There’s been a lot of buzz in the industry lately about the long-hot Manhattan rental market finally taking a breather from its constant rent increases.
Indeed, while the rental market is still up about 5 percent year-over-year, it saw a dip in prices between the third and fourth quarters of 2012.
This month, The Real Deal talked to rental brokers, firm heads and market analysts to gauge what they’re seeing on the ground and what they make of the recent softening.
Most noted that the market is still incredibly strong and argued that the recent weakness was nothing more than a seasonal downshift. Others said it still remains to be seen whether renters have maxed out on their willingness to pay increased prices.
Citi Habitats’ Gary Malin said he would be watching to see whether 2013 brought “renter fatigue,” meaning renters had hit a tipping point.
One telling sign is the dynamic at work between the boroughs.
Market analyst Jonathan Miller noted that the difference in median rent between the Manhattan and Brooklyn markets has “compressed” slightly in the last year. Some say that may be because an increased number of Manhattanites are turning to the outer borough for more affordable apartments.
But he noted that the “more modest” rental growth in Manhattan is a good thing. “Anytime you have out-of-control growth that doesn’t self-regulate, it always ends badly,” Miller said.
Others noted that while some renters attempted to flee the rental market recently to buy instead, they are now back because qualifying for a purchase is still difficult.
“The same customers who might have fled the rental market at the beginning of 2012’s fourth quarter are now returning to our rental offices in search of another year’s lease,” said Douglas Wagner of Bond New York Properties.
For more on which rental price points are performing best, what’s going on with rental development and what’s happening with concessions from landlords in the rental market, we turn to our panel of experts.
Gary Malin
president, Citi Habitats
For the last few years Manhattan rents were continually going up, but recent reports show that the market is now softening slightly. What are you seeing in terms of prices for Manhattan rentals?
During the fourth quarter of 2012, we saw Manhattan rents decrease by a relatively small amount. The shift can largely be attributed to the time of year. And rents have actually increased by an average of 5 percent year-over-year and are nearly 15 percent higher than they were two years ago. So they still remain at near-record-high levels. It remains to be seen just how much of the recent rent drops are seasonal, versus signs of “renter fatigue” — my term for the point where renters just can’t afford to pay the asking prices anymore. If we see continued declines into 2013, it could be a sign of the latter.
The most recent market reports also show that inventory ticked up. What are you seeing in terms of inventory compared to six months ago, a year ago and two years ago?
Six months ago was the peak of the summer renting season, so there is more inventory on the market now than there was during that extremely active period. The vacancy rate is also up slightly from one year ago. In December 2012, it was 1.37 percent, up from 1.27 percent the year before. But it’s important to keep in mind that these rates are extremely low compared to the national standard.
TRD and others have reported that some first-time buyers have been pushed into the sales market because rental prices have gotten so high. What are you seeing on that front, and how is that impacting your firm?
Our agents have transitioned a lot of rental clients into the sales market. The studio and one-bedroom market on the sales side is currently very active. … However, strict lending standards and an uncertain economy mean that many New Yorkers will remain in the city’s rental market — by choice or necessity.
Which Manhattan neighborhoods have seen the biggest price drops and inventory increases as part of this rental market softening?
In terms of rent declines across all apartment sizes from November to December of 2012, the biggest drops occurred in Midtown West. When examining vacancy rates for the same period, the largest jump in the number of available apartments occurred on the Upper East Side.
Which Manhattan neighborhoods have held up the strongest since the softening began?
Downtown areas have continued to perform extremely well — areas like Soho, Tribeca and the West Village. One reason is the lack of inventory. You don’t see many [giant] high-rises in these neighborhoods, and that’s part of their charm.
We’ve reported that many renters are opting out of the pricey Manhattan market and are looking for rentals in Brooklyn and Queens instead. What are you seeing on that front?
During 2012, our firm worked on several new residential buildings in Downtown Brooklyn and in Long Island City and Astoria, Queens. All these developments have performed exceptionally well. Renters can find new luxury rental properties that are trading at a 25 to 30 percent discount to equivalent properties across the river.
