The rental market is still hot. But maybe not quite as hot as it was this summer. Brokers say the typical seasonal drop-off seen in the fall was a little bit more of a harder landing that normal.
Still, things are pretty strong. Rents rose around 15 percent this year, according to many brokers, and some expect hikes of another 5 to 10 percent next year. Commissions are up, fringe neighborhoods are commanding higher rents, and the lack of new rental development is limiting supply and making the market tighter. So what’s to complain about?
The Real Deal spoke to prominent rental brokers and got their thoughts about the current market.
Fritz Frigan
director of sales/leasing for Midtown, Halstead
How much higher do you think Manhattan rents will rise? When will they likely peak?
There was a 15 to 20 percent increase this year until early October. I have noticed from landlords and various people I’ve talked to that in early October we saw a fairly dramatic slowdown.
Has it peaked or is it part of the approaching traditionally slow season from December to February?
The slowdown was fairly sudden and early this fall, so for this year it may have peaked.
Where are you seeing the slowdown occur?
The biggest difference is since October we’ve seen some fairly spectacular price drops in high-end properties. There are eight to nine rental buildings where landlords in the last two weeks are reintroducing incentives to tenants. Incentives like one month of free rent or no broker fee on apartments that are two- or three-bedrooms and larger. The absorption of studios and one-bedrooms is still very healthy.
What neighborhood has benefited the most from the current rental market?
When the rents have such a great run, with three years of increases, it ultimately benefits the fringe neighborhoods. What comes to mind is the luxury product built above 96th Street on the East Side.
What surprises you most about the current rental market?
The number of condo conversions, which diminished the rental supply. In the last two years, we are talking about over 10,000 rental units that are gone or will be gone.
Are you starting to see condo projects that haven’t sold out start to rent units?
I hear some rumbling that some condo projects are thinking about making some of their units rentals, but I am not seeing it yet.
Barak Dunayer
president and founder, Barak Realty
How much higher do you think Manhattan rents will rise? When will they likely peak?
I think rents will continue to rise through the summer of 2007. As mortgage rates rise and buying becomes less affordable, buyers will turn to renting and drive rental prices up. Also, people usually turn to renting to wait out the uncertainty in the marketplace. By fall of 2007, I believe the sales market will have completed its correction and the future will be clearer, thus making people more comfortable to make buying decisions.
Rents this past summer were 15 to 20 percent higher on average than the summer of 2005. As vacancy rates climbed slightly in the fall, prices have softened slightly.
How about undersupply and oversupply in terms of different neighborhoods?
I don’t see oversupply in any neighborhood. Even neighborhoods with higher vacancy rates are still under 1 percent.
What novel responses to the hot rental market do you see from renters and landlords?
I’ve seen renters become very aggressive and offer a full year of rent up front and more to gain advantage.
Are renters being driven out of Manhattan, and where are they going?
Northern Manhattan, Astoria, Williamsburg and Hoboken are receiving many ex-Manhattan renters. This is the case in any hot rental market where the prime areas become less affordable for certain people. The difference is that there was certainly a revival in Northern Manhattan over the last five years and people now are more comfortable moving there than before.
How has the tight market affected broker commissions?
Brokers’ commissions are up and my brokers are happy. If you want to find a good apartment, using a good broker is almost unavoidable. Good brokers get the information first and very often the difference between winning and losing the deal is a single New York minute.
Are you starting to see condo projects that haven’t sold out start to rent units?
I am seeing more and more of these. It’s not a good sign for the sales market, but better for the rental market. The rental market will have more supply and probably better-quality apartments since projects originally designed as luxury condos usually have better designs, finishes and amenities.
Still, for investors [who own new condo units and plan to rent them out] the difference between rental prices and sales prices remains very large, so the return on investment is still very thin. Even if you buy cheaper today and you receive higher rents, you still get very little cash flow, if any at all. More people buy today for appreciation rather than for cash flow.
Do you think you’ll see a lot more rental development going forward?
Now is the time to go rental. The only problem is that it takes a long time from the time a project is conceived to the time when you can start renting it, and nobody knows how the market will be at that time.
Any notable deals you’ve seen recently that show the state of the market?
