Economic
Condition of the Residential Real Estate Industry
Price
Index of Operating Costs Survey
Each
year since 1969 the Board has been provided with a Price Index of Operating
Costs (also known as the price index or "PIOC") which approximates the
actual changes in gross operating costs for apartment buildings. The
PIOC also provides information on actual changes in real estate taxes
and sewer and water rates.156 These
price changes are incorporated into a single figure that often becomes
a point of departure for consideration of other economic and policy issues
relating to the guidelines. Although not controlling, the PIOC is perhaps
the most influential figure affecting the final guidelines.
The
price index is a relatively complex instrument for estimating the actual
costs of operating a rental building. In 1970 the federal Bureau of Labor
Statistics constructed a "market basket" of goods that a typical owner
is expected to purchase in a given year. The basic components of that
market basket include taxes, labor, fuel, utilities, insurance, maintenance
and administrative costs. Each item is given a "weight" to gauge its
relative importance in the overall basket. Price changes in the various
components are gathered through a series of surveys of vendors and reviews
of such things as labor and insurance contracts. In the case of taxes,
actual changes in tax bills are reviewed through a computer link up with
the City's Department of Finance. The price of heating fuel is adjusted
to reflect the relative warmth of the year under review, by adjusting
for degree-day variation. Each year the weights in the market basket
are adjusted to reflect the relative changes in the price of each component.
Thus, for example, if labor costs outpace insurance costs, the weight
given to labor will be increased before the next survey.
With
the exception of taxes and water and sewer costs, the price index is
not a measure of cost changes.157 Rather
it is a measure of price changes. Thus, if an owner experiences
fuel savings due to conservation measures such as the installation of
thermopane windows, or labor savings by switching from manual to automatic
elevators, such gains are not captured in the index. Similarly, if an
owner is saddled with new costs such as new permit or filing fees, or
regulatory obligations such as lead paint removal, these burdens are
not captured in the index.
In
addition to these limitations, any mechanism for measuring prices may
run askew over long periods of time. Thus, periodic "reality checks" through
alternative data sources or through a wholesale updating of the weights
or the market basket may be needed. In 2000 the Board undertook a review
of these various issues by contracting with Dr. Anthony Blackburn, who
authored many of the price index reports in the 1980's, to examine the
need for updating the index. Dr. Blackburn found that "[t]he PIOC appears
to have provided quite accurate estimates of changes in operating costs
over the last 17 years, in part because its errors have been offsetting.
It also appears that, because of a drift in the expenditure weights,
there is now a potential for the PIOC to misestimate future changes in
operating costs." For this reason, Dr. Blackburn recommended various
adjustments utilizing alternative income and expense data. A complete
copy of his report is annexed hereto in Appendix
R.
The
chart below shows the percent changes in both the PIOC and the "core" PIOC
from 1982 to 2000. The "core" PIOC eliminates the more volatile fuel
and fuel-related costs from the calculation. The figures for 2001 are
estimated.
Price
Index Projections
In
addition to the price index, each year the staff produces a set of price
projections for the coming year. These projections are particularly helpful
with respect to the renewal guidelines for two-year leases. A complete
summary of the projections from 1975 through 2000 including actual changes
in the price indices with which to gauge the accuracy of the projections
is included in Appendix S.
RGB
Rent Index
The
price changes measured by the PIOC are also compared to projected changes
in rent levels to produce an estimate of the average operating cost to
rent ratio ("O&M to rent ratio") in rent stabilized buildings. The staff
uses a measure called the RGB Rent Index to estimate the overall impact
of the Board's guidelines and the statutory vacancy allowance on rent
rolls each year. The one and two-year guideline increases, the mix of
lease terms, the supplemental adjustment, the statutory vacancy allowance
and the minimum rent are combined to produce the aggregate change in
rent levels. A chart of the changes in operating costs from 1969 through
2000 as estimated by the price index, along the RGB Rent Index over the
same period is contained in Appendix T.
A full explanation of the RGB Rent Index and the methodology for calculating
the index is included in Appendix U.
Income
and Expense Study
Much
has been said about the accuracy and general value of the annual price
index. Owners have charged that it fails to reflect true operating costs
and other obligations of ownership while tenants claim that the index
methodology is unsound and misleading in the sense that it does not provide
data on actual expenditures and profits. While no study of profits has
ever been undertaken, recent access to income and expense statements
on file with the New York City Department of Finance has greatly enhanced
the Board's understanding of the financial condition of rent stabilized
properties. For eleven years the Board has received detailed summaries
of operating costs as well as rental incomes. The Real Property Income
and Expense (RPIE) data is analyzed by RGB staff in its annual Income
and Expense Study. In addition, in the Spring of 1992 the Department
of Finance conducted audits on some 46 rent stabilized properties in
order to gauge the accuracy of the I&E filings.
