The term “New York City co-op” probably brings to mind chichi buildings on the Upper East Side where apartments sell for millions and coop boards decide who gets to join the elect. In reality, housing co-ops include a wide swath of the city’s social spectrum, and they provide a social glue that is especially important in this huge and fractious city. Co-ops provide something else as well: a partial buffer against raw speculative greed.
As the real estate bubble inflates across the country, even real estate dealers in New York are touting the benefits of this. Once again, a commons-like arrangement within the market is helping to protect the market from its own excess.
For quirky historical reasons, co-ops became the main form of apartment ownership in New York, rather than the condos that predominate elsewhere. The city has some 80% of the apartment co-ops in the nation; these make up the same percentage of the city’s residential real estate market. At the high end of the spectrum are the snooty palaces established long ago to keep undesirables (e.g., Jews) from moving in next door. At the other end are the labor union coops, and the sweat equity buildings that turned abandoned structures into homes on the Lower East Side and elsewhere in the 1970s and ’80s.
These latter embodied the true co-op ideal. In between are the middle income co-ops, such as Stuyvesant Town and Co-op City, which were part of a post war effort to keep the middle class in New York. (Co-op city actually helped to drain the middle class from the South Bronx.) New York being what it is, these sometimes have become nesting places for the well-connected. When he was elected mayor, David Dinkins, then the Borough President, was living in a three-bedroom co-op for which he paid $700 a month. He was not alone.
More recently, there was a wave of conversions of rental buildings to co-ops. Under New York law, landlords who do these have to offer apartments to existing tenants at special reduced prices. Many of these “insider co-ops,” as they are called, became middle income as a result, at least until the market went crazy and insiders started cashing out.
The advantages of co-ops are built into their ownership structure.. With a condo you literally buy the physical space that your apartment occupies. (I had a law school professor from Eastern Europe who liked to ponder the metaphysical implications. If the building burns down do you then own the portion of the sky where your apartment once was?) With a co-op, by contrast, you don’t actually buy a unit. Instead you buy the current owner’s shares in the cooperative that owns the building, and these shares include the right to occupy the unit in question.
With a condo you buy space. With a cooperative you buy into the community that owns the space. As someone who once served on the board of a smallish insider co-op, I can tell you that this is not an unmixed blessing. New Yorkers are not known for docility where their apartments are concerned, and co-op politics can be as contentious as those of the city at large. What color to paint the hallways? Will modern double-pane windows disrupt a period facade? Even small issues such as these can increase one’s compassion for the diplomats who have to deal with the Middle East. The bigger ones can get proportionately more messy.
But nobody said democracy was easy, and it’s not the worst thing to take responsibility for such problems instead of fobbing them off onto a landlord. For one thing you get to know your neighbors, at least in smaller buildings such as mine. You see them at annual meetings, hear their views, connect names and faces. Campaigns for board seats provide further contact. (In my building these were low-key; that’s not always the case.) If you serve on the board as I did you get together once a month at least.
A lot of New Yorkers don’t know the people who live in the apartment next door. Our floor by contrast was a little village. We had dinners together, watered plants and fed cats while others were away. On summer evenings people sat out on the front stoop and chatted. (As Jane Jacobs observed, such human presence is the best protection against crime. ) One resident turned the plot around the sidewalk tree into a postage stamp garden. Things like this can happen in rental buildings too. But the co-op structure helps, especially if the owners do not inhabit Trumpian cocoons of wealth.
In the co-ops founded out of social ideals it can help to a remarkable degree. Penn South is a garment workers co-op that occupies several city blocks between Chelsea and Penn Station, a short walk from the 7th Avenue Garment District. In the late 1980s there was a proposal to take the building private, which meant that the current owners — then mainly retired garment workers — could have cashed out for large sums of money. (Penn South was a “limited income” co-op, which means that when owners sell they get a return of their investment plus a fixed percentage, rather than the market price. This keeps the units in middle income range.)
Residents were told they could get $200,000 or more for apartments for which they paid $8,000 back in the 1960s. “It was an invasion of the barracudas and the sharks,” one resident told me afterwards.
