Summer in the city. At this time of year, it has become a pretty familiar pattern to see New York’s residential rental market heating up in sync with the seasonal rise in temperatures. Typically, the influx of recent graduates ready to start their new jobs – alongside existing New Yorkers facing expiring or adjusted leases – heralds a hike in demand for apartments at all levels. On the surface, 2014 seems no different: second quarter reports reflect higher prices and lower vacancies across the five boroughs. However, these stats don’t tell the whole story. New rental volume in Manhattan has declined year over year, and quality product that was being snapped up in 2013 currently is lingering for 2-3 weeks.
So what’s the explanation for this somewhat conflicting data? One needs look no further than the rental markets in outer neighborhoods, boroughs, and NYC suburbs to gain insight into the dynamics at play. Harlem rentals have been surging, with a 61.4% increase over the last year. According to figures released in June, median rents in Brooklyn are at a near record highs. In Stamford Connecticut, rental high-rise buildings can be seen going up all over the city, and most of the recently finished product has very little vacancy. While one might think this is due to businesses moving headquarters out of the city to the more tax friendly State next door, a more plausible explanation is a segment of the traditional Manhattan rental market is looking elsewhere due to its relative affordability. Sales in more affordable suburbs has picked up as well. As a result, while it is true that many who are priced out of buying in Manhattan rent, they don’t have to rent in Manhattan. Many nearby locales are taking advantage of their lower prices with a manageable commute with a wave of new product. It is important to point out that this dynamic can be self moderating–prices in some of these alternative locations have risen sharply, making Manhattan look less expensive than it had been. Should this continue, it bodes well for our rental market as the year progresses.
Another more nuanced explanation of the conflicting data may be a result of the change in landlord behavior as it relates to incentives. For example, many landlords who until only recently assumed they had strong pricing power, have responded by offering incentives to entice prospective renters as well as existing tenants where feasible. While it is not uncommon to offer concessions on new developments, we saw a broader range of landlords employing this strategy. So much so that in May, new rentals with concessions were 5.7% of the market (up from 3.4% in June 2013). With more tenants now creatively incentivized to stay in their current apartments which leads to less turnover, new rental numbers are down, vacancies remain low, and higher headline rents are maintained.
Now, while looking at the statistics and behaviors are interesting for brokers, landlords, and renters alike, I think it’s important to recognize that we are dealing in nuances within a very healthy broader market backdrop. My observations on renter behavior “beyond the stats” only suggests this could be early indicator of things to come. However, It is waaay too early to conclude rental prices have peaked, or the health of this market is at a material turning point. Recent employment improvement in the NYC labor market, tight credit, and less affordable sale prices still suggest a strong rental market in the months ahead. Stay tuned to see how these interesting dynamics unfold in the second half of 2014.
Enjoy the rest of your summer, and stay cool!