Rent

Concessions are so crazy that landlords may (finally) have to start lowering rents

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With a flood of new buildings opening and a cooling rental market, concessions—the offer of a free month's rent, waived broker fee, and the like—have been more prevalent of late. And as we head into the winter season, which is always slow for rentals, the trend has gotten so dramatic that the rental market may be at a "breaking point."

Citi Habitats released its November rental market reports this week, with data showing that 27 percent of new leases signed in Manhattan last month included some form of rental concession, while the vacancy rate is at 2.11 percent, its highest point in seven years. All of which points to the fact that an increasing number of landlords are having to offer concessions to entice renters, while others simply aren't finding tenants willing to pay their high asking prices.

"The vacancy rate is the more alarming number than the concession rate," says Citi Habitats president Gary Malin. "It shows that there's no underlying issue of demand, but that numbers are so high that tenants can't act. So landlords are going to have to lower rents. The question is when."

The November rental report from Douglas Elliman tells a similar story, showing price declines in Manhattan, Brooklyn, and Queens, and record concessions across the board. In Manhattan, the median rental price was essentially stable, dipping by 0.3 percent; in Brooklyn, it fell by 1.3 percent; and in Queens, the drop was more precipitous at 6.6 percent. However, rents aren't getting cheaper for all types of housing, but rather, deflating at the expensive higher end, while renters in search of cheaper apartments still face stiff competition.

"If you look at the fact that the median rent in Manhattan doorman buildings dropped 1.4 percent year over year, while the median for non-doorman [buildings] rose 2.7 percent over the same period, that's a big difference in the direction they're moving," says Miller Samuel appraiser Jonathan Miller, who authored Elliman's report. This is a continuation of a trend that's been in play all year, with a flood of high-priced new development rentals all hitting the market at once, creating excess supply at the top of the market, while everyone else still scrums for a good deal.

"The high end is slipping and the lower end is rising," Miller adds. "New development rentals are 35.6 percent of the rentals in Manhattan. And as price point rises, demand weakens and concessions expand. The takeaway is the landlords have to work a lot harder to protect the 'base rent' at the higher end of the market than at the lower end, because of the [number of new buildings]."

In other words, landlords who'd like to maintain a high legal rent have to offer up increasingly valuable extras, to the tune of multiple months free rent. (Miller also notes that while a higher percentage of Manhattan buildings are offering concessions, in Brooklyn, the concessions themselves are larger, likely because new development buildings that have opened in formerly cheap neighborhoods are hoping to set price records, even if it means luring in a renter with the promise of four months' free rent.)

So when will the standoff end, and landlords begin to lower their prices? Malin says to keep an eye on the market in January, where demand typically picks back up after a slow holiday season. If deals are still sluggish then, prices at the high end may finally start to drop. "My feeling is if landlords don't see the numbers they want in January, they'll start to bargain," says Malin.

But either way, don't expect price drops to be especially dramatic. While the "high plateau" of the market is starting to erode slightly, Miller says, "the market here is like a glacier—and we're not expecting a big chunk to fall off any time soon."