After a heated battle Penn South voted down the proposal. The community and what it stood for was more important to them than the money was. “There’s an honor to this co-op and we always felt we had to live up to it,” another resident said. An owner in another co-op building that went through a similar battle put it this way: “What right do we have that no one else in the world should ever have the good deal we had?”
Such sentiments are not common in real estate matters these days. The nature of ownership really can effect the way we view property and its role in the world. Conventional co-ops don’t produce the same degree of communal spirit. But there’s some, and other benefits as well.
These include the selection process. To sell a unit — technically the shares — in a co-op you need to get approval from the board. It’s true that ritzy coops turn this process into an audition for the Social Register. Maybe it’s not the worst thing that people who usually can buy their way into anything, on occasion have to suffer rejection from a co-op board. (In Richard Nixon’s case however the rejection probably just made his problem worse.)
But on our board nothing remotely like that ever happened, and I suspect most co-ops are the same. We were neighbors. We knew that one day we’d probably want to sell our own apartments, so we didn’t want to make the process too sticky for someone else. The building already was diverse in multiple directions, so it was not apparent who the disfavored groups might be to begin with.
Our concern was to prevent problems, which came basically in two kinds. One was the obvious bad neighbor. Someone who has been convicted of child molestation would be of concern to parents of young children, for example. Someone who proposed to pay cash for an apartment while they had no visible income or means of support would raise a red flag too. Drug dealers have been known to take residence on the island of Manhattan. I once lived under one. Probably more important, someone with shaky finances was a risk for all of us. If one person doesn’t pay their co-op fees, it throws the whole budget out of whack. We all end up holding the bag.
So we looked at finances pretty closely. The other potential problem is the speculator who buys an apartment only to sell it when the price goes up. We wanted neighbors, not absentee landlords. The latter don’t have the same commitment to the building and the neighborhood, and tenants sometimes don’t either. I lived on the first floor next to the front door, and I could tell the owners from the tenants from the way they entered and came down the hall. Owners knew how much it cost to paint the hall, and cared. (Our building, like most, had limits on how long an existing owner could rent out an apartment.)
To economists, a self-governance process such as this is just muck in the divine mechanism of the market. Buyer and seller negotiate a price, and it’s nobody else’s business what they do. But in a co-op building it really is the business of the other members; and this third presence in the transaction has benefits even in a narrow economic sense. In a nutso real estate market such as today’s, a slight damper on the market mechanism in the form of a co-op board can be a good thing.
At least, that’s what people in the real estate business are saying. They contend that the city’s housing market is resistant to the bust cycle that is looming elsewhere, and that the co-op structure is one reason why. “One thing that makes the New York market different is co-op boards,” one Frederick Peters, president of the Warburg Realty Partnership, told the New York Observer a few weeks ago. Of course, these selling agents are not without an interest in the view that buyers today won’t lose their shirts. Caution is due, moreover, when people start talking about an “Iron Bubble” impervious to collapse, as the article was called.
Still, it is interesting that the co-op boards should come up in this context. Even if they don’t totally prevent a crash, the moderating effect seems more than plausible. The article continued:
bq. Co-op boards don’t like financial “adventurers”; prospective buyers’ long-term financial security is as important as their bank balance at the time of purchase.
And the boards like it even less when investors come in to rent out or “flip” apartments — meaning they have no plans to occupy the place themselves, only to turn around and resell the place at a higher price than they paid themselves.
“The situation in New York is different in the sense that we don’t have the rampant speculation, the property flipping,” said Jonathan Miller, president and chief executive of Miller Samuel, a real estate appraisal and consulting firm. “It pales in comparison with what is going on nationally.”
Unlike in other hot markets, New Yorkers primarily are buying property for personal ownership rather than to turn a quick profit.
It is not often that Manhattan is held up as a model of market moderation and commitment to the home. Maybe there’s a lesson here. At a time when the goal in Washington is to toss all of life into the seething cauldron of the market, just maybe the real need is to build more enclaves from it and buffers against it, of the kind that co-op housing in New York represents.
We learn either by suffering or foresight. If the real estate market keeps churning as it has, there’s going to a lot of the former before the point comes home.
