New York City’s 169,500-unit market-rate, investment-grade apartment market is on fire, with the second lowest vacancy rate and the highest second quarter rent gain among the top Reis markets. New York City has about 2 million total rental units, but the majority is rent regulated, public housing, or age restricted, and/or otherwise tied up by long term tenants. With not only the city but also the metro area already densely developed, most of the demand for living in New York is funneled to its market-rate rental housing. With the city’s economy one of the few vibrant ones in the post-recession U.S., that demand is now huge.
Reis reports a vacancy rate of 2.2% for the second quarter of 2012, up 20 basis points from the prior quarter but down 50 from a year earlier. At these levels the month-to-month vacancy fluctuations are virtually meaningless, as units are only vacant because landlords are holding out for ever-higher rents not because they can’t find tenants. Vacancy is always low in New York, with the year-end rate having gone no higher than the 4.0% recorded in 2003. It had fallen as low as 1.1% in 1995.
“Overall vacancy in Manhattan remained at an incredibly low rate—just over 1.0%—in the first quarter of 2012,” according to Multi-Housing News quoting CitiHabitats. “CitiHabitats notes that overall vacancy fell another 9 basis points in the month of April alone—from 1.25% to 1.16%.” This source cites “an increasing number of renters—many of whom have fled single-family—and limited available inventory, which is partly the result of the economy but also reflective of the limited space for new development in the densely populated borough” as reasons for low vacancy. Reis predicts the citywide rate for investment grade units will end 2012 at 2.2% and level off at just under 2.0% thereafter—essentially perpetual full occupancy.
SUPPLY AND DEMAND
For most of New York City’s recent history, demand and lack of demand drove the apartment market. Few unsubsidized apartments were built in the years after the city retroactively imposed rent regulation on buildings constructed from the end of World War II to the early 1970s. The multi-family boom of the 1980s featured the construction of condominiums on most of the remaining sites in prime Manhattan neighborhoods, and the conversion of thousands of existing apartments to cooperatives and condominiums. With no new supply, demand booms led to soaring rents while economic busts led to falling demand and rent weakness.
With the city’s falling crime rate and economic recovery, however, demand is now unrelenting. And with many industrial areas re-zoned and lower crime rates making additional neighborhoods attractive to apartment development, new supply picked up in the late 1990s and has reached levels not seen since the early 1960s in the years since. Reis reports 1,926 new units added in the second quarter in four projects, leaving 4,660 under construction. The firm expects about 4,800 apartments will be added this year, followed by between 4,000 and 5,000 in each of the three years following. Net absorption is now constrained only by the shortage of units to absorb, and so will follow new supply almost exactly keeping the vacancy rate steady.
Condominium construction stalled after the housing bubble burst, but is starting to revive. Reis reports more than 2,000 condos under construction, some of which are in projects that stalled after starting during the project bubble. Press reports indicate some condo projects have gone rental, and some developments abandoned mid-construction may be restarting. Reis also reports nearly 2,700 subsidized and senior housing units under construction around the city. While the federal government cut back on housing development subsidies in the mid-1970s, the city has continued to invest its own money in affordable housing.
Rent gains are raging after moderating in 2011. In the second quarter of 2012 the average asking rent rose 1.6% to $3,001 per month, while the average effective rent jumped 1.9% to $2,940 per month. While the year-over-year gains are just 3.3% and 4.1%, respectively, Reis predicts increases of 4.9% asking and 5.7% effective for all of 2012. The increases had been 4.8% and 5.3% in 2010 before slowing in 2011. This pace of rent gain far exceeds the increase in household average income as measured by Moody’s Economy.com, at 2.4% in the year to the second quarter.
In Manhattan “average rents in New York City’s main borough soared 3.4% between January and March alone—to $3,590 per month,” according to CitiHabitats as quoted by Multi-Housing News. “As demand for apartments remains intense in New York City, landlords will boost rents to new highs, while developers revive stalled projects,” according to Marcus & Millichap. “Asking rents will surge 6.1% to $3,079 per month. Effective rent will advance 7.0% in 2012 to $2,994 per month.”
The Reis forecast is only slightly more moderate, with asking and effective rent gains predicted to be similar to those of 2012 in each of the following four years as well. These large percentage increases, well in excess of inflation, come on top of an already high base. As a result, from the second quarter of 2012 until the end of 2016 the asking average is forecast to increase by $850 per month, while the effective average rises by $812. That is just the increase from current levels. Meanwhile, 90 miles away in metro Philadelphia the average asking rent for second quarter is $1,075 per month and the average effective rent is $1,046 per month. The forecast gains from those levels are far more moderate. How high can rents go compared with elsewhere before people, particularly young workers, are no longer willing to live in New York? That experiment is underway.