The
changing relationship between incomes and expenses is an extraordinarily
complex matter that draws upon a variety of data sources. A complete
history of the income and expense issue was prepared in the spring of
1993 and was published in the 1993 Summary of Research. The full text
of the 1993 report is contained in Appendix
K1. A recent update of that memo, analyzing historic changes in the
relationship between operating costs and rents is contained in Appendix
K.
The
findings of this analysis are divided between units in buildings constructed
before 1947 ("pre-war") and after 1946 ("post-war") due to disparate
data sources. The main findings are as follows:
In
the Post-War stock, the O&M to rent (contract) ratio increased by 2.1
percentage points from .55 to .571 from 1969 - 1997. That is, owners
of post-war buildings spent an average of 55 cents of each rent dollar
on operating costs in 1969 (the first year of stabilization), and an
average of 57.1 cents in 1997.
In
the Pre-War stock, the O&M to income ratio declined by 5.4 percentage
points from .65 to .596 from 1967 to 1997. In other words, owners of
these units (which were subject to rent control at the time) spent 65
cents of each rent dollar on operating costs in 1967. By 1997 (after
these units moved to rent stabilization) they spent only 59.6 cents of
each rent dollar on operating costs.
Overall,
the O&M to rent/income ratio declined by 3.4 percentage points from .623
to .589 between 1967 to 1997. That is owners, on average, devoted 62
cents of each rent dollar collected to operating costs in 1967-70, and
only about 59 cents in 1997.
When
operating costs are subtracted from rent collections, the amount remaining
is net operating income ("NOI") which allows for capital improvements,
financing costs and "profit."158 According
to the analysis provided in the memo, "[a]djusting NOI for inflation
in the post-war stock (the only stock for which comparative data is available)
... from 1969-70 to 1997 average monthly NOI fell slightly from $386
to $378 (by $8 or 2%). Given the fact that this stock was 27 years older
at the time of the 1997 measurement, an even greater decline was expected.
These
are complex issues and many caveats are in order. New members are advised
to consult the complete text of the memo. Generally, the cost of operating
a rental building relative to rental income has fallen slightly over
three decades of rent stabilization. This means that average net operating
incomes have grown relative to operating costs. In inflation adjusted
terms, net operating incomes have held steady with a slight drop in real
NOI for post-war housing. The relative gains in NOI for pre-war housing
suggest that in inflation adjusted terms, NOI has grown as these units
transitioned from rent control to rent stabilization. The chart below
is derived directly from annual income and expense filings. It shows,
for every dollar of stabilized owner income, the average amount spent
on expenses in a building and the amount left over for net operating
income. As the chart illustrates, since 1992, owners have generally spent
less on expenses and have had more income left over for debt service,
income tax and profit.
The
price index along with the O&M to rent/income ratio and the projections
are used to generate two figures known as the commensurate rent adjustment.
This adjustment was previously discussed here.
A memorandum setting forth the mechanics of the various commensurate
formulae is included herein at Appendix J.
The
Cost and Availability of Financing
The
Mortgage Survey
Each
year the Board's research staff conducts a survey of area lending institutions.
This survey includes questions on financing terms, financial characteristics
of "typical mortgages," factors influencing mortgage decisions, and the
number and dollar value of loans made to owners of stabilized buildings.
The results of the survey are reported to the Board annually in the Mortgage
Survey Report. In addition, experts in banking and finance are often
invited to testify at Board meetings. The chart below shows average interest
rates for new and refinanced multi-family mortgages for rent stabilized
properties from 1981-2000.
Overall
Supply of Housing and Overall Vacancy Rates
The
Housing Supply Report
The
local emergency housing rent control act mandates the production of a
housing survey every three years specifically to determine if the declared
housing emergency continues to exist justifying a continuation of the
rent control law.159 This
survey commonly known as the Triennial Housing and Vacancy Survey (or
the "HVS"), has evolved over the years into a highly detailed picture
of the City's rental housing stock along with demographics on the tenant
population. Although originally concerned only with rent control, the
survey now provides a wealth of data on all housing sectors. Consequently,
the Board is provided with a comprehensive base of information regarding
the overall supply of housing and vacancy rates every three years.
