Winning in New York City’s Rental Market

Winning in New York City’s Rental Market

2/2/17

The dynamics of New York City’s rental market have changed. The New York Times, Wall Street Journal, Real Deal, and other major newspapers and journals are running articles about the shift in rents. Let’s take a deeper dive to see what is happening.

How Did New York City’s Rental Market Get Here?
New York City’s rental market has risen dramatically over the past five years. In many cases, year-over-year increases were in the double digits. Why? Owners and developers realized a very strong demand from millennial renters who “paid up” for high-quality renovations and building amenities.

As this trend continued, more and more owners took notice and redeveloped more apartments specifically targeting the “higher end” of the rental market. With land prices rising, especially in Brooklyn and Queens, new rental developments were built specifically for this class of renter.

The result? An increased supply and more neighborhood options for NYC apartment dwellers.

What’s the impact?

Recently, as rental growth slowed, owners continued to push the “asking rent” for apartments higher and higher. Those increases were outpacing the demand and affordability for some of the rental population. To counteract this, owners began offering one month free, then two months free, and finally, paying the rental brokerage fee.

As a result, although the rents in New York City’s rental market appear high on the surface, determining the “real” rents inside of a building has become confusing to investors. They often ask, “What is the ‘net effective’ rent”?

Within 24 months, the new supply will be absorbed and high end rents will firm up again.

Two New Yorks?

With all of this focus on the upper end of the rental market, also known as class “A,” few developers spent time creating and redeveloping more affordable housing. Although the mayor has an agenda to create more affordable housing, how it is done appears to be controversial.

Therefore, finding a way to create more middle income housing is an opportunity for investors as rents in the middle and lower end are experiencing moderate growth. Furthermore, there are no immediate prospects for developing an impactful supply in this category.

The Blink of an Eye
For high-end rentals, we recommend owners in New York City’s rental market implement a strategy for the next 24 months.

 

  • Owners should offer no more than a one month concession
  • And/or extend lease terms.

This leads to less confusion about the real operations of the building, and in the event of a sale or refinance, this places the owner in a powerful position defending the building’s gross income. ¬†Within 24 months, the new supply will be absorbed, and high end rents will firm up again.

Many successful real estate investors are contrarians. So, while today there is a transition in the rental market, it is not permanent. For those with an optimistic outlook, 2017 may present buying opportunities.

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