What happens to concessions when it’s time to renew a lease?

Tenants have leverage but should not bank on getting the same deal, insiders say

TRD New York /
Jun.June 08, 2018 07:00 AM

From left: 365 Bond Street and 333 Schermerhorn Street

Rental concessions may be sky high across the city, but tenants shouldn’t count on getting them renewed once their lease is up. Given the private nature of the negotiations, landlords are usually reluctant to extend free months beyond the initial lease, according to several industry players.

While statistics on how often landlords stop or renew concessions once a tenant’s initial lease ends are hard to come by, owners of rental properties have a psychological advantage, said StreetEasy’s senior economist Grant Long.

“From a landlord’s perspective, the intention is obviously to [maintain] the legal rent level or to even raise the rate if possible, and by keeping that free month in there, they preserve some of that negotiating leverage,” Long said.

If a tenant signs a 14-month lease for $2,700 with the first two months free, for instance, the net effective rent is closer to $2,300 per month. But by the time the tenant is ready to renew the lease, he or she will have already been paying $2,700 per month for a year. So, if the landlord simply renews the lease at $2,700 per month without any additional free months, it can seem like nothing has really changed.

But several factors could work in a tenant’s favor — ranging from the building’s vacancy rate to the amount of housing supply in the surrounding neighborhood.

“Renters are more educated than they have been in the past. There are lots of resources out there,” Long said. “A lot of renters are going to feel empowered to ask for more going into renewal negotiations.”

New buildings typically have a turnover rate of between 20 and 30 percent from their first to second years, said Citi Habitats’ David Maundrell. But it can be tough to pin down how much of this is due to concessions running out versus people relocating because of other changes in their lives, he added.

Maundrell framed concessions as one of the best ways for tenants to find a good deal on an apartment, given that they are unlikely to find a similar apartment with notably cheaper rent. “No one lowers rent anymore,” he said.

Concessions hit record highs in Brooklyn and Queens in April, per Douglas Elliman, with 65.1 percent of new deals in Northwest Queens including them and 51 percent of new deals in Brooklyn including them — marking the first time the borough has cracked the 50 percent mark. In Manhattan, 44.3 percent of new leases in April included concessions.

These unprecedented highs could lead to changes in what landlords decide to offer on lease renewals going forward, according to sources. Landlords tend to be more willing to offer lower rents when they are not publicly advertising them, Long said.

Elliman broker and senior vice president Matthew Villetto described the reliance on concessions as a “slippery slope” and said it can be hard for landlords to stop using them once they start. He noted that he’s marketing buildings in Brooklyn and Long Island City where the building owners refuse to give out free rent on lease renewals — a strategy that he said has been working so far. Instead, those landlords are negotiating with tenants on other issues like fees for using building amenities.

“People just want to feel like they’re getting something, so sometimes that comes into play,” Villetto said, “but we’ve been very successful in taking a hard stance on not giving free rent on renewals.”

He added that a neighborhood’s housing stock plays a huge role in the amount of leverage tenants have. He cited Midtown West as one area where landlords don’t always have an upper hand due to the supply of rental apartments.

“That free rent may come into play on second-generation leases where the tenants decide to stay, and even if it goes back on the market, they’re probably going to be giving a month free at least,” Villetto said.

In general, New Yorkers are very likely to experience rent increases and also very willing to move. A recent StreetEasy survey found that 64 percent of residents have seen their rents go up in the last three years, and 59 percent of residents younger than 45 plan to move in the next year.

And given how many buildings are now offering rental concessions, if a landlord won’t include free months on a lease renewal, some tenants will to simply move to a different building where they can sign another new lease and get another deal with concessions.

“If there are a lot of concessions in the marketplace, some tenants are just going to hop around and try to get two more months free,” Villetto said.

Maundrell said that while it’s still common for concessions to end after the first year, the market has shifted more in favor of tenants overall. In previous cycles, many New York City landlords would knock off concessions and jack up rent once the initial lease ended. That happens less often these days, he said, due to the continual increase in gross rents and apartment inventory.

Maundrell said landlords will also consider whether they would be able to get more money for their units on the open market when deciding whether to extend concessions or not — even when factoring in the month of rent they would likely lose while looking for new occupants.

“You do have situations where a landlord would give a concession to keep someone in the building. It comes down to the math,” he said. “It’s a complete case by case situation. It’s not like when we do a new rollout of a rental building, where you give guaranteed a month or two months free.”

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