In
addition to the HVS data, the Board updates its information on the City's
housing supply by reviewing new construction levels and rehabilitation
efforts through information provided by the Department of Buildings and
the Department of Housing Preservation and Development. Data provided
by the State Attorney General's Office on the number of buildings converted
to cooperatives is also reviewed. This data is summarized annually for
the Board in the Housing Supply Report. See also the chart
of New Dwelling Units Constructed in New York City, 1921-1999.
Data
from the Cost of Living Indices
The
Income and Affordability Study
Each
year the Board is provided with data on an April to April basis from
the regional cost of living index. This information may be compared to
the data provided by the annual price index to gauge changes in a landlord's
cost of maintaining rental housing relative to the overall cost of other
goods and services. It is also helpful in comparing relative changes
in rent to the cost of other goods and services. A comparison of changes
in rent stabilized rents to changes in the regional consumer price index
is contained in Appendix V. The cost of
living data is reported to the Board annually in the Income and Affordability
Study.
One
of the most important indices, stabilized tenant income, is only available
in the triennial Housing and Vacancy Survey. The table below details
median stabilized household income from 1974 through 1998, in nominal
and real 1998 dollars.
Another
important figure derived from the HVS is the share of income paid in
rent, or rent burden for rent stabilized tenants. The chart below shows
the median rent burden for rent stabilized households from 1970-1999.
As discussed earlier in the Affordability section,
the rent burden for both stabilized households and all renter households
has risen sharply, especially in the initial stages of stabilization.
Other
Data - Summary of Special Research from 1989-2000
Along
with the large variety of facts and figures provided by those who testify
at the Board's annual meetings and hearings, the Board has requested
special reports in a number of areas related to the economic condition
of the rental housing industry and to the circumstances faced by rent
stabilized tenants. Key findings from these various reports are provided
below. The year noted on the left column refers to the annual research
summary where the full report may be found.
1989
Building
Violations and Tax Arrearages in Rent Stabilized Hotels, SRO's and
Rooming Houses (pp. 113-115)
While
now dated, this brief report disclosed that median per unit tax arrearages
were a more serious problem for rooming houses ($390) than for hotels
($360) and SRO's ($210). Similarly, rooming houses averaged about three
times as many housing code violations per unit (1.34) than SRO's (.42)
and more than seven times as many as hotels (.17).
1990
The
Supplementary Rent Adjustment / Housing Affordability (pp.
46 - 47)
This
report provides an overview of the effects of the Board's supplemental
allowance on individual rent levels from 1983 to 1989 in percentage terms
- depending on rent levels and the lease terms chosen. Generally, tenants
unaffected by the supplemental adjustment experienced cumulative rent
increases of 30 to 32% depending on whether they chose a one or two year
lease. Cumulative rent increases for tenants affected by the supplemental
adjustment ranged from 40% to 72%. Thus, while the dollar amount of increases
may have been as great or greater for higher rent tenants, low rent tenants
experienced much larger increases in percentage terms.
1991
Energy
Efficiency in Rent Stabilized Buildings (pp. 48)
This
brief report compares energy usage targets for "efficient" buildings
developed by the Department of Housing Preservation and Development's
Division of Energy Conservation, with actual energy usage derived from
income and expense data for rent stabilized buildings. The report concludes
that owners should save "anywhere between 6% and 13% on heating bills
if greater conservation efforts are made." Such improvements "should
be achieved through 'better maintenance procedures, and low cost retrofits'" and "do
not represent targets achievable only through highly expensive system
replacements."
Report
on Rent Stabilized Hotels (pp. 74 - 85)
This
extensive report reviews the economic condition of rent stabilized hotels,
SRO's and rooming houses, along with levels of rent registration with
the DHCR for each group. The study finds that "it appears that 40% of
all (potential) stabilized hotel-type units have not been registered
even once since 1984." It further found that 47% of buildings had not
registered. It found that 59% of rooming house units, 29% of hotel units
and 18% of SRO units were unregistered. A later analysis conducted in
1992 (reported at pp. 91-93 of the 1992 Research Summary) found that,
among hotels that did register with the DHCR, on average, only about
60% of income was derived from registered rents. Among SRO's and rooming
houses that registered with DHCR, virtually all of their income was derived
from registered rents. Both reports raised troubling questions about
the enforcement and efficacy of rent regulations in the hotel/SRO/rooming
house sectors.
1992
The
Vacancy Allowance (pp. 51 - 61)
This
report summarizes the history of the Board's vacancy allowance and some
arguments for and against the allowance. Issues discussed include its
effects on rent skewing, tenant mobility, building revenues and the enforceability
of alternative vacancy allowance formulas. In addition, an analysis of
DHCR's treatment of preferential rents (rents below legal levels) and
what happens to these rents when a vacancy occurs. While instructive,
much of the analysis has been rendered moot by the imposition of a statutory
vacancy allowance formula under the Rent Reform Act of 1997.
