The Real Deal New York

Luxury rental throwdown

As supply surges, experts say to expect concessions but differ on which neighborhoods will get hit the hardest

June 01, 2016
By Marynia Kruk

Robin Schneiderman, Brian Upbin and Michael Graves

Robin Schneiderman, Brian Upbin and Michael Graves

After experiencing an incredible run-up in prices over the last five years, the NYC luxury rental market may be finally hitting a ceiling.  “Last September is when things started to shift and demand started to taper off a little bit,” said Dan Marrello, a leasing director at Town Residential. Although Miller Samuel’s most recent rental report showed that luxury median rents in Manhattan reversed its decline in April by  climbing 2.9 percent over last year to $8,536, the number of new leases signed fell by 1 percent to 486. All told, an estimated 8,000 rental units are entering the NYC market this year. They include the Durst Organization’s 750-unit starchitect project VIA 57 West at 625 West 57th Street, Related Companies’ 84-unit complex 456 Washington and Moinian Group’s Sky at 605 West 42nd Street, which will boast 1,175 apartments and 70,000 square feet of amenity space. Meanwhile, investors who bought condos at projects like One57 are adding to the luxury rental market. Given the supply, one trend to watch this summer will be the number —  and quality — of concessions. “That is usually an indicator that the end is near, when you see them throwing in cars and fun stuff,” said Andrew Barrocas, president of MNS.

Dan Marrello
Leasing director, Town Residential

There have been a lot of news reports recently about the softening luxury rental market. What are you seeing in Manhattan?

I definitely do see a softening. I can see on certain listings that we have that aren’t seeing the same prices as last year or the year before. Over the last three to four years, there have been a lot of condominiums that have come to market that have been sold to investors and turned into rental products. You have a couple rather large buildings that have hit the market. You have Sky with about 1,200 units, VIA 57 West with 700-plus units and 160 Madison Avenue, not a huge building, but with over 300 units.

You’ve also seen an expansion of the market, in neighborhoods like Brooklyn where people never thought of renting five-plus years ago. You’ve also got people going into Queens, Long Island City.

How long is it taking for luxury rental buildings to reach full occupancy?

It really depends on the size of the building. Related just launched a 100-unit building in Tribeca at 456 Washington. They launched at the beginning of April and they will probably be done by August. Their timing is perfect. Meanwhile, the Durst Organization is probably going to be working 8-12 months on Via 57. They launched in the winter and demand in December, January and February is much less. But you can’t always control when you come to market. The shovel was in the ground three-and-a-half years ago. There are construction delays, there are permit delays. You name it.

What concessions, if any, are landlords offering in the luxury rental market these days?

I’m seeing lots of “OP,” which stands for Owner Pay. The owner pays the broker one month rent if they bring the tenant in. You’ll see that in addition to one month free for the tenant. Landlords can’t adjust prices down in new construction because they have a bank to answer to and the financing was based on certain pro-forma of base rent. So instead of dropping the rent, they will offer one, two, three months free rent to entice a renter to rent. We saw three months free on a two-year lease — though I can’t say which building.

Equity Residential, the largest publicly traded apartment landlord, said in February that its two- and three-bedroom units in Manhattan have become “more difficult to lease.” What are you seeing in terms of demand for each unit type?

Yes, that coincides with the price point. In that luxury sector, the apartments are larger. So whether it’s two, three, four or five bedrooms, everything built condo is huge. Some of those are the investor units hitting the market [as rentals], which puts pressure on rents for larger-size units. Classic rental buildings don’t have an excess of units that have four or five bedrooms. In the past, you never got that big. That has shifted with the condo development world.

Where do you see rents moving for luxury apartments in Manhattan in the next six months?

I thought in October we would see a correction. Job growth is not in the sectors we are used to, like finance. There is job growth in education, health services and hospitality, but those jobs don’t always pay a lot. There’s got to be a correction. You’ll probably see a 10 percent to 20 percent correction, depending on location. You’re already seeing it. First come the incentives, then you see the price corrections when the incentives don’t work anymore.

Which Manhattan or Brooklyn neighborhoods are seeing the biggest declines in rent prices?

Upper East Side is always impacted because it has the most product and is the largest residential neighborhood. It has the most expensive and the most affordable apartments. There’s a lot on the market in the Financial District.  Meanwhile, the West Village and Soho tend to be protected because you can only build so high there, so there’s no oversupply there.

Will more luxury condo developers be enticed to convert their units to rentals if the buying market continues to shrink?

Some developers that are not out of the ground yet may suspend construction for the time being or change direction and go rental. It really depends on how much the developer acquired the land for. Between the land cost and cost of construction, there has to be enough room for profit in order to build. For example, if the developer is all in for $2,000 per square foot, then he may need to get $2,600 for the project to work. There may be uncertainty if the market will bear that, especially in one to three years.

Jonathan Drescher
Senior vice president of project development, Durst Organization

What’s your take on the softening luxury market? What kind of monthly rents are you seeing in Manhattan and Brooklyn?