Every deal is a notable deal. Just for finding a little studio on the Upper West Side for someone with a dog, my brokers deserve a Nobel Prize.
Gary Malin
chief operating officer, Citi Habitats
How much higher do you think Manhattan rents will rise?
In the next year it will go up 5 to 10 percent depending on different factors. For this year, we have seen the peak. There is a slight retraction right now over how it was in the summer. There is more flexibility historically at this time of year, though.
What has changed about where those priced out of Manhattan are heading in comparison to the last hot rental market, before Sept. 11?
Certain parts of Brooklyn have experienced growth; the options have expanded. Long Island City doesn’t have enough options yet, but as it builds itself up there will be great opportunity.
How has the tight market affected broker commissions?
Higher rents equal a higher fee. Beyond that, this summer renters needed a good broker more than ever. Good deals came and went a lot faster. Landlords all have different requirements; some will take pets when the market’s weak and won’t when it’s strong.
Do you think you’ll see a lot more rental development going forward?
I am getting more calls because prices have risen dramatically and there is little product out there. Developers may have been waiting until prices became more realistic. I feel now is an opportune time given the pricing.
Any notable deals you’ve seen recently that show the state of the market?
At 37 Wall Street [a conversion from an office building Downtown] we are in the third week of renting, and out of 372 units, we’ve already rented 50 in the off-season.
Gordon Golub
senior managing director, Citi Habitats
What have you seen in the market over the past year?
In the past year rents have risen 10 to 15 percent. At this point they are about equal or within 1 to 2 percent of where they were in the beginning of 2001.
What sort of rental stock is in shortest supply?
Three-bedrooms-plus are in shortest supply, the reason being on the rental end there are not as many of those. They are not developed by landlords; they are more risky in a down market, which leads to less supply.
What neighborhood has benefited the most from the current rental market?
The West 40s and 50s on the far West Side from 10th to 12th avenues and the Lower East Side.
How about undersupply and oversupply in terms of different neighborhoods?
Vacancy rates are less than 0.5 percent. There is an undersupply in all neighborhoods.
How is the current market different than the last hot rental market, before Sept. 11?
There’s better product to choose from and more diversity than there was pre-Sept. 11.
Are you starting to see condo projects that haven’t sold out start to rent units?
We are seeing a lot of condo units being rented out and this has surprised a lot of investors who had thought to flip the units. They are seeing nice returns over a longer period of time from renting them out. They are being rented quickly.
Any notable deals you’ve seen recently that show the state of the market?
There is a walkup building at 118 Ridge Street, which many people would have considered an outlying area of the Lower East Side, which is renting two- to three-bedroom units at $3,600 to $5,000, and they are being absorbed very quickly.
Marc Lewis
vice president and managing director, Manhattan Apartments
How much higher do you think Manhattan rents will rise?
Everyone thinks we’re in a rental bubble. I’ve been in the business a long time. In 1972, a walkup was $150 — now the same apartment is $1,500 to $1,600. It can’t continue to go up as it has been in the last 30 years.
When will rents likely peak in the near-term?
They will go up another 25 percent in the next two years is my guesstimate. Nobody five years ago would have imagined we’d be paying these rents.
What sort of rental stock is in shortest supply?
The shortest supply is in under $3,000 a month. There is a dearth of inexpensive apartments. Inexpensive used to be under $1,000. Now the average one-bedroom is $3,000 a month in a doorman building, and they are hard to find.
What are some neighborhoods that have benefited the most from the current rental market?
In the Theater District it costs more for a walkup apartment at West 46th between 9th and 10th avenues than an apartment on East 83rd Street. Midtown West from the 30s to 50s is tremendously revitalized because of new construction and rezoning.
What surprises you most about the current rental market?
I’m surprised that rents are $50 to $70 a square foot in doorman buildings.
What novel responses to the hot rental market do you see from renters and landlords?
People used to walk around with keys all day; now the keys they are using are on their keyboard. It’s a marketing and Internet business; who can display it better on their Web site gets the renter first.
Is there a concern that vacancy levels will drop low enough to negatively affect the rental market?
They are so low now, that’s an interesting question. You have more sharing of apartments going on in Manhattan than at any other time in my history. [But] there are always apartments available. In any one day we have 1,000 listings.