Adina Azarian
president, Adina Equities at Keller Williams NYC
For the last few years Manhattan rents were continually going up, but recent reports show that the market is now softening slightly. What are you seeing in terms of prices for Manhattan rentals?
The winter months are always slow. I think it’s very possible that once [we move beyond the off-season] it will be more clear that any softening was just really normal fluctuation. Prices have gone up on average about 20 percent in the last two years.
Sources say that the upper end of the rental market has done far better than the middle and lower ends. Is that what you’re seeing?
I agree. The luxury market is very tight. The three-bedroom-and-up luxury apartment is just hard to come by, and the rents are through the roof. In general, there’s been a major slowdown in new construction, especially for large luxury apartments that investors used to buy and rent. That slowdown has definitely caused a lack of luxury rental inventory.
Do you expect the softening of the market to have any sort of impact on whether developers continue to build new rental buildings?
I think the rental market is still too strong to have that impact. However, I have had conversations with developers and investors who recognize the lack of new construction and see the demand. So they are thinking “condo” again.
Bahar Tavakolian
senior vice president, Stribling & Associates
Recent reports show that the market is now softening slightly. What are you seeing in terms of prices for Manhattan rentals?
Yes, that seems to have been the trend. It appears that we peaked in the summer. Prices have softened just slightly, [but] some owners and agents are not keeping up with market changes and are insisting on asking rents of the peak period. These listings tend to stay on the market.
Which Manhattan neighborhoods have seen the biggest price drops and inventory increases as part of this rental market softening?
FiDi has always had a rather large inventory of rental properties. Midtown West with MiMa and large residential buildings on and around West 42nd Street also has a large inventory of rental units.
Is the upper end of the rental market doing better than the middle and lower ends?
Absolutely. It’s all about inventory, and there’s a serious lack in the upper end.
Douglas Wagner
executive director of leasing, Bond New York Properties
Are you seeing more renters move into the sales market because rents have gotten too high?
Some renters have turned to the sales market because of high rents, lack of choice and low interest rates. [But] we’re finding that some consumers have become turned off by bidding wars, lack of choice in the sales market and the arduous qualification process for mortgages. The same customers who might have fled the rental market at the beginning of 2012’s fourth quarter are now returning to our rental offices in search of another year’s lease.
Which Manhattan neighborhoods have seen the biggest inventory increases and price drops as part of the rental market softening?
Vacancies in Midtown West and the Upper West have increased by approximately 15 percent since December 2011. The only neighborhood that shows lower prices this year over last is the Upper East Side, where some of the most affordable inventory in the city can be found. The studio and one-bedroom market starts at about 2 percent cheaper than last January.
Which Manhattan neighborhoods have held up the strongest since the softening began?
The West Village maintains the highest value and the lowest vacancy rate. Prices have barely changed in this neighborhood in two years, although there is about 12 percent more inventory this January. Time will tell if landlords have to adjust their historically high prices to see these apartments absorbed.
What’s going on with concessions in the rental market?
Developers [continue to offer customary concessions] on new construction. There are also some landlord concessions at the highest price point of each size category. For example, the $3,500 studios and $4,500 one-bedrooms sometimes offer some free time or a partial broker fee in buildings with large inventories.
What are the most surprising trends you’re seeing in the Manhattan and New York City rental market today?
Landlords with mid-market apartments in walk-up and mid-rise elevator buildings have spent much of the past year renovating ordinary apartments in order to be competitive with the higher-tier properties. We’re seeing some well-designed and highly finished tenement-style apartments pricing like doorman units.
What are the most positive trends you’re seeing in the Manhattan rental market today?
We look forward to the forthcoming changes to real estate advertising regulations, which should take effect by the spring. Brokers will become more accountable for representing themselves transparently to consumers. Rental agents who misrepresent themselves on Craigslist as owners will find no tolerance and big penalties under the new laws.
What are the most troubling or worrisome trends?
There are fewer choices than ever for economically limited renters.
What sorts of trends are you expecting to see in the rental market in the coming months?
We anticipate prices will remain high. Whatever seasonal build-up of inventory we might experience in the first quarter will be absorbed in the second quarter … [and] vacancy rates will remain at crisis levels during 2013.