Effects
of Rent Regulation on Economic and Racial Integration (pp.
71 - 76)
This
extensive review found that "there is no statistical evidence of a relationship
between rent regulation and economic or racial integration" but does "not
conclusively negate the possibility that, under some circumstances, rent
regulation may promote or facilitate greater economic and racial integration." The
report relies upon extensive economic and ethnicity information available
from the 1987 Housing and Vacancy Survey. Utilizing various statistical
measures, the report found no significant variations in integration levels
resulting from the relative proportion of rent stabilized units in 53
sub-borough areas.
1993
A
Review of Change in Income and Expenses, 1967-1991 (pp. 33-44)
This
extensive report examines the effects of over twenty years of rent stabilization
on the net operating incomes of regulated buildings. It is fully updated
and the same issues are analyzed in a 1999 staff memo included herein
at Appendix K and K1. The key findings
in that memo were previously noted here.
Tax
Arrears in Rent Stabilized Buildings, 1993 (pp. 50-54)
This
brief report analyzes the characteristics of buildings in distress as
indicated by excessive tax arrears (3+ quarters in arrears). It discloses
that the arrearage problem reflects "the ongoing financial deterioration
of the worst-off buildings" insofar as many of the buildings were chronic
delinquents. About 80% were built before 1929. They had slightly higher
operating costs than average (driven by higher fuel and repair costs),
and lower rent collections. Average tenant incomes in these buildings
was about 25% lower than the average for all stabilized households. Average
rents were 10% below the average for comparably sized buildings and 20%
below the average for all buildings. Buildings with arrears also tended
to be "over-mortgaged" insofar as they carried debt levels that were
difficult to service given their rent rolls.
The
NYC Housing and Vacancy Survey: A Ten Year Retrospective (1981-91) (pp.
62-76)
This
extensive report covers developments in the housing market during the
1980's including new construction, household incomes, rents, affordability,
vacancies, demographics of tenant households, and housing and neighborhood
quality. One of the more notable findings with respect to the operations
of the RGB is that during this period "[r]ent increases outpaced the
RGB's Price Index of Operating Costs by a fair margin. The ten year change
in the PIOC was 71% compared to an 85% increase in rents."
1994
Tax
Arrears in Rent Stabilized Buildings, 1994 (pp. 48-58)
Expanding
upon the work started in 1993, this report includes a survey of owners
of buildings with 3+ quarters in tax arrears. For those owners, the study
reveals "vacancy and collection losses to be a severe problem" with "nearly
20% of the potential monthly rent roll" being "uncollected, 6% due to
vacancy and 13.5% due to collection losses." When asked what single city
initiative would most improve the profitability of their buildings, 40%
favored lower property and water & sewer rates; 30% favored a "fairer
and more efficient housing court" and only 25% favored higher rent guidelines.
With respect to the actions of the Rent Guidelines Board, two-thirds
of the owners responding indicated that targeted guidelines for low rent
apartments or small buildings, as opposed to general guideline increases,
would most improve their profit levels. This report is particularly helpful
in understanding conditions in distressed housing and the concerns of
owners.
Rent
Skewing in Rent Stabilized Buildings (pp. 62-65)
Rent
skewing is a way of describing substantial differentials in rent for
comparable units. One of the more significant problems with most rent
regulation systems is that rent adjustments tend to impose relatively
higher rents on newcomers. Allocating rent adjustments in an even-handed
way is a difficult task. In this 1994 report, the RGB staff found that "length
of occupancy" discounts occur in both regulated and unregulated rental
housing. The annual discounts tenants receive are about the same. Nonetheless,
rent stabilized tenants generally had deeper overall discounts due to
the fact that they tended to occupy their apartments about twice as long
as unregulated tenants. Thus, for example, in Manhattan the annual longevity
rent discount received by both regulated and unregulated tenants averaged
2.6% per year. Still rent stabilized tenants in Manhattan stayed in their
apartments 8.9 years on average, compared to 4.2 years for unregulated
tenants. This resulted in an average longevity discount of 23.4% for
stabilized tenants, and only a 10.7% average discount for unregulated
tenants. The longevity discounts for the other boroughs are far less
pronounced. (Brooklyn: 14.8% stabilized; 14.2% unregulated / Queens:
16.2% stabilized; 11.0% unregulated.) In the Bronx, unregulated apartments
actually witnessed larger longevity discounts (11.4% - stabilized; 12.1%
unregulated). In sum, the RGB staff found that because stabilization
tends to produce longer-term tenancies, greater longevity discounts (and
skewing) are generally found.
