units were rolling off rent stabilization once they reached a certain rent level. And so the city wanted to stop the bleeding of units leaving rent stabilization. So what they did is they put caps on how, you see, you couldn't take units off of rent stabilization anymore, and they put caps on how much you could increase the rent even if you spend money renovating them. And remember, a lot of times, rent stabilized units need a lot of renovation when the, when the tenants leave because they're in pretty dilapidated shape. So, so let's give it, let me give you an example. Let's assume a dilapidated rent stabilized unit on East 6th Street. And a lot of units like that need anywhere from 100 to $110,000 of renovation costs. I mean, it's a gut renovation in terms of window framing and painting, bathrooms, appliances, kitchen floors. You know, 100 to 110 grand is a kind of a low budget renovation. But you can, according to this law, you can only increase the rent by $347 a month. When you do the math, that's a payback period of 27 years for the property owner even before assuming any kind of return on capital or financing cost. Obviously. Who's going to do that? Not a lot of people, not a lot of property owners. And so you can see in this chart that we have in the piece that once that act went in place, the applications to do major capital investments in buildings or individual apartment improvements plummeted. And what started going up was landlords warehousing these apartments. And warehousing means you're intentionally leaving them vacant and not renting them out. Another reason why they're doing that is because the rent increases that have been provided on a one and two year basis are consistently falling behind operating costs. And so, you know, in a free market, what, what happens is you have more and more buildings. By some estimate, 20% of all the rent stabilized units have negative NOI. And so I think we shouldn't be surprised to find out that some of those property owners no longer want to rent them because just not renting them could cost less money than actually renting them. So what, what are the consequences of this? The growth, because of the low growth in the supply, the rent to income ratio has gone from about 33% in 1990, which is around the national average today, to over 50%. And these are for kind of median income families. So that's a very, very painful economic consequence of the housing shortage is that people are paying way too much of their money that they earn on rent. And it also creates other really bizarre things related to immobility. And the Citizens Budget Commission and I tried using really kind of unbiased Affordable Housing Commission, Citizens Budget Commission, Independent Budget office type sources here. And as per those reports, only 9% of households are in the proper size relative to number of people. Where the vast majority of households are either undercrowded or overcrowded. They're overcrowded because they can't afford to move, or they're undercrowded because after the kids leave, they don't want to leave because they have such a sweet deal and they can't afford to afford to move anywhere else. Now what does this all boil down to? 3 things. Zoning, zoning and zoning. Right. Those are the top three reasons why that New York City is in this mess. And I have a couple of statistics here that I want to share with you. Some of these are just staggering when you think about them. So for 40 years from 1960 to 2020, more than half of all New York's community districts experienced negative or limited growth in the allowable residential building space because they were either down zoned, I'll explain that in a minute. Or they had historic district creation down. Zoning means that you putting in zoning rules that are more restrictive than what was there before. So think about that. Over 40 years, as this housing situation is worsening, more than half of the community districts decide to make it even more difficult to build and by the time you get to 20, 22, 40% of all the buildings in New York are impossible to tear down and rebuild because they're above the allowable floor area area ratio for that particular parcel. Like, that's incredible. That 40% of all the residential buildings are now higher than what you could build from scratch. And so therefore, nobody's going to touch them, nobody's going to fix them, nobody's going to renovate them. And then the last thing is, you know, if I were stuck with someone in an elevator and I just had a couple of minutes before they got off on their floor and they said, you know, tell me about New York City housing. I'll give them this one statistic. And this is kind of amazing. And I got this from Jason Barr, who's a professor at Rutgers that focuses on these geospatial issues in civic planning. 