NEW YORK (BLOOMBERG) -- There’s an unmistakable trend across New York City: Real-estate developers are seeking to construct buildings with exactly 99 units. No more, no less.
In the past four quarters, 28 such permits were filed, more than double the total from the previous 16 years combined, according to city data analyzed by the Real Estate Board of New York, a lobbying group.
To those in the industry, there’s no question what’s behind the pileup at that precise number: A new tax program for real estate developments that requires higher worker wages for buildings with 100 or more apartments.
Last year, the New York legislature passed 485-x, which allows developments in New York to receive a tax break if they include a certain number of affordable housing units. It replaces a similar program called 421-a that expired in 2022. However, the new program requires developers of buildings with 100 units or more to pay workers at least $40 an hour — a mandate far more stringent than the prior one.
Developer MaryAnne Gilmartin is a case in point for the results of the program. She once envisioned a pair of 400-unit rental towers on a NYC lot, but she’s now considering as many as six smaller buildings — a patchwork of projects that ultimately would deliver fewer apartments. The revised plan would take longer to execute and cost more per unit, but Gilmartin said this is the more financially viable option for her.
It’s an unintended consequence of an initiative designed to substantially expand the city’s supply of housing, a crucial need at a time when spiraling rents have made life in New York more unaffordable than ever. The Real Estate Board of New York and many developers argue that 485-x hampers their efforts and will lead to fewer units than might have gotten built under the old program it replaced.
The wage requirements “are a huge burden,” said Gilmartin, chief executive officer of MAG Partners. “We’ll build less housing, less quickly, and it’s less financially viable. Frankly, we just have less ability to address this housing crisis.”
Unaffordable Housing
The city’s housing shortage has gotten so dire that every candidate in this year’s mayoral race has a proposal to remedy it. As soaring costs threaten to send New Yorkers fleeing, there’s broad agreement on the idea that the faster more homes can get built, the better. Help has come from state legislators, which passed 485-x last year, while city lawmakers have enacted zoning changes to pave the way for more residential construction — a step toward Mayor Eric Adams’ “moonshot” goal of adding 500,000 units by 2032.
Ahead of the mayoral election, as candidates debate the best ways to alleviate the housing crisis, the new flood of 99-unit buildings is a signal of how changes in policy can have far-reaching and unintended effects.
Under 485-x, wage minimums go up with the number of apartments. For example, workers on buildings with 100 to 149 units must be paid at least $40 an hour with 2.5% annual raises. Crews on 150-unit projects would be paid an hourly minimum of $63 or more, depending on the location.
This means affordable housing will be built in “smaller amounts and at a slower pace,” said Daniel Bernstein, an attorney at Rosenberg & Estis who works with developers. “There is going to be more housing produced. But you will not see the amount developed at scale because of the construction-wage requirements.”
Wage requirements under the previous program, 421-a, kicked in at 300 units and were less stringent, giving developers the ability to pay certain laborers less than others, according to Bernstein. With 485-x, the minimums largely apply across all trades, he said.
On sites with 99 units or less, workers must only be paid the city's minimum wage of $16.50 an hour. The average hourly wage for an entry-level construction worker is typically $18.30 an hour, while the most experienced workers can get up to $50.38, according to the New York Department of Labor.
In return for the higher wage requirement, 485-x offers more-attractive tax incentives over a longer period of time, Bernstein said.
Higher Costs
But even with those benefits, the 150-unit wage minimum would tack on 20% to a project’s hard expenses, said Gilmartin, who’s considering buildings with 99 or 149 apartments on the site where she would have built two larger towers under the prior program.
Add in high interest rates, rising land costs and the looming impact of tariffs, and the math on larger buildings doesn’t make sense, said Rick Gropper, founding principal at Camber Property Group, a New York-based firm that specializes in developing affordable and mixed-income housing.
Other than potentially saving money on wages, a series of smaller buildings enables each to qualify for its own tax break. On the other hand, that means more paperwork and time spent on construction. And whether a property has 99 units or 200, they all have to meet the same standards, making the economics of scaled-down projects complicated as well, according to Gropper.
“You still have to have an elevator and other building requirements, with only 99 units to offset those costs,” he said.
While most of the initial 485-x projects are on the smaller side, the New York City Department of Housing Preservation & Development, which manages the tax incentive program, is talking with some companies that are exploring bigger properties but haven’t yet registered plans, a spokesperson for the agency said.
‘Important’ Buildings
REBNY has warned that the city’s housing needs are massive and that while the group supports any program that encourages construction, the wage mandate means 485-x won’t come close to generating enough units to give New Yorkers meaningful rent relief, said Henry Perez-Tlatenchi, a senior policy researcher at REBNY.
Still, midsize buildings are “important,” especially in neighborhoods outside Manhattan, where towers with hundreds of units may not be a good fit, he said.
To be sure, 485-x has jump-started housing production after the expiration of 421-a brought new projects to a standstill. REBNY’s analysis for the second quarter showed 6,943 proposed dwelling units citywide, nearly double the amount seen for the three months through September 2022, the first period after 421-a lapsed.
Affordable-housing advocates say that while they do expect 485-x to spur development, they haven’t yet seen enough evidence that the program is working as intended.
“It’s important that we are maximizing zoning on each site and are building housing that works in different neighborhood types,” said Rachel Fee, executive director of the New York Housing Conference, which worked with the state on 485-x. “We’re still very early in the life of the tax incentive. But if we’re not seeing larger buildings, then we would need to revisit this.”
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