1995
Distressed
Housing (pp. 49-56) (tax arrears and foreclosures)
These
reports continue the Board's review of distressed housing. Most notable
is the examination of tax foreclosure policies of 26 cities compiled
from a survey taken by RGB staff. The survey found that few cities managed
tax delinquent properties as New York has (i.e. seizing delinquent properties
and managing them as a public sector landlord). Rather, "[n]early all
[of the cities surveyed] attempt to retrieve as much revenue as possible
from buildings in arrears through auctions, lien sales or, if necessary,
demolition and subsequent sale of vacant lots." In 1994 the City announced
that it had stopped foreclosing ("vesting") tax delinquent properties.
By the time the RGB revisited this issue in 1996, the City began selling
the tax liens of relatively healthy properties to investment banks. (See
1996 Report - Tax-Delinquent Property p. 76-77). More troubled buildings
were deeded to third party buyers who were given various incentives and
loans to improve the properties. The City's Department of Housing Preservation
and Development also set up an "early warning" system to help responsible
owners improve the financial and physical condition of their buildings
to avoid tax foreclosure.
Small
Buildings (pp. 59-63)
This
report examines the condition of small buildings in terms of rent levels
operating costs, tax arrears, and tenant incomes. The report concludes
that while "small buildings are not vastly different from large buildings
in most respects, small buildings are slightly worse off than large buildings
according to every variable we reviewed." Small buildings have lower
gross income and slightly higher expenses; they pay slightly higher property
taxes relative to their total income; they have higher vacancy and collection
losses; they tend to be older; they are more likely to have an owner
living in them; their tenants have somewhat lower income and tend to
move more frequently. The report also observes that these buildings are
more vulnerable to economic downturns. Indeed, three quarters of buildings
falling into tax arrears have fewer than 20 units.
Notably
the report does not examine the profitability of small buildings. To
do so, RGB staff would have to examine the return on equity placed at
risk by small building owners. While small buildings produce less income,
it is also likely that they have lower per unit purchase prices. In short,
apartments in small buildings generally tend (a broad generalization)
to be at the lower end of the market and their economic conditions reflect
that position.
1996
Rent
to Income Ratios - a comparison among large cities (pp. 66-68)
The
RGB staff utilized census bureau data to compare the relative cost of
rental housing in New York City with 21 other large cities (those with
at least 50,000 rental units). New York was found to have relatively
high rents (exceeded by only six of the cities). However, because New
Yorkers have higher average incomes, the median tenant household had
a relatively low rent to income ratio. That is, while nationally, the
median tenant household spent 31% of their income on rent, in New York
the average was 28%. Three-quarters of the 21 cities listed had higher
average rent to income ratios than New York.
1996
Tax Arrears Study (pp. 58-60)
See
note under 1995 - Distressed Housing, above.
1997
Summary
of 1996 Housing and Vacancy Survey Data (Appendix D, pp.
94-111)
This
extensive statistical summary of data from the 1996 Housing and Vacancy
Survey covers regulatory status, vacancy rates, economic characteristics
(rents, incomes etc.), neighborhood quality and demographic characteristics
of renter households. It is largely dated, but may be useful for historical
comparisons. A complete analysis of the 1996 HVS was subsequently published
by the Department of Housing Preservation and Development and is available
to RGB members. A similar publication for the 1999 HVS should be available
in 2001.
1998
Recent
Movers Study (pp. 56-68)
This
important study offers an initial glimpse of the effects of the luxury
decontrol provisions of the Rent Reform Act of 1997. In an extensive
survey of recent movers, the RGB staff found that rents rose 12%, on
average, when a vacancy occurred - less than the 18% to 20%+ "minimum" allowed
by law. This suggested that not all landlords were able to collect the
increases and that regulated rents were already at or close to market
in many areas. The study found a stark difference between the market
in Manhattan south of 96th Street on the East Side and 110th Street on
the West Side, and the other areas of the City. In the "core" area of
Manhattan recent movers paid rent increases averaging 21% while recent
movers in the Bronx paid 5%; in Brooklyn 8%; and in Queens 8%. The increases
were attributed to both a strong economy as well as the legislative changes
in 1997. The study also found that "vacancy decontrol" (where a vacancy
occurs and lawful rents exceed $2,000) was occurring almost exclusively
in Manhattan.
