THE VACANCY RATE: APOCALYPSE SOON?
Can Landlords Warehouse Enough Luxury Apartments to
“Eliminate Housing Shortage” and End Rent Regulations?
By Tim Collins

Recent changes in New York's rent laws that increase the number of high-rent apartments may well jeopardize the very existence of the entire rent-regulation system.

An increase in the number of apartments renting at market rate will raise the number of apartments being held empty by owners, as they wait for tenants willing to pay $2,000 or more a month. A rise in the number of empty luxury units could push the citywide vacancy rate over 5%-which would trigger the automatic-decontrol provisions of the rent laws. This is the Trojan Horse strategy, which the opponents of rent regulation hope will accomplish what they could not manage in an open public debate.

New York's system of rent stabilization and rent control rests upon the assumption that a housing emergency exists. That emergency is defined solely as a shortage of available dwelling units, as measured by periodic vacancy surveys in each locality with rent regulations. The critical figure at issue is the percentage of rental units that are vacant and available for rent.

Under rent stabilization, if a city's vacancy rate exceeds 5%, the emergency must be declared at an end there. One appellate-court decision suggests that rent stabilization may not be preserved even for sub-classes of apartments-for example, apartments renting for $500 or less-with a vacancy rate of less than 5%, if the overall vacancy rate for the locality exceeds 5%. Under rent control, if the vacancy rate exceeds 5%, the law appears to permit a continuation of controls subject to "orderly decontrol, with due regard to prevent uncertainty, hardship and dislocation."

Under rent stabilization, if the emergency is declared at an end, landlords would be permitted to increase rents to any amount as tenants' leases expire; they could also simply refuse to renew existing leases. This would mean a termination of rent and eviction protections for all apartments within a few years of the declaration.

The most recent Housing and Vacancy Survey, conducted in 1996, found a vacancy rate of 4.01% (up from the 3.44% rate posted in 1993). The survey is based on interviews of some 18,000 households conducted by the US Census Bureau and paid for by the city. Given existing trends and the effects of recent legislative changes, a vacancy rate of 5% could easily be surpassed in the next survey, scheduled for 1999. In sum, there is a real possibility that rent stabilization will cease to exist within the next three to four years.

By permitting sharp increases in rents for vacant apartments and expanding luxury decontrol, the so-called Rent Regulation Reform Act of 1997 may cause the vacancy rate to climb over the 5% threshold. The analysis is simple. The new vacancy-bonus provisions will send all stabilized rnts up sharply upon vacancy. About 9% of rent-stabilized apartments become vacant each year. In addition, the new laws allow market-rate rents for apartments which reach the $2,000 mark upon or after vacancy. Under the new law, an empty apartment formerly rented by a 10-year occupant paying $1,600 per month could be fully deregulated.

Apartments with far lower rents could also undergo deregulation if the owner is willing to invest in improvements. The new law also severely weakened protections against illegal overcharges, so landlords who disregard the limits on raising rents are much more likely to get away with it. As the number of high-rent apartments grows under this liberal deregulation policy, many units will sit on the market for longer periods and create a misleading statistical picture of housing abundance.

Doubling-up rises

When rents rise, fewer people can afford to relocate, and they are also more likely to double up with friends or family. This will cause more empty units to stay on the market longer, as owners hold out for their price. In this way a 4% vacancy rate can be easily bumped over 5%.

There appears to be two ways to prevent this from happening. First, many who are familiar with how the triennial vacancy surveys measure vacancies suggest that they may overstate the number of true vacancies: A more refined methodology, they suggest, would hold the rate below 5%. Second, the 5% vacancy rate itself is a myopic way of defining a housing emergency, and so changing the laws to incorporate other factors is warranted.

Those who find fault with the survey suggest that a few reasonable corrections in data-gathering and interpretation techniques will show a much lower vacancy rate. There is some evidence that they are correct. Upon close examination, the statistics seem strange indeed. According to the 1996 Housing and Vacancy Survey ("HVS"), in New York City there were over 20,000 apartments vacant and available for rent with asking rents of less than $500 per month. Anyone who has shopped for an apartment in the five boroughs will readily recognize that this figure is absurd. The vacancy figures include over 6,000 Housing Authority apartments, where the waiting list exceeds 336,000 families-not exactly a portrait of a healthy market with plenty of affordable units.

