ECONOMY
advocates alike : new housing will only be built if it is expected to generate enough revenue to pay for the capital required to build it .
In the case of apartments , those revenues come from the rents paid by residents of the new community . If the rents aren ’ t high enough to produce satisfactory returns , the capital in that great atmospheric river will flow to some other investment in some other city and the project here at home will remain unbuilt .
Meanwhile , the unalleviated shortage of housing puts upward pressure on rents , leaving residents to grapple with higher living costs , and creating a ripple effect felt throughout the community .
But what determines how high the returns – and therefore the rents – must be to attract capital for new apartment construction ?
Ultimately , that depends on the level of risk and uncertainty that capital providers perceive in the project . And one of the greatest sources of risk and uncertainty comes not from the project itself , but from a source entirely removed from it : the legislature .
Policymakers striving to address various issues in the housing market often create new laws and regulations . Paradoxically - and tragically - a legislative climate in which new housing legislation is continually introduced can hurt the very people the laws seek to help .
Part of the reason is that the effect of new laws takes time to work through any complex system and few systems are more intricate and complex than cities . As succeeding rounds of housing legislation are passed , uncertainty increases about the eventual effect of enacted laws , not to mention potential problems from pending proposals .
In response to an ever-shifting regulatory landscape , capital markets add an “ uncertainty premium ” onto the level of returns required to entice investors to risk their funds on commercial real estate projects . Higher costs , in turn , raise financial the bar for builders trying to secure funding for the construction of new housing .
As legislative risk makes projects become less financially attractive , capital diverts to other , seemingly less risky investments in other markets . This results in fewer new apartments , a persistent supply-demand imbalance , and higher rents than would otherwise be necessary .
Evidence of this effect is abundant . Despite being short 340,000 housing units , New York City – inclusive of its five boroughs and 8.5 million residents –
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