A little more than a year after New York state’s 421-a program offering tax exemptions for rental developments expired, Gov. Kathy Hochul is offering an alternative incentive to restart construction of some halted projects.

The 421-a tax exemption, popular among developers, was credited with helping to boost the supply of New York City’s affordable housing. More than 3,000 properties, including some 117,000 units, were built under the program in the decade before its end in June 2022, a 2022 study by the New York University Furman Center found. Some 70% of all completed projects in the city between 2010 and 2020 used 421-a, the study said.

Hochul's move comes as New York City's apartment vacancy rate, at 2.5%, stands near historic lows, and against the national average of 6.9%, according to CoStar data, making the market one of the tightest in the United States with at least 100,000 units.

Renters are "competing for a limited number" of apartments, a CoStar analysis said.

Hochul’s office, which hasn’t come to agreements with the Legislature regarding a replacement or extension of 421-a, introduced a program this week aimed at continuing some Brooklyn projects that broke ground before it expired on June 15, 2022, one of the criteria to qualify. Some of those projects were stopped because the expired program required they also be completed by June 2026 to be eligible.

Empire State Development, a state agency, now plans to buy privately owned properties in the Gowanus neighborhood for a nominal fee, lease them back to the original owners for a term that would parallel the 35-year-long 421-a tax benefit period, and eventually deed the properties back to those owners, Hochul’s office said Tuesday in a statement. She also announced other executive actions that aim to address what she described as a “housing crisis” in the state.

"These executive actions are an important first step to expand our housing supply and promote housing growth,” Hochul said in the statement. “But make no mistake: to fully address the scope of this crisis, we need action from the Legislature — and I'm committed to continuing our work on housing in the coming months."

Gowanus experienced a development boom since the New York City Council in 2021 passed what Hochul’s office described as “an expansive rezoning” covering 82 blocks to build housing. The new executive action will help several existing residential proposals to advance, “unlocking thousands of units of housing, including affordable housing,” Hochul’s office said.

The governor said the program ensures 7,500 new housing units will be built on top of 1,000 permanently affordable housing units.

Andrew Barrocas, chief executive of Brooklyn-based MNS Real Estate, said in an interview that “it’s a breath of fresh air.”

The leader of MNS, which specializes in the marketing, sale and rental of residential properties in New York City, hopes it’s the first of many state actions to come: “It’s a step in the right direction. It’s challenging to build rental housing in New York without tax abatement. We need more exemptions like this. It’s something that’s forward thinking.”

Barrocas added MNS has "been involved with 500 new construction development rental projects in the past 15 years across the city. Every one has a 421-a tax abatement. It’s been detrimental for the rental market not to have that. Building rental housing without that is impossible," he said.

Some developers have been having trouble getting financing because banks and other lenders were concerned that projects weren’t able to finish construction to meet 421-a’s completion deadline in 2026, Barrocas said. And that’s not to mention the fact that higher interest rates and borrowing costs, coupled with uncertainty about the economy, have seized up the overall market’s lending and other activity.

“The major issue for developers is banks were hesitant to finance the program” on concern developers may not be eligible to get the 421-a tax abatement, Barrocas told CoStar News. The new alternative measure Hochul put forth will help give banks and developers the assurance, he said. “This gives the financing side the comfort that if you don’t make that [completion] deadline that you’ll be OK.”

Many New York residential developers have echoed Barrocas’ remarks that some form of tax abatement is crucial for the building of rental housing, often citing the math doesn’t work without an incentive. The end of the 421-a tax exemption program has led to a big drop in filings for apartment building construction, the Real Estate Board of New York has said.

For instance, after the number of multifamily foundation filings totaled 411 in the first five months of 2022, before the 421-a program expired in June, that number declined 59% to 165 between June and November 2022, REBNY said in a study released this year.

Critics of the program have said there are other ways, such as property tax and other reforms, to increase the affordable housing stock. They also say New York City has lost a huge source of its revenue by giving away the tax break to developers.

New York isn’t the only market with some form of tax incentive program to encourage building of affordable housing, according to the nonprofit Local Housing Solutions. Washington, D.C.; Provincetown, Massachusetts; Portland, Oregon; Cincinnati; and Cook County, Illinois, are among others that also give developers some form of incentives, according to its website.

In Chicago, which is based in Cook County, there are several initiatives in the works to increase the amount of affordable housing, including beefing up the city’s affordable requirements ordinance.

There also is state legislation that took effect in 2022 allowing developers to receive lower property tax assessments if they set aside a percentage of units with rents affordable to people making 60% or less of the area’s median income.

Previous Mayor Lori Lightfoot launched an initiative to facilitate the conversion of outdated office towers on and around LaSalle Street in the Loop business district to affordable housing. Under that program, developers setting aside 30% of their apartments as affordable would be eligible for several types of financial incentives, including tax increment financing. It remains to be seen whether any of the projects will gain final City Council approval under new Mayor Brandon Johnson.