92% of all the housing near subway stops outside Manhattan within your, in the other four boroughs are three stories or less. Let me say that again. If you trace the subway lines outside Manhattan and you go out into Brooklyn, Queens, Bronx, Staten island, and you follow those subway lines and you look along those corridors and the streets where the subway lines are where you're supposed to be maximizing the amount of people that live there to take advantage of all this money that you spend on public transit, 90 plus percent of those buildings are three stories or less. If each one of those buildings were just doubled from one story to two or two to four or three to six, the whole affordable housing crisis would be over. Right. So this is all about zoning. Now. I know, you know, Adam's left office in a variety, with a variety of clouds over his head. I'm not going to get into those because I don't know enough about them. But what I do know is under his leadership, the city, New York City, finally passed this thing called the City of yes in 2024. And it looks like it opens up some avenues here to address some of these zoning issues. And there are a few of them. We have some maps in here that look at where they apply. So they're trying to fix this issue of Transit Oriented Development. And what it does is it re legalizes the modestly larger apartment buildings near subway and rail in low density areas. Now, some parts of the city negotiated their way out of this thing, but enough parts are in it. It'll be interesting to see what happens. They've all. They're also allowing more housing above businesses on commercial streets. They passed this thing called accessory dwelling unit reform, which Allows one and two story family buildings in, in the basement or in the backyard to build a detached unit of 800 square feet to increase the density. A lot of people have been asking for that. There's also been a relaxation of some crazy parking rules in, in parts of Manhattan and, and waterfront Brooklyn and Queens. And then lastly they have expanded the eligible geographies where you can convert buildings from non residential to residential. So this was potentially a pretty big deal. We'll have to see exactly how it plays out over time. They also passed something called an FA our reform, which is a floor area ratio reform. Almost every developer that I talk to, that I've ever met talks to me about the limitations that they can't build as high as they want. This, this law is much ado about nothing. By the time you crunch all the numbers, the places where the fars were increased were so marginal and narrow and with all sorts of carve outs and exclusions that they didn't really accomplish much there now. So now let's talk about Mamdani and his housing policies and priorities. So what are they build 200,000 units of subsidized union built rent stabilized apartments over 10 years. If they could do that, that would substantially alleviate the housing shortage in New York. They want to accelerate land use approvals for these kinds of developments and they want to double spending on existing public housing. Now that I can understand. The latest reports from the city are that the city is $78 billion in arrears on repairs to public housing. So I can understand why the mayor wants to spend some more money on that. The mayor is also launching a rental ripoff hearings to solicit feedback from renters and more task forces to accelerate construction and remove permitting barriers and things like that. So what do I think of these things? Well, the first constraint the Mayor is going to run into unless he can convince the federal government and the state government to cover a lot of the cost of this plan, is that the city can't afford it. And there's two big constraints to think about. One is that the city typically applies a cap of 15% of debt service as a share of tax revenue. And based on the projections from New York's own controller, New York's headed to about 14.3% or something within a few years. So there's not a lot of room to all of a sudden borrow $70 billion in the, in the geomarket to finance this. The second thing that's even more binding, there's a state constitutional limit on the borrowing power of New York City. And a bunch of that is already taken up by existing GO bonds, some TFA bonds and some other bonds. So there's only about 30 billion left there. And presumably the mayor wouldn't want to exhaust the entire amount of remaining borrowing capacity just to finance part of this plan. So the borrowing constraints are real here and not just imagined. Then you have to remember New York City debt burdens are already very high. We have six different charts in the piece that look at different measures of debt. Per capita debt to personal income, debt to revenues. Just want to show you one of them here from the University of Denver. New York has the highest municipal net municipal obligations per taxpayer compared to a whole bunch of other cities, even worse than Chicago, which is saying something because they normally win gold medals in this kind of thing. So, you know, that's the other real world constraint on what the mayor might do is that the New York City debt burdens are already pretty high. Now there's a lot of discussion about a rent freeze. Short term rent freezes are probably not a big deal, but longer term rent freezes can be. And there's been a ton of research on this topic and a study just came out that combined 100 rent freeze and rent control studies. And the authors describe the results as unambiguous. Right. And that's not a word that most of the people who write these studies