Jonathan Miller
president/CEO, Miller Samuel
What are you seeing in terms of prices for Manhattan rentals compared to six months ago, a year ago and two years ago?
The rental market has continued to rise on a year-over-year basis, but the pace of growth has been easing over the past three months. The median rental price is up 0.8 percent from the same period last year, up 11.3 percent from the same period two years ago, but down 1.6 percent, or $50, from six months ago. Of course, that’s a seasonal decline.
What are you seeing in terms of renters opting out of Manhattan because it’s become too pricey and renting in Brooklyn and Queens instead?
We have been seeing this trend evolve over the past year. [But] the difference in median rent for Manhattan and Brooklyn has compressed over the past year as demand rises in Brooklyn. The difference in median rent between Manhattan and Brooklyn for December compared to a year ago went from $525 to $513. Not a large change, but it shows how Brooklyn has been rising a bit faster than Manhattan has.
What differences are you seeing between the higher and lower ends of the rental markets?
The lower end of the rental market has seen more competition with the sales market as first-time buyers consider buying and move into the purchaser market. We are not seeing the same activity in the larger-apartment market.
How are landlords, particularly those who have new development buildings that they are still looking to lease up, reacting to the changes in the rental market?
I don’t think the rental market will be about falling rents over the next year. Employment has risen and mortgage rates have fallen. … Rents will remain elevated for a while, whether or not they rise or fall a bit going forward. [But] I think we will see more use of landlord concessions going forward. The period we are in now without much use of concessions is the outlier.
What are the most positive trends you’re seeing in the Manhattan rental market today?
A more modest pace of growth is always a positive trend. Anytime you have out-of-control growth that doesn’t self-regulate it always ends badly. Think about the housing boom in the middle of the last decade.
What are the most troubling or worrisome trends?
That we have no cohesive economic policy vision coming out of Washington and that the banks really aren’t all that solvent. Also that the rise in rents, not just in New York City but in the U.S., was a function of tight credit and that the entire boom in multi-family development was predicated on rising rents. It just makes me nervous.
Javier Amor
salesperson, City Connections
How is the Manhattan rental market doing these days?
In the last week and a half, people have been asking for up to $100 off the asking price of an apartment. In most cases, my fiduciary responsibility is to the landlords and we try to get the landlords as much as we can, but we have had to come down $50 in most cases from the asking price.
How long are Manhattan rental apartments staying on the market?
I am seeing the apartments on the market a little longer, but historically speaking, we are going to see a dip in the market right after the holidays, all the way through to the middle or end of February.
Which Manhattan neighborhoods have held up the strongest since the softening began?
The West Village, Tribeca and Chelsea have kept their pricing.
What are you seeing in terms of renters opting out of Manhattan because it’s become too pricey and renting in Brooklyn and Queens instead?
What I see the most is people moving from Midtown West to the Hudson Heights and Washington Heights area. They are blown away by the amount of space they can get. The psychology is that it is still in Manhattan.
Which price ranges in Manhattan are seeing the most softening now?
I think it would be right around $1,900 to $2,200. The apartments are sitting a little longer than we would like and usually we have to adjust downward.
How are landlords, particularly those who have new development buildings that they are still looking to lease up, reacting to the changes in the rental market?
At one point, they were no longer paying commissions. Recently, I have seen that come back with some of the buildings informing us that they are paying brokers commissions until a certain date. I haven’t seen any other concessions like free rent.
What are the most surprising trends you’re seeing in the Manhattan and New York City rental market today?
My past customers are asking what it would take to buy a home. They’re asking me what it would cost for them to own an apartment that’s similar to the rental that they are living in now.
What sorts of trends are you expecting to see in the rental market in the coming months?
I think we are going to start seeing a bit more of people wanting a better deal. I think they will become a bit more aggressive in their offers if they find a comparable [rental] two blocks away.
What are the biggest challenges to renting apartments in the current market?
For some people it is just qualifying. For the landlords I represent, I have to make sure I am bringing a qualified tenant, and more often than usual there have been clients whose credit has taken a hit. That’s my least favorite part of the job.