The fundamentals of the rental market are inherently strong. New York City suffers from a housing shortage and it will take decades to build our way out of it. There might be some modest fluctuation in rents, but as long as talented, smart and motivated people continue to flock to New York City from across the country and around the globe, the rental housing market will remain strong.

Are you concerned about a rental glut?

There is an oversupply in the condo market at $5,000 a square foot and above. This represents a small fraction of the market. Conversions of the apartments of this type and quality to rentals is difficult. However, it represents a trace amount of the market. Making the process more difficult is that the financing in-place on condos such as these make it very difficult to convert them to rental properties.

Aside from supply, are there any other market forces at play that account for the weaker demand for luxury rentals?

The expiration of 421a in June and then January led to the creation of a vast pipeline of rental projects that will keep a steady supply of new product on the market for the next two years.  However, without 421a, there is no way to build market-rate rental housing and the supply of rental units will fall off the table. This will reduce inventory and put upward pressure on rents.

How long is it taking for luxury rental buildings to reach full occupancy? And what concessions, if any, are landlords like yourself offering in the luxury rental market these days?

It takes approximately 20 months for a large rental building to reach stabilization from initial occupancy. We open our buildings in phases and offer more generous concessions when construction is ongoing and amenities have yet to open. We are seeing one to two months rent concessions in new construction.

Extell recently abandoned its plan to list 38 units at One57 for lease, electing to sell them instead. What do you think about that strategy and what it says about the luxury market right now?

Converting a $5,000-per-square-foot condo into a rental is a challenge. A $5,000-per-square-foot condo basically translates to $180 per square feet in annual rent. We have built our buildings to compete with condos in terms of amenities, views and other features but with an eye on design for the rental market. In most cases, unless there is a very deep discount, anyone who is renting will find our product a better value.

Michael Graves
Broker, Douglas Elliman

What are you seeing in terms of inventory compared to six months ago, a year ago and two years ago? Are you concerned about a rental glut?

I would not define it as a glut. It’s a healthy, gradual correction that will level out and then head back upwards. It’s not the floor falling out from under us. There has been a long pipeline of new developments that came to fruition recently and many were absorbed by investors. Now those investors are vying for the same tenants, which accounts for the competitive environment we are experiencing. We are also seeing record-setting offerings such as a unit at One57 currently asking $150,000 per month.

How long is it taking for luxury rental buildings to reach full occupancy? And what concessions, if any, are landlords offering in the luxury rental market these days?

It’s the prime rental season and I don’t expect to see wide-scale concessions across the board. However, some landlords have become more motivated and are willing to negotiate. I would say, if you have a 20-unit building, five rentals per month would be a target, or faster if you are pricing competitively.

Equity Residential said in February that its two- and three-bedroom units in Manhattan have become “more difficult to lease.” What are you seeing in terms of demand for each unit type?

I would expect that to be the case. As you climb the scale there is a smaller audience. And due to recent successful developments, that market is a bit more saturated now than it has been historically. In 2011-2013, developers discovered the large, high-level-finish condo market was underserved. Buildings like One57, 150 Charles and 56 Leonard opened the floodgates to similar product, which in turn has increased the current luxury offerings.

Where do you see rents for luxury apartments in Manhattan and Brooklyn going in the next six months? Will there be a recovery or do you see a continued decline? Which Manhattan or Brooklyn neighborhoods are seeing the biggest declines in rents?

The locations preferred by the international set will continue to do well, especially around the park. Wealthy foreigners coming from Asia and Europe want to be on the park, near shopping and other well-known attractions. I also believe that prime locations such as Tribeca, Soho, Gramercy, West Village and Chelsea will continue to do well. Meanwhile, the far Lower East Side, which is difficult to get to, will be the first to get hurt. Secondary locations that are not as accessible, that have not proven themselves to have legs over many years, may need to decrease asking prices. These could include the Far Upper East Side, Lower East Side, Chinatown and Harlem as well as outer boroughs. Locations that have recently been propped up by gentrification are most likely to revert.

What are the most surprising trends you’re seeing in the Manhattan and Brooklyn luxury rental market?

The amenity race, buildings offering larger and more creative amenity packages. That’s what we’re seeing amped up right now. A few years ago it was the golf simulator and in-house movie theater. Now it is indoor and outdoor pools, bowling alleys, teenage lounges and a variety of inventive work spaces, work-out facilities and decompression rooms. I suspect the trend will continue because that’s how developers compete.

Robin Schneiderman
Director of new business development, Halstead Property Development Marketing

Are you concerned about a rental glut?

I wouldn’t call it a glut. I would call it an increase at the very high end. There has been so much development in New York City over the last three years. There’s a lot of inventory in contract which is going to close this year and next year. Once that happens, we’ll get a better sense if there’s been a true increase in excessive luxury, units that rent for $10,000 per month and up.

How long is it taking for luxury rental buildings to reach full occupancy?

Depends on the number of units. You’d have to do a case study. Three hundred units could take six to 10 months. That’s 40 units per month during the busy season. The Brooklyn rental market has 11,000 rental units in the pipeline coming in the next two to three years, including both ground-up and conversion. Prime neighborhoods in Brooklyn include Williamsburg, Greenpoint, Cobble Hill, Boerum Hill, Dumbo, Brooklyn Heights, Park Slope and Downtown Brooklyn.

