Yes, I'm still an odd one to be writing about the state of America's urban areas. If you've been reading my work since earlier today, you know I grew up in a rural setting in Iowa and am a content rural dweller myself now. I have little time for cities, despite having lived in them for four decades. I find them unpleasant; crowded, noisy, and, to be honest, they smell bad. I like the clean country air of the Susitna Valley, and if that means I have to put up with temperatures dropping to double-digits below zero, that's fine.
With that being true, why am I still worried about America's cities? Because our cities are the beating hearts of our nation. Much of the country's economic activity happens there. Urban areas contain a lot of the country's industry and academia. What's more, our cities used to be the pride of the nation, but that's not so much the case anymore. Rampant open-air drug use, huge homeless encampments, and rampant crime, including rioting against federal immigration officers, are taking their toll.
New York may be one of the most egregious examples, not the least of which because of the Big Apple's selection of an unrepentant communist, Zohran Mamdani, as mayor. When I was a young man, even though I had never yet visited New York, I always thought that if any city could rightly be called the capital of the world, it would be New York. No longer. Among the Big Apple's many government-imposed problems is in the rental property market, badly distorted through the city's idiotic rent-control policies - and it's getting worse. Now the Division of Housing and Community Renewal (DHCR) is fiddling with the rules around renovation of older properties, costing the developers seeking such renovations horrendously, and making matters far, far worse. Case in point: Peak Capital Advisors.
A stone’s throw away from the Brooklyn Bridge, at 70 Middagh Street, stands a charming ten-unit apartment building. Built in 1897, it’s just down the street from the former February House, the artists’ commune where notables like W. H. Auden, Carson McCullers, and Salvador Dalí once lived. But more than a century of use took its toll on the building, and few of its essential systems had been replaced. In 2019, changes to New York State’s rent stabilization laws put 70 Middagh Street at risk of falling further into disrepair by making rehabilitation even more economically infeasible.
That’s when David Gomez found a way to square the math. State law exempted buildings that were substantially rehabilitated from rent stabilization, allowing them to charge market rents. Gomez’s firm, Peak Capital Advisors, could thus restore the building and recoup their investment, assuming they followed a 1995 Division of Housing and Community Renewal (DHCR) framework outlining what qualified as “substantial rehabilitation.” There were two conditions: first, that 75 percent of major systems had been replaced, and second, that the building was at least 80 percent vacant when work started.
Sounds, well, not unreasonable as housing regulation overkill so often goes. In a nutshell, this would seem to provide some incentives for developers to renovate older, mostly-empty buildings by allowing the units to come off New York's unreasonable rent-control program, euphemistically called "rent stabilization."
Then, the DHCR moved the goalposts.
But in 2023, after updating its framework, DHCR challenged Peak Capital Advisors’ attempts to charge market rates. DHCR claimed that the buildings had not been in “substandard” condition, discarding the previous presumption for what counted and applying its new definition of the term. The state abruptly—and without notice—sought to compel Peak Capital to acknowledge that the newly renovated units were still subject to rent stabilization, forcing rents to revert to a fraction of the market rate.
Peak Capital wasn’t alone: the state also went after the owners of some 11,000 additional units that had been decontrolled in this manner over the prior three decades. The repercussions of these cases extend beyond any single developer. They risk sending a message that developers aren’t welcome in New York, even as the state desperately needs their investments to address the housing affordability crisis.
There's not really the "risk of sending a message" here. The message has been sent, loud and clear, and development companies had better take notice.
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Like almost everything to do with economics, this is all about incentives. The original DHCR program provided some incentive - or at least, made it less torturous - to seek to renovate old buildings that, for one reason or another, couldn't attract tenants due to their age and condition, even if they were rent-controlled. But now this, this unforgivable bait-and-switch, has removed even that, and in many cases, after millions of dollars were spent in renovations and refurbishing. This is a reverse incentive, in fact, and that message sent is this: "Don't invest any money in New York real estate." The more overregulation like this is in place, the less incentive there will be for anyone to do anything with older buildings, which will empty out, and deteriorate, and in the end, contribute to entire neighborhoods becoming blighted zones.
It's hard to see a way back from this. The Big Apple's productive, tax-paying residents are leaving in droves. A communist sits in Gracie Mansion. Fewer and fewer firms are willing to risk any capital in the city. New York may well be in a death spiral, and it may take some sort of collapse before what was once one of the world's greatest cities can recover some semblance of sanity in its government.
