Rent Control Archives - Lipton's Tea

The Small Business Rent Stabilization Act—Innocent Name, Ugly Consequences

Two state legislators, Julia Salazar and Emily Gallagher, want to restrict increases on commercial rents and grant retail tenants automatic 10-year lease renewals. The bill would create a nine-member Rent Guidelines Board—similar to the one governing stabilized apartments—responsible for setting rent increases for commercial properties.

It sounds benign. Who doesn’t support small businesses? It isn’t. What could go wrong with politically appointed individuals dictating commercial rents in the country’s most complex retail market—or allowing underperforming tenants misaligned with neighborhood trends, to remain in place in perpetuity?

Then there’s the matter of lenders. Many loan covenants impose requirements tied to retail rental income and tenant quality. This proposal appears to overlook the tension between regulated rents and private lending agreements.

Vacancy Rates Are the Rationale

According to Salazar, the justification is the “very high…storefront vacancy rate in New York City,” and the “need to level the playing field for both commercial and residential tenants.” But how would controlling commercial rents solve high vacancy rates? Quite the opposite may occur. The further regulated rents drift from market rates, the greater the incentive for landlords to keep storefronts vacant rather than lock in unfavorable long-term leases.

Sound familiar? It should. New York City is sitting on more than 50,000 vacant rent stabilized units following the 2019 changes to rent laws. There is little reason to believe commercial space would behave differently.

Do Retail Tenants Need Protecting?

Unlike residential tenants, commercial tenants tend to be more sophisticated. They retain legal and professional counsel. They analyze foot traffic, demographics and neighborhood trends before signing leases. They are not similarly situated to residential tenants and do not require the same level of statutory protection.

Commercial Rent Control Isn’t a New Idea—Just a Bad One

Commercial rent regulation proposals in NYC date back to the 1980s, but they have consistently failed to gain traction. Perhaps the only encouraging aspect of the current proposal is that it, too, appears unlikely to pass. In the State Senate, it has just one co-sponsor of the bill, and Assembly support remains limited.

That’s the good news. There is, however, reason for caution.

Like Salazar and Gallagher, NYC’s Mayor Zohran Mamdani is a Democratic Socialist who campaigned on and supports similar proposals. Commercial rent control may not advance, but the broader appetite for price regulation persists. Mamdani recently floated a 9.5% property tax hike to address anticipated budget shortfalls—a reminder that interventionist policy proposals remain firmly in play.

Price controls are not the answer. Let the law of supply and demand dictate pricing. It works.

Sources:

Argentina isn’t the United States and Buenos Aires isn’t New York City but when it comes to rent regulation, we could learn a thing or two from newly elected President Javier Milei.

Rent Control by Any Other Name Still Doesn’t Work

In 2022—before Milei was elected President, there were approximately 200,000 empty apartments in Buenos Aires due to its strict rent control laws. The so-called warehousing of rent regulated apartments is a natural response from landlords—whether in Caballito or Chelsea—who prefer receiving no rent rather than a nominal amount with disproportionate counterparty risk.

To circumvent the strict rent laws in Argentina, a black market flourished where landlords tried to rent to individuals in their social circles who would agree to pay rents above the restricted amount. Others rented to tourists in US dollars but otherwise kept their apartments unavailable for long term residents. For residents, it was all but impossible to find an apartment.

Does all of this sound familiar, it should as NYC has an estimated 100,000 empty apartments. Turns out economic principles like supply and demand can’t be contained: they cross borders and are multilingual.

Laissez-Faire: Let Supply and Demand Do Its Thing

Since scrapping the rent-control regulations in Argentina, landlords are rushing to put their apartments back on the market, increasing supply by more than 170%. President Milei is also allowing rents to be priced in US dollars further protecting the rental market against runaway inflation which still stands at 237% (Milei is projecting 18% in 2025).

Still, housing prices in Buenos Aires are stabilizing and at their lowest rate of increase since 2021 as more apartments flood the market. Supply is up, rents are declining, and people can now find apartments in what was once a frozen rental market.

First, There Must Be Pain

Bold measures—akin to the shock therapy enacted by the Russian government in the early 90s—don’t come without unfavorable consequences, at least in the short term. For some, the increased housing costs have made life difficult when coupled with higher food and utility prices resulting from the unwinding of price controls across the Argentinian economy.

Since the elimination of price controls, many are having trouble getting “to the end of the month.” Milei’s popularity has diminished as well, falling from a 60% approval rating earlier this year to 45% in August. But the right path isn’t always the easiest one; it can be lonely and bumpy along the way.

Eliminate Rent Control and Everyone Wins?

Is it that simple, eliminate rent controls and the markets will do their job? Some say yes, while others claim in the short term there will be an unacceptable level of soaring prices and homelessness. It is difficult to test the hypothesis as rent controls are politically popular to those who benefit from it, and they tend to become entrenched.

But Massachusetts is one such example: the state nixed rent control in 1994 and neither rents nor homelessness jumped especially in those places where the fear was most warranted such as Cambridge. But, in areas of NYC just as in Buenos Aires, prices will go up for many tenants whose rents are absurdly low relative to the free market rent in those neighborhoods. Just ask Congresswoman Linda Rosenthal—who is fiercely opposed to the elimination of rent regulation and, at the same time, developer incentives to increase housing supply—who lives in a three bedroom on Manhattan’s Upper West Side for $1,573. If ever there was a more conflicted politician directing housing policy.

Is NYC Likely to Follow Milei’s Lead in Argentina?

Perhaps the “tear off the band-aid” approach employed by President Milei would be too much of a shock for New Yorkers who would be adversely impacted but an incremental approach could set us on the right course. Replacing rent stabilization across the city and implementing good cause eviction universally would create a uniform regulatory regime across the city and allow for healthier rent increases that better account for inflation. An increase of nearly one million free market apartments on the market would force landlords to compete on price and quality further improving the housing stock and reducing rents for many middle-income folks.

At the same time, city and state officials should continue to create incentives for affordable housing and avoid the disaster that befell the Harlem One45 Project which was voted down by an overzealous rookie City Council member, Kristin, Richardson Jordan, who, it would seem, preferred no affordable apartments to the 458 new ones that would have been created. We all define victory to our constituents differently.

Sources: Harlem Project One45 Withdrawn as Jordan Rejects Last Offer (therealdeal.com)

Argentina Scrapped Its Rent Controls. Now the Market Is Thriving. – WSJ

Argentina Ditched Rent Control. What if NYC did too? (therealdeal.com)