Aside from supply, are there any other market forces at play that account for the weaker demand for luxury rentals?

I’m most curious to see what will happen in Downtown Brooklyn and Long Island City. Those two neighborhoods alone have several thousand units coming online in coming years. You’re going to see a tremendous amount of units, a tremendous increase in new apartments in neighborhoods where this hasn’t happened before. They are going to compete against each other for new tenants and as a result, you are going to see a temporary reduction in rental prices. Then the market will stabilize. There will be a temporary reduction because they will all start their marketing and leasing at the same time, within a six-month window. Two Trees developments, Steiner Studios’ The Hub at 333 Schermerhorn Street, all three to six months of each other. For a period of time, they will have to offer concessions to lease up the buildings, but after that they’ll do fine. It’s a natural process when you have an increase in supply. 

Are certain types of buildings doing better than others? Do older buildings struggle to compete with new developments?

Tenants in New York are always excited to live in a new building, to be the first ones to reside there. There’s a significant premium to live in a new building. One market that will probably see a pick-up in demand is the Upper East Side because of the Second Avenue subway. The additional transportation will help improve this market, which has always been a lagging rental market. You’re going to see more and more people consider it. And there’s been a tremendous amount of rental-to-condo conversions, which has reduced rental unit supply on the Upper East Side.

Brian Upbin
Head of asset management, Two Trees

What kind of monthly rents are you seeing in Brooklyn? How do those rents compare to a year ago and the recent past in general?

We continue to see strong demand and growth in monthly rents in the Brooklyn luxury rental market on a year-over-year basis. Our newest rental offering at 60 Water Street in DUMBO, which opened in late in 2014, has commanded the highest rents in the borough per square foot because of its incredible waterfront views and amenities, including a roof deck designed by James Corner Field Operations, while the rest of our Brooklyn rental portfolio has shown solid year-over-year gains and very high occupancy rates. We fully expect there to be strong demand for BAM South, our latest mixed-use project in Fort Greene, which includes market-rate and affordable rentals, slated to open later this year.

Are you concerned about a rental glut?

While this new supply coming on line will sharply expand the inventory to renters, we wouldn’t characterize this growth as a glut. We believe that the quality of product coming to market will attract a larger set of prospective renters to consider these areas.

How long is it taking for luxury rental buildings to reach full occupancy?

Many factors can affect the time it takes to reach full occupancy, including the number of units, the time of year and season when leasing begins and when the building first opens to residents moving in. We generally see rental buildings reaching full occupancy one full leasing season after construction has completed. 

Andrew Barrocas
President, MNS

Where are you seeing softening in the luxury market? How do rents compare to a year ago and the recent past in general?

At $10,000 per month and above, you’re going to continue to see softening, as investors look to rent out units or developers, like Extell, take a block of apartments and try to rent them. That’s going to be very challenging. On the super-high-end luxury side of the market, the 2,000-square-foot-plus apartments don’t pencil out well as rentals. Rentals tend to be more efficient units. Yes, there are renters willing to pay $100,000 for a month, but how deep is that market? A lot of people who purchased units to rent out or developers who can’t sell inventory fall back on renting them out. There’s no oversupply of tenants willing to pay over $20,000 per month. That means investors who bought units with the intention to rent will have to rent them for less than they anticipated because of the oversupply. Below $10,000 per month threshold, there’s still lots of demand in neighborhoods like West Chelsea on the High Line and moving all the way up to Hudson Yards. 

And what concessions, if any, are landlords offering in the luxury rental market these days?

It varies. On a single unit for rent in a condominium, there is typically no concessions. If a landlord has 10 units of that size, they’ll probably offer the normal concessions, like a month’s free rent or coverage of the broker fee. I haven’t seen any weird ones, though that is usually an indicator that the end is near, when you see them throwing in cars and fun stuff.  I haven’t seen that. You’ll probably see that in the next couple of months in Miami.

Where do you see rents for luxury apartments in Manhattan and Brooklyn going in the next six months? Will there be a recovery or do you see a continued decline? Which Manhattan or Brooklyn neighborhoods are seeing the biggest declines in rent prices?

At the $10,000-a-month-and-lower price point, there are certain areas that are seeing a little bit of slowdown as large amount of product comes to those neighborhoods. People’s anticipated prices are not being met because of the amount of supply. These areas include Long Island City, Downtown Brooklyn and Williamsburg. People priced units expecting increases based on history, but at a certain point, a market always catches up with itself. Take Williamsburg. There’s a tremendous amount of inventory. The way you can differentiate yourself is based on service you offer. We represent one of the largest buildings here, and we focus on the lifestyle that is created inside the building, on giving tenants a good experience. We’re not seeing the rent declines yet. There is demand for quality.

What is the lending environment right now for financing the construction of new development rentals, especially without the 421a tax abatement?

It’s virtually impossible. Without the tax abatement, you cannot make the rental work. It will be a huge hindrance to the rental market. 

MENU