An 86% drop in the number of residential units approved for construction in New York City this year could mean a sharp decline in housing supply and, in turn, higher prices for would-be buyers and renters in the years to come.
The dramatic fall in approved developments follows a sharp decline in the number of permit applications, six months after the expiration of the 421-a Tax Abatement Program on Jan. 15, according to a new analysis by Elliman Insights, a publication of Douglas Elliman Real Estate.
As the deadline for 421-a approached, developers rushed to submit permit applications, which brought the total for 2015 to a record of 54,619 residential units, including both rentals and condos, the Elliman report found.
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But the expiration of the program, and its tax incentives, seems to have also washed out interest from developers to build. Between January and May, the city approved just 3,311 units, an 86% year-over-year decline and a 59% drop compared with the same period in 2014, according to Douglas Elliman, which looked at data from the New York City Department of Buildings.
“For buyers, not only will there be less supply, which will likely hike prices further, but the loss of the 421-a abatement may lead to less purchasing power overall,” said Sofia Song, executive vice president of data and research at Elliman Insights.
The program was created in the 1970s to spur development, but it evolved to provide tax breaks to developers who included affordable housing in their projects.
One high-profile beneficiary was Extell Development Co., the developer behind One57, the ultra-luxury tower on West 57th Street, known as Manhattan’s Billionaires’ Row.
A review by the city’s Independent Budget Office released last year found that Extell obtained nearly $66 million in property tax breaks in exchange for building 66 affordable apartments in the Bronx. For opponents of the 421-a program, One57 was an example of a project that reaped tremendous tax incentives in exchange for minimal investment in affordable housing.
With the end of 421-a, Ms. Song said, “developers will likely pass along the higher tax costs to unit owners, which could be hundreds, if not thousands of dollars more a year.”
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Already, New York prices have been increasing significantly. The average sales price of a home in New York City increased by an annual 10% in the second quarter of 2016 alone, mainly due to the condo segment, which saw average prices going up by 23%, according to the Real Estate Board of New York.
Since new projects approved before the expiration of 421-a must be completed before the end of 2019, there will be a huge amount of construction in the coming years. Douglas Elliman estimated the number of units in the pipeline this year to be 38,759 throughout the city’s five boroughs, with Brooklyn leading the way with more than 14,000 units.
In 2019 and beyond, however, the pipeline shrinks dramatically, to a total of 7,735 units for the whole city, less than a fifth of the 2016 total.
“The numbers seem to bear out what many had feared when the 421-a lapsed: a slowdown in developments, less construction, lower supply and higher costs,” said Ms. Song, adding that this could lead to the creation of a new program.
Pipeline of residential units in New York City
| Borough | 2016 | 2019 |
| Manhattan | 10,978 | 4,006 |
| Brooklyn | 14,361 | 2,309 |
| Queens | 10,030 | 1,398 |
| Bronx | 3,093 | 22 |
| Staten Island | 297 | 0 |
Source: Elliman Insights