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The Commercial Impact on Apartment Rentals in Manhattan

Whats going in the market right now?

I would like to start this entry by explaining where the New York City Real Estate market is at. As long as you haven't been trapped without any form of communication for the past year+ you know that our economy has been hit with a recession as people have been losing jobs, wealth has been destroyed, and credit is almost non existent. The government has attempted to spend and incentive itself out of this mess by lowering interest rates, offering programs such as cash for clunkers and the $8,000 housing rebate.

All of these incentives are trying to spark the economy by having people spend more money and save less. But, people still fear investing and the same is true for business. In New York City, the overall trend has been to tighten up expenses and maintain their company. This hurts the economy because the first expense companies shed is employee salaries - they believe they can get the same amount of work done with less people. All of these jobs lost means people can't afford rents and will eventually have to move to smaller and less expensive dwellings. In turn driving demand for cheap housing up and luxury housing down. Which shrinks the overall value of buildings and real estate. Companies not looking to expand means no loans and no new employees. When companies grow they need more labor and they also need to take out loans to afford their business ventures. Investment when done by many companies increases demand for commercial real estate, skilled professionals and banks credit.

Commercial real estate has a very delayed lag. Companies generally sign leases for 5+ years so often times they get trapped in leases for a while. If you signed a 5 year lease in 2007 at the height of the economy you will be stuck paying inflated prices till 2012. As companies fire employees they free up space and sometimes start trying to sublet space or floors in their office to help with the burden of paying rent. This sublet space price is generally very cheap because companies need to space rented quickly. When more sublet space gets introduced in the market overall commercial values drop. Additionally, when companies leases expire they look for smaller and cheaper locations which creates even more available space.

With all these companies trying to save money and not grow their company. There are fewer workers and many workers take on work at discounted pays. This has lead to a great decline in our luxury rental market and a smaller decline in non-luxury & walk up apartment rentals. Many people are moving out of Manhattan to find space in Brooklyn & Queens where their dollar goes significantly further and the commute is still reasonable in terms of price and time.

As the commercial sector continues to devalue moving forward i expect residential rents in Manhattan to drop as supply will increase and demand will decline.

Response to Wall Street Journal & Rent Turnover

Wall Street Journal says "Landlords offer incentives to stay put" for current renters in NYC
ORIGINAL LINK: By DAWN WOTAPKA
Amid the jobless recovery, some landlords are showering flat-screen TVs, cash, rent cuts and other incentives on tenants to encourage them to renew their apartment leases and thus avoid the expense of filling empty units.
The rise in unemployment has prompted tenants to seek roommates, move home or trade down to cheaper units. In the third quarter, the national apartment-vacancy rate hit 7.8%, a 23-year high, according to Reis Inc., which tracks vacancies and rents in the top 79 markets.
"Many companies are doing whatever they can to keep units occupied, especially heading into the seasonally slower leasing period," said Paula Poskon, an analyst with Robert W. Baird & Co.
The trends are taking a toll on the bottom line. Apartment Investment & Management Co., which owns and operates roughly 150,000 units nationwide, reported Friday that its funds from operations, a key REIT metric, fell to 19 cents a share from 60 cents a year earlier. UDR Inc., which has about 45,000 units on the West Coast and in Washington, D.C., reported earlier this month that its funds from operations dropped 42% to 19 cents.
"We do need job growth in order for our business to prosper," said David Neithercut, chief executive of Equity Residential, the country's largest apartment REIT by market capitalization. "I think 2010 will be another year of doing the best we can."
Some of the large REITs were able to keep their occupancies up. UDR managed to increase occupancy to 95.6% from 95% a year earlier. Colonial Properties Trust, which operates 35,000 Sunbelt apartments, said its third-quarter occupancy fell to 94.4% from 96%a year earlier.
Landlords attracted and retained tenants by offering incentives and rent cuts. Equity Residential said new tenants in the third quarter paid 9% to 10% less rent than the previous residents. AvalonBay Communities Inc., an upscale operator, said its decline was about the same.
Owners are focusing on keeping existing tenants because when apartments become vacated they can sit empty for months and often require marketing, painting, brokerage commissions and other expenses to attract new tenants. Denver-based UDR is offering renewing tenants a flat-screen TV, new carpet, kitchen upgrade or, $300 in cash. The money is the most popular choice, said Chief Executive Thomas Toomey,
Mr. Neithercut said Equity Residential doesn't initially offer rent cuts to existing tenants to persuade them to renew. But if the tenant plays hardball, the company asks: "What can we do to keep you?" he said.
One problem for landlords is that existing tenants can easily check the Web to see what deals new tenants are being offered. And new tenants are getting incentives like a waived pet deposit or two months' free rent.
Some landlords have also become more open-minded about tenants with credit issues involving home foreclosures. In the past, a foreclosure on a credit record could have meant an automatic denial. Now such blemishes are so commonplace that the stigma is easing. Equity Residential looks for reasonable credit history "outside of a problem that they've had with a single-family home," Mr. Neithercut said.
Another sign of the times: In New York City, landlords are paying broker fees. Typically in New York, which has traditionally been a tight rental market, tenants have to pay fees as high as 15% of a year's rent. But so far this year, Equity Residential has paid about $1.5 million in such commissions.
Apartment landlords say that one benefit of the bad market is that it has practically halted new construction. New completions are expected to be 98,000 next year and 109,000 in 2011, compared with 188,000 last year and 204,000 this year, according to Green Street Advisors Inc.
When loss rates are taken into account—the removal of units because of obsolescence—the actual addition will be immaterial. That means that when the economy rebounds, the supply will be tight, increasing landlord profits.
"I have utmost confidence in our ability to be successful when we get to there," said Mr. Neithercut. "I just don't know how far away 'there' is."