How has the tight market affected broker commissions?
Brokers are much more sought after and needed than they were a few years ago. Some charge 17 to 20 percent [of the first year’s rent], and you have to pay because there is such a shortage and not much negotiating going on.
Do you think you’ll see a lot more rental development going forward?
Only if Mayor Bloomberg and the City Council decide to change the laws for tax abatement and other incentives to build property in the city, because right now the numbers don’t make sense. Unless the condo market goes down and the cost of land goes down, then it doesn’t make sense to do a rental development. So far I don’t see that happening anytime soon.
Any notable deals you’ve seen recently that show the state of the market?
We rented a three-bedroom in a doorman building for $20,000 a month in the East 50s. I was shocked to see that there was somebody for that apartment. I could probably give you 20 other examples; everything is high.
Kevin Kurland
president and founder, Kurland Realty
How much higher do you think Manhattan rents will rise? When will they likely peak?
They definitely have peaked for the year. There will likely be rent increases next April and May as rents typically increase in the spring and soar throughout the summer.
What surprises you most about the current rental market?
In 1999 and 2000, the rents were the highest I had ever seen. This year really blew away the rents that were being commanded back then. It came on strong in April and it is only in late October that it started to fall off, but it was incredibly heavy, even at these record-breaking rents.
How does seasonality play into demand, and what are we likely to see this winter?
Typically the demand slows down in the winter because the wave of college and grad students has passed. When the winter weather comes people don’t want to trudge around the city as much, although some are forced to because that’s when their lease expires. At the same time the winter is a more favorable time for renters; sometimes they get the lower rents as well as incentives.
The influx of college students in the late spring and summer means a spike in leases that begins in April and lasts through the end of September.
Is the tight rental market changing the demographic of who continues to rent in Manhattan?
Yes, it is swinging toward a much more affluent demographic.
We’re seeing even more college grads than ever before whose parents earn a few hundred thousand dollars per year and who will customarily guarantee the leases. College grads and grad students make up even more of the majority of the renters today versus 10 years ago.
Where are renters being driven out of Manhattan going?
Brooklyn, Queens and New Jersey have in recent years been built up residentially and commercially so there are more options.
How has the tight market affected broker commissions?
It’s helped because it’s never been more difficult for a person to find an apartment without a broker. Brokers can command higher commissions and can be more formal with the commissions, which traditionally range from 1 to 2 months’ rent — 8.33 to 15 percent of the annual rent. With the tight market we can charge toward the higher end of that range. Brokers’ commissions have increased percentage-wise more toward the 12 to 15 percent range.
Andrew Barrocas
chief executive officer, The Real Estate Group New York
What do you think of the sharp rise in rents this year?
They’ve gone up around 12 percent. Over the course of the last year, landlords have been surprised with the way we market and have gotten more money than they ever expected. They would come in pricing an apartment at $4,000, we would say $4,500, and they would get $4,700. I have landlords that are in shock because they can’t believe how much they are getting. They say, “I don’t think we can get this much,” and we get more.
What sort of rental stock is in shortest supply?
Small studios, because prices have gone up so much and salary increases have not kept pace. People have gone back to renting smaller apartments by virtue of affordability. In addition, developers get a better price per square foot in smaller units than larger units and therefore a lot more buildings are offering smaller units than before.
What neighborhood has benefited the most from the current rental market?
The West Village.
Which has benefited least?
The Financial District. An enormous amount of new construction has come to market in the last two years and more is yet to come.
What surprises you most about the current rental market?
Why more owners and landlords don’t take advantage of current market conditions. For anybody who owns a unit that is not their primary residence, I don’t understand why people are looking to sell their condos right now. Rentals are hotter than sales, and for the first time in a long time people are able to get positive cash flow on an investment property.
How is the current market different than the last hot rental market, before Sept. 11?
Before Sept. 11 we saw an enormous amount of new rental development, but now it has become too expensive to build a rental and make a profit without a very long-term plan. In the last hot rental market developers did everything they could to keep up with demand. Many of the new rental buildings out there today were built in response to the tech boom. Now many of those properties have been converted to condos, and developers can’t afford to build additional rental units.