A co-founder of a platform for student housing argues that such a business model can play an important role in closing gaps in today's residential market for an important element of the population.

This news service recently spoke to Outpost Club, a platform for student housing in New York City and Philadelphia. This end of the residential market may not get as much attention from those in the high net worth advisory space as, say, the luxury sector, but from an investment angle, the pursuit of consistent returns means that investors must consider the whole spectrum of a market. 

The following article is by Outpost Club’s chief executive – and the organization’s co-founder – Sergii Starostin. The editors of Family Wealth Report are pleased to share these views. Jump into the conversation if you have questions or responses, and email tom.burroughes@wealthbriefing.com   The usual editorial disclaimers apply to view of guest writers.

Every three years, the US Census Bureau runs a survey on New York City's vacant and available rentals, first published in 1965. New data shows that the city had the lowest vacancy rate since 1968, at only 1.4 per cent in 2023, showcasing how drastic NYC's housing crunch has been in the past few years. While 5 to 8 per cent could be considered a healthy rate, it has significantly fallen from 2021's 4.5 per cent during the post-pandemic economic rebound.

Moreover, partly due to the 2022 expiry of the 421-a tax break that incentivized developers to build affordable units as part of their projects and the elevated borrowing costs, permits for only 15,500 apartments were filed last year, which is the lowest number since 2016.

The above data indicates developers' inability to fulfill the rising demand for rentals in New York's housing market. Combine this with the high inflation rates of the last few years, which forced landlords to raise leases on their units, and we have an even more significant problem. As rents in the state increased 33 per cent from pre-pandemic levels and median rents rose seven times faster than average wages in New York City in 2023, New York is leading the US in population loss, with 630,000 residents leaving the state in 2020.

Landlords also struggle in New York's rental market
However, tenants are not the only ones negatively impacted by New York’s housing crisis. As one side faces challenges in finding affordable rental units, landlords are also struggling with a downturn of solvent renters.

In 2023, eviction cases rose steadily to approximately 12,000 since the end of the moratorium in 2022. With an increase in insolvent tenants, it becomes even more critical for landlords to find reliable and qualified tenants to occupy their units. However, New York's competitive rental market with high demand and limited affordable options may present a significant challenge for those offering their apartments to renters in the state.

The search for qualified renters in the current rental market translates into longer vacancy periods for landlords. During these times, they don't receive any revenue from tenants, which results in lost rental income and increased financial risks.

On top of this, the Housing Stability and Tenant Protection Act (HSTPA) has restricted the options for the owners of stabilized buildings to raise rents between tenancies to compensate for renovations, capping Individual Apartment Improvement (IAI) at $15,000 over 15 years. 

This, combined with unstable rental income, puts a financial strain on landlords, which limits their ability to make the necessary repairs or maintain their properties.

The ongoing New York housing crisis has a substantial negative impact on owners as well, with the increasing financial pressure making it challenging to find suitable tenants, decreasing their reputation, profitability, and sustainability in the rental market.

A brighter future ahead for New York
While it is not perfect, the new housing deal addresses New York's affordability crisis and declining population.

With 75 per cent of New York City units expected to have protections under the existing rent stabilization or the good cause, the bill ensures affordable and reasonable rental costs to safeguard tenants against the effects of inflation and recession. At the same time, landlords will be able to take advantage of a lower vacancy rate and new grounds for eviction. Finally, the reintroduction of a tax break program for developers under the 485-x scheme will positively impact the housing shortage, with a focus on building affordable units. 

In addition to incentivizing developers to build affordable housing with the 485-x tax break, the deal doubles the IAI cap and introduces new protections for renters. Analysts estimate that the bill will safeguard tenants living in an estimated 321,000 to 473,000 of the little over 1.1 million New York market rentals that remained unregulated before the current legislation. For these units, landlords will be limited to raising leases by 5 per cent plus inflation or 10 per cent, whichever rate is lower.

With the above protections and financial assistance to renters, the deal can close important gaps in New York's housing market. By helping to prevent evictions and maintaining a stable tenant base, reduced vacancy rates can lead to more stability. It is a comprehensive framework that addresses the challenges of both landlords and renters, fosters collaboration, and sets a precedent for a more equitable and sustainable housing market in the state. 

In addition to regulations like the housing deal, innovative solutions must be implemented to combat the ongoing rental market crisis in New York, such as co-livings. Their housing model, where tenants live by common interests, is a profitable scheme that landlords should consider as an alternative to traditional units. For example, co-living rental with 32 bedrooms has a 31 per cent higher average monthly rental revenue per unit than the estimated rent under the traditional leasing model

While occupancy appears to be very strong at 98.3 per cent; net operating income (NOI) is about 25 per cent higher despite the increased operating costs. This example showcases that innovative solutions and outside-the-box thinking can help reduce the negative impacts of housing crises like New York's.