usually use. Unambiguous means almost all the studies pointed in the same direction. So what did they find? That rent freezes and rent control, definitely they control rents, right? By law, they prevent you from raising the rent, so that's good. But mobility, labor mobility collapses, new construction starts decline, housing quality gets worse, the housing supply goes down or stops growing, rents skyrocket in the uncontrolled part of the city. And then you have worse misallocation. So you pay a price, you can do it, and you can protect people in the short term, but you pay a longer term and medium term price for this kind of thing. And again, these results were, were pretty consistent tax rates. You know, everybody listening to this call should know mayors can't raise income tax rates, right? That there's a, there are state legislatures that have to do that, and then the governor has to sign bills that, that approve it. It's a little miniature version of what takes at the federal level. So. And by the way, even if the mayor convinces members of the state legislature to raise tax rates, the top marginal personal income tax rates in New York are already the highest in the country. And the top marginal corporate income Tax rates in the US Are also the highest in the country, particularly adding the MTA surcharge for some of the downstate regions. So if the mayor pushes for higher taxes, I think he's going to run into a buzzsaw, at least in parts of the state legislature, given those facts. Now, the mayor and the city Council do have the flexibility to unilaterally raise property tax rates, but New York also has the highest property tax rates per square foot for industrial, retail and multifamily properties. So there's not a lot of wiggle room here to to try to raise taxes to finance this plan. So there's a lot more information in the piece on scaffolding laws and construction and insurance and all that kind of stuff. But just to wrap up here, for whatever reason, if Mondani's plan does not take flight, and again, if it does, it it would make a big dent in the affordable housing shortage in New York. But if it doesn't take flight, New York's going to have to go back to the hard work and hammering away at restrictive zoning policies, construction costs that impede development, and forge more private public partnerships to improve the stock and the affordability of housing. The There was a city. The city of yes plan is a good start. And Hochul, of all people announced a let them build plan just last month, which was a sign that New York might be finally interested in cutting some of the red tape which consistently places New York close to the last in the country in cost of doing business surveys. Now let's see what happens. Right. A similar bill failed to pass the legislature in 2023, but it's an interesting sign that Hochul is moving in that direction. So to close here, there was an article in the Georgetown Journal on poverty law and policy. Right. Pretty progressive publication that concluded that the 2019 act and the good cause eviction laws are counterproductive. They make it harder for the most vulnerable families to find housing. It pushes out small landlords, and it makes it harder for low income renters to find a place to live because it effectively contributes to shrinking supply. Could there be some kind of epiphany in City hall among the mayor and his people on this? I doubt it. Based on his public statements, that's not likely a view the new mayor is going to adopt. We'll see. And if he doesn't, the city's government and owners of a million rent stabilized units are going to remain across the table from each other for years to come. And if that's the case, the stock of New York City rental units may be stuck at levels which haven't grown by much in over 50 years. So that is. That's the story on the new mayor and housing policies, the housing shortage. Thank you for listening. The next Eye on the Market, coming out in early March, will probably be scheduled to be our annual energy paper to Whopper this year with lots of interesting things. And then between now and then, I'm going on my bucket list catamaran trip to fish in the Seychelles for dog tooth tuna. So so long everybody. See you in.
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Michael Semblast's Eye on the Market offers a unique perspective on the economy, current events, markets and investment portfolios and as a production of JP Morgan Asset and Wealth Management. Michael Semblist is the Chairman of Market and investment strategy for J.P. morgan Asset Management and is one of our most renowned and provocative speakers. For more information, please subscribe to the Eye on the Market by contacting your JP Morgan representative. If you would like to hear more, please explore episodes on itunes or on our website. This podcast is intended for informational purposes only and is a communication on behalf of JP Morgan Institutional Investments, Inc. Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation. Outlooks and past performance are never guarantees of future results. This is not investment research. Please read other important information which can be found at www.jpmorgan.com disclaimer EOTM.