New York state enacted into law a new tax incentive program as part of its $237 billion budget, a move that comes nearly two years after the expiration of the 421a tax incentive program that developers have said was key to boosting New York City's affordable housing supply.

The 10-year 485x program gives tax incentives to multifamily developers in exchange for a portion of their building units being affordable, New York Gov. Kathy Hochul’s office said Monday in a statement. While the program replaces the 421a initiative that expired in June 2022, projects currently vested in the expired 421a program are having construction deadlines extended by six years through 2031, a move Hochul’s office said allows the building of “thousands of previously at-risk rental units,” including affordable housing.

The 421a program has produced more than two-thirds of all newly constructed multifamily housing in the city in the past decade, Hochul’s office said.

The budget deal “will equip New York City and state with the tools needed to jumpstart a new wave of housing development,” Rafael Cestero, chief executive of the nonprofit multifamily lender and investor Community Preservation Corporation, told CoStar News in an emailed statement. “This program, in addition to the other housing initiatives in the deal, comes not a moment too soon.”

Developers big and small have talked about the importance of some form of tax incentive program to help the math work in their buildings in a city faced with high labor, construction and other costs. The end of the 421a program, against the backdrop of interest rates at their highest in decades, has dented the city’s housing development projects and led the number of housing units developers proposed last year to fall to just half of the annual levels New York City produced between 2000 and 2020, industry group the Real Estate Board of New York has found.

New York isn’t alone in offering tax incentives to boost its affordable housing supply. Other cities from Washington, D.C., to Portland, Oregon, also have their own tax incentive programs aimed at boosting affordable housing supply.

As Vornado Realty Trust Chief Executive Steven Roth said recently about 245 million square feet, or nearly 60% of New York’s office properties, is "well past their sell-by date," the state also is giving incentives to make it easier to convert unused office space into affordable housing. A 1960s law that limits the size of the city’s residential buildings to 12 times its lot size, often known as the 12 floor-to-area ratio, or FAR, also is being eliminated especially as industry watchers have said some office buildings that are potential conversion candidates have far higher FAR ratios.

Marc Holliday, chief executive of Manhattan’s largest office landlord, SL Green, said last week some 25 million to 40 million square feet of Manhattan’s office stock will be converted as a result as he said SL Green helped to lobby for conversion of obsolete office buildings in Manhattan south of 96th Street.

“It will have a transformative effect on Manhattan,” he said last week on the company’s first-quarter earnings call. “Amid record-high Manhattan office vacancies, the [office-to-residential] bill will create stability in the market … and generate foot traffic to support local retail business. Many of the conversions will take place in the next three to five years. … The result will be a significant reduction in available [office] space.”

SL Green is converting its office property at 750 Third Ave. to residential, for instance.

"We credit [SL Green] with championing pro-office conversion legislation and thus believe other office [real estate investment trusts] could benefit, depending on their portfolio," Piper Sandler analyst Alexander Goldfarb said in a report Sunday, adding the legislation will have a "positive impact" on office real estate investment trusts. The state budget also includes a pilot program that will allow the city to legalize existing basement and cellar apartments in certain areas.

Among tenant-protection measures, the budget said annual rent increases in the city that are above 10%, or 5% plus the consumer price index, whichever is lower, are “presumptively unreasonable to protect tenants against price gouging and strengthens legal protections for covered renters in eviction proceedings, where applicable.”

To be clear, the housing package has received mixed reaction from different sides.

REBNY, for instance, said last week that the new 485x program “will produce less rental housing than its predecessor, 421a.”

Tenant advocates coalition Housing Justice for All, on the other hand, on Saturday said the housing package “didn’t solve the housing crisis.”