This article was featured in the Wall Street Journal and only discusses one aspect of rent renewals. To understand the issue better I have to back up and deliver the point of views from both the tenant an owner.

The tenant who has been living in an apartment for let’s say a year, has become acquainted with his apartment and it has become part of his routine. The tenant understands that moving will require, time, effort and money. The tenant will have to find a place they like, pay for application fees, broker fees, security and moving vans. These expenses add up, and could end up running a few thousand dollars. Additionally, the tenant will have to run around the city looking at different places and then if the tenant likes the place and submits an application one then has to wait to see if the owner approves them. All of these deterrents leads to most tenants renewing if they have not experienced any lifestyle changes or frustration with the building owner.

The owner wants to do as little work as possible while making as much money as possible. They would always prefer a tenant renewing as long as they paid their rent on time and have not done anything to cause issue. The owner will generally look to increase the monthly rent by 3% each year to stay in line with general inflation.

When real estate prices decline from the previous year the whole scenario veers off from the status quo. Owners can’t increase rent, to fill vacancies owners need to decrease rents, pay broker fees, or offer free rents. Tenants find out the price they are paying is more than they are renting for now. So when their lease expires and they are in a position to renew they want the deal. But owners, knowing that tenants do not want to deal with hassle of moving do not offer as good deals.

Owners who are willing to offer fair deals to their current tenants when their lease is ready to expire will lead to a low turnover %. But, many stubborn landlords who want to squeeze every penny out of their tenants will want to make as much money as possible and sometimes lose tenants by being stubborn.

If you are in a position where your lease is expiring I would suggest doing two things. First, head to urbansherpany.com to find out prices of apartments in your building and other buildings in a close proximity. Then write a letter to your landlord/owner/management company explaining the fact that you would like to continue living where you are, but have found other places at much reduced rents. Make a lowball offer saying what price you would like to live at, stating that you have always paid your rent on time and have been a good tenant. From here the landlord/owner/management company will either accept your bid (if it’s fair) or offer you their own deal. This negotiation period can be difficult, but as long as you stick with your guns the owner will generally concede a few hundred dollars to avoid the search of finding another tenant and paying a broker fee. If the owner is not willing to drop the price, just move – it can be a stressful experience, but the money you could potentially save and the increase in quality of apartment might be worth it.

Always check urbansherpany.com to find out any information on the Manhattan rental market as well as listings, guides, and market statistics.