Warehousing rampant

Moreover, of the 81,000 apartments counted as vacant and available for rent, over 17,000 had been on the market for over six months. One can intelligently ask how apartments can be truly considered available for rent when they have been sitting empty for so long. It seems likely that the surveyors may have been misled as to the willingness of landlords to actually rent these warehoused units. If these long-term vacancies were eliminated from the vacancy figures, the overall vacancy rate would drop from the present figure of 4% to about 3.2%.

Unfortunately, it may be unrealistic to expect that the city will change its methodology, or that the courts will defer to any vacancy numbers other than those produced by the Census Bueau. Perhaps a better approach would be to supplement the statutory definition of a housing emergency to ensure that it is more realistic. There is a compelling economic argument to do this--and a simple statistical way to accomplish the change. Moderate-income households respond to housing shortages and high rents by doubling up. One indicator of changes in the rate of doubling up is the rate of overcrowding. In 1984 about 7.7% of the city's households were classified as overcrowded (having more than one person per room). Today that number has risen to 10.3%--a high figure by historical standards.

Overcrowding was also a common problem during the Great Depression, when there were plenty of apartments for rent. In 1946, when a joint committee of the state Legislature met to revise the multiple-dwelling law, they noted that a housing shortage had begun to appear as early as 1936, but that widespread doubling-up had concealed it. There, policymakers were willing to look beyond mere vacancy rates in identifying a shortage.

What's a "crisis"?

Ironically, under the current law, if thousands of lower-income people are forced to double up and the vacancy rate rises as a result, the opponents of rent regulation will push to have the housing emergency declared at an end--and dismantle the last hope that many working people have for an affordable apartment. One way to avoid this absurd result is to amend the law to incorporate overcrowding rates into the definition of the housing emergency. For example, if an 8% over-crowding rate is considered a tolerable maximum, the 5% vacancy threshold for decontrol could be increased to match each percentage point that the overcrowding rate exceeds 8%. In other words, if the Housing and Vacancy Survey finds an overcrowding rate of 10% (2% above the suggested maximum) the statutory threshold vacancy rate of 5% should be increased by to 7%.

In economic terms, this approach would simply recognize the lag time that housing markets experience in achieving a clearing price. At some point, many of the landlords holding empty high-rent apartments will bargain with new tenants, which will in turn free up lower-rent apartments for those who may be doubled up waiting for an affordable place. Unfortunately, since the new law also allows large rent increases in lower-rent units, the pressure on those with affordability problems can be expected to remain for a painfully long period. Another way to mitigate the possible disaster of abrupt deregulation is to adopt a general statute which forbids unconscionable rent increases for all sitting tenants, and which prohibits evictions except for a proven good cause. New Jersey has had such laws for decades. The New York legislature could adopt guidelines which are permanent and easy to monitor and enforce.

For example, any rent increase which exceeds twice the local consumer price index in a one-year period could be presumed to be unconscionable unless the owner could demonstrate financial hard-ship. All tenants could be given a right to renew leases and all evictions could be barred unless good cause is shown--such as nonpayment of rent, creating a nuisance, or illegally subletting. This type of legislation would rest upon consumer-protection goals and would not require a declared housing emergency.

Such legislation would greatly aid household and neighborhood stability and would certainly serve the interest of "family values." The homes of all renters and their families would no longer be viewed as crude commodities subject to the whim and caprice of momentary market pressures and avaricious landlords. In sum, the sharp rent increases engineered by the new rent "reforms" may create a temporary illusion of housing abundance, which could cause a premature finding that the housing emergency has ended. If the rise in vacancies is examined, policymakers will find that it is not a product of an increased housing supply. (What developer in his right mind would build in a market with plenty of high-rent units?) Rather, the increase in vacancies will come from the fact that huge numbers of potential new households have been priced out of the market and are doubling up. That is a very bad reason to end protections for everyone.

Tim Collins, former director of the Rent Guidelines Board, is an attorney with the firm of Collins, Dobkin and Miller.