How much longer can concessions mask weak rental market?

Wonder why everyone is talking about a rental market downturn even though rents are close to record highs? The explanation: landlords are hiding weakening demand behind concessions.

Take Ben Shaoul, landlord to around 1,200 rental units in Manhattan, who said he has been offering concessions throughout 2016 and plans to offer one or two months free rent or pay tenant’s broker fees in 2017 as well. Sometimes he throws in a $500 American Express gift card.

Meanwhile, the new rental development 7 Dekalb Avenue in Downtown Brooklyn has been offering dry-cleaning gift cards and waived storage fees. But almost a year after the building hit the market, its 50 market-rate units still aren’t fully leased.

The idea behind offering concessions as opposed to just lowering rents is that higher face rents keep up a building’s value in the eyes of lenders and potential buyers. But it’s hard to avoid lowering rents indefinitely, as the high price tag can still discourage renters.

“Rents have got to come down,” Citi Habitats’ [TRDataCustom] David Maundrell told the New York Times. “That’s the only way to get the absorption rates back.”

Concessions have increased particularly in the luxury market, where the influx of new supply has been greatest. Overall, 11,514 new rental units hit the market in Brooklyn and Manhattan last year, and another 13,340 are set to hit the market in 2017.

In the third quarter of 2016, Manhattan’s median rent stood at $3,405, barely below the record of $3,424 reached in the second quarter. [NYT] — Konrad Putzier