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Housing markets in other parts of the country have been seeing record high prices and an increase in demand in 2020 — but not so in New York City, where the residential market has taken a beating from the pandemic.
Rents are in freefall and the vacancy rate hit an all-time high of 5 percent. The sales market came to a near standstill in the spring, and seven months later, contract activity is just starting to approach pre-pandemic levels.
But with Covid-19 vaccines being distributed around the country and the Federal Reserve’s commitment to keep interest rates low until 2023, there may be a light at the end of the tunnel.
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“Uncertainty is something every market hates,” said Greg Heym, chief economist at Brown Harris Stevens. Now, he and other economists following the residential market are feeling more optimistic — though they’re not expecting miracles.
“I think we all expect a sort of slow, measured recovery,” he said.
StreetEasy economist Nancy Wu said she doesn’t think markets will get back to pre-pandemic levels until the city’s jobs and businesses recover.
New York City’s unemployment rate in November was 12 percent and the national rate was 6.7 percent. That translates to 771,200 New Yorkers out of work, predominantly from the leisure and hospitality sectors.
“Many of the city’s small businesses have closed permanently, and it will take time for new business and jobs to be created in their place,” Wu said in an email.
Appraiser Jonathan Miller, who sits on New York City Mayor’s Economic Advisory Panel with Heym, sees the rental market and sales market as two very different stories.
The trajectory of the city’s rental market will depend on the distribution of the vaccine and New York City’s largest corporations’ decisions to bring employees back to the office, according to Miller.
But when it comes to the sales market, he’s watching to see how much federal aid the city will receive and how moratoriums on evictions and foreclosures are handled. If there’s a wave of newly homeless residents, he worries the additional costs will be shouldered by homebuyers and homeowners by way of new taxes.
Heym shares those concerns, saying new real estate taxes, particularly the state’s proposed pied-à-terre tax, could drive away buyers.
Here are the key issues and trends economists and industry insiders are forecasting for the city’s residential market in 2021:
New York City for sale
Real estate agents and developers agree that, in contrast to national trends, buyers have the upper hand in New York right now.
But the question many are asking is: Who’s buying?
The most likely buyers of late are Americans; they would also need significant cash on hand, as some lenders have tightened their criteria for mortgages in Manhattan.
But with most of the city’s main draws closed or severely curtailed — be that restaurants, cultural institutions or offices — Miller questions what would bring someone to New York now.
“What New York is going through is much less about people leaving and much more about people not coming,” he said. “People not coming to the city is a bigger risk.”
While contract activity is finally approaching 2019 levels after a largely dismal year, Heym notes that the city’s pre-pandemic market wasn’t in such great shape, either.
“We had an inventory problem back then, and we have a worse one now,” Heym said.
Much of the city’s excess inventory is high-priced, new development condominium units, most of which were sitting unsold long before the pandemic. In February, Miller estimated that it could take as many as six years for the available condos on the market to sell.
Though sponsors are beginning to accept discounted prices from individual buyers, one trend that some expect to become more prevalent next year is bulk buying. Dylan Pichulik of XL Real Property Management, a luxury property management firm, said he’s been having conversations with firms interested in snapping up chunks of unsold units, who then turn those apartments into high-priced rentals with a company like XL managing the day-to-day.
“In a sense, New York is on sale right now,” said Pichulik. “We know the developers need money … and we’re starting to see headlines about banks trying to foreclose.”
Summer 2021 for rent
New York City’s once immovable rental market was shaken to its foundations this year. Manhattan’s vacancy rate surpassed 6 percent in November, with over 15,000 apartments available for rent.
But the rental market is “much more dependent on the vaccine and the ability for corporate America to begin to call back a larger number of their employees,” Miller said. Many large companies are aiming to get workers back in offices by summer, though that timeline could change.
But while occupancy may enjoy a V-shaped recovery, many landlords aren’t expecting their rental income to return to pre-pandemic levels for years.
Robert Morgenstern, managing principal of multifamily investment and operating firm Morgenstern Capital, said rents across his portfolio of largely market-rate units have dropped 8 percent to 12 percent, depending on the unit size and neighborhood.
“It’s about a 10 percent drop in rent, which if you think rents grow at 3 to 4 percent, you’re talking to three to four years of rent decline,” he said. “That’s a lot. And the concessions are higher. … It’s a tough moment.”
But Morgenstern noted that lower rents for a number of years will create opportunities for people who had been priced out of the city.
“I think the city is going to get younger,” he said.
Lifting the SALT deduction cap
The $10,000 cap on state and local tax deductions, which began in 2018 as part of President Donald Trump’s Tax Cuts and Jobs Act, has been a thorn in the side of the industry.
Douglas Elliman executive chairman Howard Lorber has been one of many critics. On CNBC’s “Squawk Box” in March, Lorber said he believed a repeal of the SALT cap “would be looked at again” by Trump. Nothing came of it.
Now with the Biden administration taking over, the industry has some hope that the cap will be lifted, Heym said. It isn’t coming just from industry sources. A November report prepared by Deloitte after the presidential election notes that Biden’s position on the deduction cap, though unclear, is “said to favor repeal.”
Heym pointed to the U.S. Senate runoff elections in Georgia as harbinger for how likely a repeal of the SALT cap — in addition to additional federal aid for New York — may be.